What it means
Governments offer export incentives because exports bring in foreign currency and support domestic jobs. A firm that receives help can charge lower prices abroad, or keep a higher margin, than it otherwise could.
In effect, the state shares part of the cost or risk of selling overseas. Incentives come in several forms.
Direct support includes cash payments or subsidies, while indirect support covers tax relief on export profits, refunds of duties paid on imported raw materials (known as duty drawback) and subsidised export credit. Some countries also offer export credit insurance and trade fair funding to help smaller businesses.
International trade rules limit what governments may do. Many direct export subsidies are restricted under agreements overseen by the global trade body (the WTO), and countries sometimes impose countervailing duties (extra import taxes) on goods they believe are unfairly subsidised.
A company relying on an incentive must check it is lawful in both its home market and its customers' markets. From a finance perspective, incentives affect pricing, margin and cash flow.
A refund received on exports is usually recorded as income or a reduction in cost, and it can arrive months after the sale. Treasury teams should plan for that delay, because the money is not available at the time of shipment.
Incentives can also be withdrawn or changed when governments change policy. A business that builds its entire strategy on a single incentive is exposed if the rule disappears.
Sensible planning treats the benefit as a bonus on top of a business that works without it. When you evaluate an export project, strip the incentive out and look at the profit first.
Then add it back as a separate line, so management can see how much of the result depends on government support. This keeps the decision honest and makes it easy to update if the scheme changes.
In practice
Real-world examples.
Example
A furniture exporter claims a refund of import duty paid on timber that was used in products shipped abroad. The refund returns $18,000 a year to the business. Finance books it as a reduction in the cost of goods sold.
Example
A trade agency offers a software start-up a grant that pays half the cost of exhibiting at two overseas fairs. The start-up spends $40,000 and receives $20,000 back. It uses the saving to hire a sales rep in the new market.
Example
A manufacturer of agricultural equipment uses a state-backed export credit facility to offer buyers in another country payment terms of three years. The lower interest rate makes its machines more competitive against rivals, and the manufacturer is paid up front by the lending bank.
Formula
Calculation
Profit per unit with incentive = (selling price - cost per unit) + (incentive rate x selling price)
Suppose a clothing maker sells 10,000 shirts abroad at $50 each, with a cost of $46 per shirt. A government scheme refunds 5% of the export value. Profit per unit without the scheme = 50 - 46 = $4, so total profit = 4 x 10,000 = $40,000. The incentive per unit = 0.05 x 50 = $2.50, so profit per unit = 4 + 2.50 = $6.50 and total profit = 6.50 x 10,000 = $65,000, an increase of $25,000 or 62.5%.Case study
Seen in the real world.
Meridian Textiles is an illustrative, fictional company that exports cotton fabric. Its margin on foreign sales was thin at 3%, and a rival from a country with generous incentives was winning contracts on price.
The finance team found a duty drawback scheme that refunded tariffs on imported dyes. After applying, the company recovered about $150,000 a year, lifting the margin on export sales to 5%.
In this fictional story the money arrived four months after each shipment, which caused a cash gap that Meridian bridged with a short-term credit line. The lesson is that incentives help profit but can strain cash flow, so timing must be built into the forecast. The treasurer also set up a monthly report that listed every pending claim, its filing date and its expected payment date. Within a year the report showed that rejected claims, caused by missing paperwork, were costing the company about $20,000, and a simple checklist at the shipping desk removed most of them.
Watch out
Common mistakes.
- Building the whole export business case on an incentive that the government may reduce or remove.
- Assuming the incentive is paid at the time of shipment, when refunds often take months and create a working capital gap.
- Ignoring trade rules, because some subsidies can trigger extra duties in the destination country.
Questions
People also ask.
What is duty drawback?
It is a refund of customs duties paid on imported materials that are later used in goods that are exported.
Are export incentives the same as subsidies?
Some are, but many are tax reliefs, insurance or finance support, which the rules can treat differently.
How should a company account for an export incentive?
Usually it is recognised as income or as a cost reduction once it is reasonably certain to be received, following the applicable accounting standard.
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