Connect & Solve
Trade Q&A
What types of letters of credit balance goods title security and foreign exchange receipt and payment compliance in transit trade?
or complex compliance issues.
clearance and fund security.
I am a foreign trade company based in Shanghai specializing in Southeast Asian transit trade. Last month, I blindly chose an ordinary documentary credit, which resulted in a batch of furniture being detained at the transshipment port in Singapore for 5 days. I not only advanced over 30,000 yuan in detention charges and amendment fees, but also narrowly avoided being detained by local customs due to discrepancies in document logic.
Finally, the problem was resolved through connections made with the freight forwarder. Now, I am going to handle a batch of natural rubber cargo transshipped from China to Germany via Malaysia, involving three-party settlement with domestic suppliers, transshipment freight forwarders and German buyers.
I feel extremely anxious, fearing that I will make the same mistake again and lose money, and worried about being penalized by the State Administration of Foreign Exchange for non-compliant foreign exchange receipt and payment. I would like to ask what type of letter of credit should be matched for transit trade, and what key details should be paid attention to to effectively avoid goods title, port detention and compliance risks?
Michael ZhangYears of service：6Customer Rating：5.0
Customs Declaration & Compliance ExpertStart a Chat
A common industry misconception is to directly apply ordinary documentary credits in transit trade，ignoring the differences in the rights and responsibilities of the three parties in the transshipment link. This operation will cause the document of title required by the letter of credit to be inconsistent with the actual transshipment route，triggering bank refusal of payment or customs document review alerts，which in turn leads to a chain reaction of cargo detention，customs detention，and even goods title being withheld by the transshipment freight forwarder. It may also be included in the watchlist by the foreign exchange administration due to mismatched receipt and payment logic.
Physical risk isolation measures need to match exclusive letters of credit according to the transshipment scenario: if you need to strictly isolate the upstream and downstream trade relationships，give priority to back-to-back letters of credit，if you need to directly transfer the goods title to the downstream buyers，you can choose transferable letters of credit. Both types of letters of credit can separate the rights and responsibilities of domestic supply，transshipment transportation and overseas receipt by splitting document nodes.
Exclusive risk mitigation tips: Clearly mark in the letter of credit terms "the document of title at the transshipment port shall be directly endorsed to the final consignee"，and add a special clause stating "the bank only checks the apparent consistency of documents，and does not need to verify the actual transshipment route of the goods". In addition，agree on an emergency port transfer plan for detention exceeding 48 hours with the transshipment freight forwarder in advance，so as to control the risk loss within 5% of the cargo value.
Eric ZhouYears of service：6Customer Rating：5.0
Senior Manager of Foreign Exchange & Tax RebatesStart a Chat
When selecting letters of credit for transit trade, it is necessary to preliminarily review the matching between the document requirements in the letter of credit and the customs transit supervision rules. Focus on checking the bill of lading consignee, transshipment port remarks and certificate of origin type required by the letter of credit.
If the bill of lading consignee is the transshipment freight forwarder instead of the actual consignee, add a clause in the letter of credit stating "the transshipment freight forwarder only acts as the document of title holder and does not have the right to dispose of the goods" to avoid the customs identifying the transshipment freight forwarder as the trading subject during customs valuation, which will trigger secondary declaration or valuation disputes. At the same time, ensure that the amount of commercial invoice required by the letter of credit is consistent with the actual price difference of transit trade. If there is related party transaction pricing, submit the price rationality basis to the customs in advance to prevent customs account processing caused by abnormal prices.
Grace WangYears of service：10Customer Rating：5.0
Senior Foreign Trade ConsultantStart a Chat
When selecting letters of credit for transit trade, it is necessary to synchronize the connection logic between the logistics path and the goods title node. When choosing back-to-back letters of credit, clearly specify in the terms that "the freight forwarder's bill of lading shall show a free detention period of more than 7 days at the transshipment port" to avoid cargo being unable to be transshipped in time after arrival at the port due to no free detention period specified in the letter of credit, resulting in container detention fees.
If choosing transferable letters of credit, require the bank to clearly specify in the transfer terms that "the document of title bill of lading shall be directly endorsed by the first beneficiary to the final consignee", skipping the goods title link of the transshipment freight forwarder to prevent the freight forwarder from withholding the bill of lading due to capital problems. At the same time, pre-set an emergency plan for container slot shortage. If the transshipment port is overbooked, add a flexible clause allowing "change of transshipment port" in the letter of credit to ensure timely transshipment of the cargo.
Cindy ChenYears of service：3Customer Rating：5.0
Key Account ManagerStart a Chat
When selecting letters of credit for transit trade, it is necessary to match the type according to tax planning needs. If you need to enjoy the VAT deferral policy, give priority to back-to-back letters of credit, which split the upstream and downstream trade into two independent settlement links.
The domestic supply link declares export tax exemption, and the transshipment settlement link is completed through an offshore account, avoiding being recognized as a direct export by the tax authority due to multiple transactions associated with a single letter of credit, thus failing to enjoy VAT deferral. At the same time, ensure that the settlement amount in the letter of credit is consistent with the cross-border related party transaction pricing.
