Landed cost, and the margin illusion
Freight, duty and clearing left out of stock cost produce a gross margin that does not exist — and a trader who prices from it, concludes overheads are the problem, and never finds it.
Trading and distribution businesses live or die on landed cost and inventory accuracy — two things that are surprisingly often estimated rather than calculated. A trader who does not load freight, duty, insurance and clearing into the cost of goods is reporting a gross margin that does not exist, and pricing from it.
What we get right
- Landed cost — purchase price plus freight, insurance, customs duty, clearing, inland transport and handling, allocated to inventory rather than expensed as overhead.
- Customs duty and the free zone position — goods moving between free zone and mainland, duty suspension, and the VAT consequences of each movement.
- Foreign currency — purchases in one currency, sales in another, with translation and exchange differences separated from trading margin so performance is legible.
- Goods in transit — recognised at the point risk and title actually pass under the Incoterms, not when the container is unpacked.
- Inventory across locations — warehouse, free zone, in transit and consignment, each visible and each reconciled.
- Import VAT and reverse charge — accounted for correctly at import, including the interaction with the customs declaration.
Freight and duty expensed as overheads rather than capitalised into stock produce a gross margin that is too high and an operating margin that is too low — with the error growing whenever stock levels change. Traders in this position typically believe their margins are strong and their overheads are out of control, and set prices accordingly.
Reviewed 18 August 2026 by Ahmed Nabil Selim. UAE tax rates, thresholds and deadlines change — confirm the position for your period before relying on it.
Trading & logistics — frequently asked questions
Under IAS 2, the cost of inventories comprises purchase costs, conversion costs and all other costs incurred in bringing the inventories to their present location and condition. For a UAE importer that means the invoice price plus freight, insurance, customs duty, clearing charges and inland transport — less trade discounts and any recoverable taxes. Storage costs after the goods are ready, selling costs and general administration are excluded. Expensing the landed-cost elements instead of capitalising them distorts both gross margin and stock value.
Import VAT is generally accounted for by the registered importer through the reverse charge mechanism in the VAT return, with the corresponding input tax recovered in the same return where the business is entitled to full recovery — so the cash effect is usually neutral. The mechanics link to the customs declaration and the importer's TRN, and errors typically arise where the customs declaration and the VAT registration do not match, or where goods are imported by an agent. Movements between free zone and mainland need separate analysis.
When the risks and rewards of ownership pass, which is determined by the Incoterms in the contract. Under terms where title and risk pass at the port of shipment, the goods are the buyer's inventory while still at sea and belong on the buyer's balance sheet at the reporting date. Businesses that recognise on arrival systematically understate both inventory and payables at each year end, which distorts working capital and can breach borrowing covenants calculated on those figures.
Is this your situation?
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