International transactions require various measures that differ from domestic dealings, such as handling consumption tax on overseas transactions and creating invoices in English. A pro forma invoice is one type of document for these exchanges and is key for Japanese businesses engaged in global commerce.

At first glance, a pro forma invoice looks the same as a standard invoice. Still, it functions as a provisional document that allows both the seller and the buyer to confirm the transaction details before a formal contract or payment request is issued.

In this article, we will explain the basics of pro forma invoices, including the information that Japanese businesses engaged in international trade need to know, as well as the differences between them and commercial invoices. Finally, we will list the mandatory entries for each.

Key takeaways

• A pro forma invoice is a provisional form exchanged with an overseas business partner before a trade transaction, and it serves as a quotation.
  
• A pro forma invoice differs from a commercial one in terms of when it is issued and its purpose.
  
• There are no set rules for how a pro forma invoice is created or written, but it must clearly state details such as the items, unit prices, and payment conditions.
  
• With Stripe Invoicing, you can simplify your invoicing processes by taking advantage of support for multiple languages and currencies, as well as automated invoice generation and effective data management.
  

What is a pro forma invoice?

A pro forma invoice (sometimes rendered as "proforma invoice") is translated into Japanese as "provisional invoice" or "quote." In business contexts, such as email correspondence or document subject lines, it is common to use the abbreviation PI instead of the full term.

A pro forma invoice is a form provided by the seller (exporter) to the buyer (importer) prior to the conclusion of a formal sales contract in international dealings, including trade. As the name suggests, it is a provisional document whose role is to serve as a quotation to present the proposed conditions such as price, quantity, specifications, and shipping terms, to the buyer during the initial stages of the exchange, allowing both parties to confirm and agree on the deal's provisions.

Therefore, simply receiving a pro forma invoice does not immediately create an obligation to pay.

Why there is growing interest in pro forma invoices

In Japan, the number of e-commerce businesses expanding into cross-border e-commerce and direct-to-consumer (D2C) brands has grown rapidly. As the size of the cross-border e-commerce market, particularly in the United States, China, and Southeast Asia, continues to expand, businesses are increasingly recognising the importance of mastering the practical fundamentals of international transactions. This includes learning about the various legal regulations and customs procedures of each country they might deal with.

For example, regarding taxes such as tariffs in cross-border e-commerce and sales tax, sellers are required to ensure that the correct amounts are listed on receipts and invoices in accordance with the tax laws of each country.

Additionally, there are an increasing number of cases where a pro forma invoice is needed for international exchanges. Having one makes it easier to demonstrate that complex overseas transactions, including cross-border activity, are conducted through proper processes, thereby allowing business operations to proceed smoothly.

Against this backdrop, these preliminary forms are gaining attention from many businesses as an important tool for international transactions, particularly in trade.

Main applications for pro forma invoices

What are the specific situations where a pro forma invoice is used? The main applications are shown below.

When payment is required before shipping

In global commerce, the following prepayment arrangements exist:

• Cash in Advance: Cash in Advance (often shortened to CIA) refers to a payment term under which the buyer pays the seller prior to the goods being shipped or the services are provided. It is often used in place of “advance payment,” which has the same fundamental meaning.
  
• Wire transfer in advance: Wire transfer (also known as “telegraphic transfer” and shortened to TT) refers to a payment term under which the buyer pays the seller in advance via an electronic interbank network before the seller ships the goods.
  
• Letter of credit payment: Letter of credit, or LC, is a document where a bank guarantees payment. In other words, LC payment refers to a payment term where a bank acts as an intermediary between the seller and the buyer to facilitate the transaction.
  

Please note that the official invoice (commercial invoice), which will be explained later, is issued once all conditions of the sale have been finalized. For this reason, formal invoices are almost always sent before or after the goods are shipped.

However, if any of the payment terms shown above are used, the buyer must complete payment prior to shipment. As with LC payments, in the early stages of a deal the buyer must complete the necessary payment procedures, such as having the bank issue a letter of credit.

To comply with any of these payment conditions, you will need a “document serving as proof of payment” ahead of preparation of the official invoice. In these circumstances, a pro forma invoice can function as a substitute for a commercial invoice, which is the formal version.

Obtaining an import permit

When conducting trade transactions, depending on the specific items being handled, some countries might require an import permit under their import permit system. In such cases, the buyer, who is the importer, submits a pro forma invoice to their government to obtain an import license.