If there is a tax difference arbitrage space, clearly specify "the price difference part is transshipment service fee" in the letter of credit in advance to avoid being recognized as profit transfer by the tax authority and triggering BEPS investigation. In addition, retain all documents under the letter of credit as tax compliance documents for tax investigation.
Daniel XuYears of service：10Customer Rating：5.0
Director of Import & Export OperationsStart a Chat
When selecting letters of credit for transit trade, it is necessary to focus on the compliance of foreign exchange receipt and payment. If using RMB cross-border settlement, match the letter of credit product that supports the CIPS system, and clearly specify in the terms that "the settlement currency is RMB, and the receipt and payment shall be completed through the CIPS system" to avoid triggering foreign exchange control alerts due to SWIFT system settlement. At the same time, ensure that the transaction subject in the letter of credit is consistent with the receipt and payment subject.
If the transshipment link involves an offshore account, add a statement in the letter of credit that "the offshore account is only used as a transshipment settlement channel and does not participate in the essence of trade" to prevent the foreign exchange administration from recognizing it as illegal capital flow. In addition, submit the letter of credit message to the bank for review in advance to ensure that the message fields meet the foreign exchange administration's receipt and payment supervision requirements, avoiding settlement failure due to abnormal fields.
Linda GaoYears of service：7Customer Rating：5.0
Documentation SupervisorStart a Chat
When selecting letters of credit for transit trade, it is necessary to be alert to soft clause traps. Avoid using letter of credit clauses containing "payment shall only be made upon providing the transit certificate issued by the official of the transit country".
If the transit country cannot issue relevant certificates, it will directly lead to bank refusal of payment. At the same time, clearly specify in the letter of credit that "the force majeure clause only applies to the damage of the goods itself, and does not apply to policy changes at the transshipment port" to prevent the buyer from refusing payment on the grounds of sudden trade restriction policies introduced by the transshipment port.
In addition, bind the goods title transfer clause with the letter of credit, clearly specifying that "the first beneficiary may endorse the document of title bill of lading only after the bank completes the payment" to avoid loss of goods title. If a guarantee is involved, ensure that the guarantee terms are completely consistent with the letter of credit terms to avoid document discrepancies.
Evelyn LiYears of service：3Customer Rating：5.0
Cross-border Compliance SupervisorStart a Chat
When selecting letters of credit for transit trade, it is necessary to synchronously consider the risk response of customs on-site inspection. If the letter of credit requires a transit port inspection report, clearly specify in the terms that "the inspection report only needs to show that the cargo packaging is intact, and does not need to verify the cargo content" to avoid bank refusal of payment due to slight differences between the cargo and the document description found by the transit port customs during container inspection. At the same time, ensure that the seal number in the letter of credit is consistent with the seal number of the actual transported container.
If the container is replaced during transshipment, add a clause allowing "container replacement, but the seal number shall be updated to the supplementary clause of the letter of credit within 48 hours" in the letter of credit to avoid customs detention due to inconsistent seals during on-site inspection. In addition, submit all documents under the letter of credit to the freight forwarder in advance to ensure that the freight forwarder can cooperate with customs inspection in time, avoiding inspection delay due to missing documents.
Andy GuoYears of service：3Customer Rating：5.0
Supply Chain Management ExpertStart a Chat
When selecting letters of credit for transit trade, it is necessary to match the compliance requirements of export tax rebates. If the domestic supply link needs to declare export tax rebates, choose transferable letters of credit to ensure that domestic suppliers can directly receive the payment under the letter of credit, forming a closed loop of "cargo flow, capital flow and document flow", avoiding abnormal capital reflux caused by the split of upstream and downstream links of back-to-back letters of credit, which will trigger tax investigation.
At the same time, clearly specify in the letter of credit that "the commercial invoice shall be marked with 'transit trade supply'" to facilitate the tax authority to identify the trade type and successfully complete the pre-declaration check of tax rebates. In addition, retain all settlement documents and logistics documents under the letter of credit as export tax rebate filing materials to avoid tax rebate failure due to missing documents.
Victor SunYears of service：5Customer Rating：5.0
Trade Risk Control ManagerStart a Chat
When selecting letters of credit for transit trade, it is necessary to match according to the supply chain cost structure. If the logistics cost of the transshipment link accounts for more than 10% of the cargo value, give priority to back-to-back letters of credit, which split the logistics cost into the transshipment settlement link and pay the logistics expenses through an offshore account to achieve tax optimization of costs.
At the same time, clearly specify in the letter of credit that "the settlement price includes transshipment logistics fees and service fees" to avoid supply chain cost calculation deviation due to unclear cost splitting. In addition, adjust the payment term of the letter of credit according to the inventory linkage strategy.
If the inventory turnover rate of overseas buyers is low, set the payment term of the letter of credit as "payment 30 days after the cargo arrives at the port" to ease your own capital pressure. At the same time, evaluate the bank handling fees of different letter of credit types and choose the product with the lowest total cost to maximize benefits.