From the importer’s perspective, this preliminary form acts as valid proof to demonstrate to authorities in their home country that an exchange with an overseas business (the seller) has occurred.

Sending free or unpaid items

An invoice is necessary whenever cargo is sent overseas, including for items carrying no charge: free product samples, gifts, or returns of defective products.

A commercial invoice, an official document, is intended to serve as an “invoice based on a finalized sales contract.” Hence, while it is mandatory to include details such as the product price and payment terms drawn from the final agreement between the seller and the buyer, in situations involving imports or exports without an invoice for payment, it is not possible to issue an equivalent official billing record.

In these circumstances, a preliminary version replaces the commercial invoice.

Still, it is important to remember that a pro forma invoice used as a substitute cannot show “¥0” in the amount field. “Free” means “no invoiceable amount will be incurred”; it does not mean the item’s value is ¥0.

Accordingly, for such free-of-charge items, you must state the item’s actual price or its estimated market value and add the note: “No commercial value/Value for customs purposes only.”

What is the difference between a pro forma invoice and a commercial invoice?

These forms are often confused with one another, but there are clear differences between the two. This section will explain their distinctions from the following perspectives. Remember that in the context of trade transactions, the term “invoice” generally refers to the commercial version.

Timing of issuing an invoice

A pro forma invoice is exchanged at a different stage than a commercial invoice. The former is shared prior to the latter, functioning as both a “provisional invoice” and a “quote.”

By contrast, while a pro forma invoice can be based on the information in it, a commercial invoice is a formal invoice issued when the goods are actually shipped. Furthermore, because its contents reflect a binding agreement, it cannot be changed after being sent.

Differences in legal validity and application

A commercial invoice is a document that serves as the basis for customs declarations and customs duty calculations for imports and exports. Furthermore, because the deal’s conditions are clearly specified, it functions as evidence of an international exchange and provides legal grounds for requesting payment from the buyer.

In other words, the commercial invoice performs all the functions of an official form, including submission to customs and banks, and billing the purchaser. It is a single piece of paperwork that does not duplicate the details contained in other documents.

On the other hand, since a pro forma invoice is a provisional form intended to provide estimates or transaction information in advance, it does not have the same legally enforceable billing effect as a commercial invoice, which is officially prepared at the time of shipment.

Other invoice types

In addition to pro forma invoices and commercial invoices, there are other types used in international commerce, including the following:

Shipping invoice

A shipping invoice is a document that serves as both a delivery note verifying shipment contents and dispatch instructions providing delivery details.

Customs invoice

A customs invoice is used for border clearance. Generally, submitting a commercial invoice is sufficient, but some countries might require this specialised form.

Line items for pro forma invoices

There are no legal requirements regarding how a pro forma invoice is written, so you could create it in any format you choose. Still, to prevent misunderstandings with your business partners, it is very important to record each item clearly and accurately.

The fundamental items are shown below. Because a pro forma invoice is prepared prior to the commercial version, its basic contents generally mirror those of a commercial invoice.

• Document title: Clearly state "PRO FORMA INVOICE" so that it is immediately clear that this is a pro forma invoice
  
• Date: The date on which the pro forma invoice was issued
  
• Document number: A number assigned to the pro forma invoice to ensure efficient document management
  
• Shipper information: Contact information for the shipper, such as name, address, and telephone number
  
• Importer information: Contact information for the importer, such as name, address, and telephone number
  
• Consignee/delivery address: Contact information for the consignee, such as name, address, and telephone number
  
• Departure date: Planned departure date of shipment
  
• Destination (port of entry/country): Name of the city or country where the shipment will enter port
  
• Product description: The product's official name, materials, ingredients, and weight (e.g., g, mL)
  
• Quantity: Number and units of the product (e.g., bottle, case)
  
• Unit price: The selling price (for paid offerings) or market price (for free offerings) must be expressed in the currency used for the sale (e.g., GBP)
  
• Total amount by item: Display the total amount for each item in the currency used for the transaction
  
• Grand total: Display the total amount for the entire transaction in the applicable currency
  
• Payment terms: The terms, such as prepayment (e.g., TT in advance) and payment deadline
  
• Trade terms: The terms of trade that have been agreed upon between the exporter and importer, such as the allocation of shipping and insurance costs
  
• Validity: The expiry date of the pro forma invoice
  
• Signature: The name and signature of the business representative
  

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FAQs about pro forma invoices in Japan