Proforma vs.Commercial Invoice: Key Attributes, Uses and Benefits

Proforma and commercial invoices serve distinct roles in the transaction process: a proforma invoice provides an estimate and outlines terms before a purchase is finalised, while a commercial invoice demands payment and details the completed sale after delivery. Confusion often arises because both documents share similar elements, but their uses and legal implications differ significantly.

Issuing the wrong document can lead to delays, compliance issues, and financial discrepancies. This blog will discuss in detail about the difference between proforma and commercial invoice, including their definitions, purposes, key attributes, use cases, contents, and timing.

Definition of Proforma invoice vs Commercial invoice

Pro Forma Invoice: A pro forma invoice is a preliminary document provided to a potential buyer before a sale is finalized. It offers an estimate of the costs for goods or services, including a detailed breakdown of expenses such as unit prices, taxes, and shipping charges. This type of invoice is also known as a preliminary invoice, quote, estimate invoice, or pro forma invoice.

Commercial Invoice: A commercial invoice is a formal, legally binding document issued after a sale is completed and goods are delivered. It outlines the details of the transaction, including information about the buyer and seller, a description of the goods, payment terms, and shipping details. It may also be referred to as a tax invoice, sales invoice, invoice, or even as an e-invoice in KSA.

Purpose of Tax Invoice and Proforma Invoice

Purpose of Pro Forma Invoice

• Initial Cost Estimates: Provides potential buyers with a detailed estimate of the costs, shipping charges, taxes and other charges involved in a proposed transaction.
• Getting Letter of Credit: Assists in obtaining a letter of credit by providing a preliminary document that banks may require for issuing credit.
• Import Permit: Used to apply for import permits by providing a detailed estimate of the transaction and anticipated costs.
• Negotiation Tool: Assists in negotiations by offering a preliminary view of the price and terms before finalizing the sale.
• Custom Orders and Comparisons: Useful for custom orders where standard pricing does not apply and for comparing costs with other suppliers
• Budget Planning: Helps buyers with budget planning by providing a detailed breakdown of estimated costs.
• Transferring payment (international): Assists in transferring payments across borders by providing a preliminary financial document.

Purpose of Tax Invoice

• Finalized Transaction Record: Acts as the official document that confirms the sale and requests payment from the buyer after the goods have been delivered.
• Export and Customs Clearance: Provides detailed information required for international shipments, including exact costs, origin country, and relevant shipping details. Essential for customs procedures, including calculating duties, taxes, and ensuring compliance with export/import regulations.
• Legal Proof of Sale: Serves as a legal record of the transaction and proof of contract between buyer and seller.
• Payment Collection: Used to collect payment and finalize the transaction details, including any agreed-upon payment terms.
• Accounting and Audit: Important for accounting and audit purposes, providing a formal record of the transaction for financial reporting and compliance.

Legal Status and Obligation

Pro Forma Invoice: This document is not legally binding and serves preliminary purposes as a courtesy rather than as part of a formal transaction. Pro forma invoices are created voluntarily and are not mandated by government regulations.

Commercial Invoice: This invoice is legally binding and essential for formal transactions and customs processes. Government regulations, such as VAT rules in Saudi Arabia, require businesses to issue commercial invoices with specific details. Additionally, Saudi Arabia's e-invoicing mandate necessitates that e-invoices be generated for every transaction.

Issue Timing of Pro Forma and Sales Invoice

Pro Forma Invoice: Issued before a purchase has been made to provides an estimate or quote of the prospective transaction to potential buyers.

Sales Invoice: Issued after a purchase has been made and the goods have been delivered serving as the finalized proof of contract and requests payment. 

Contents of Preliminary Invoice and Tax Invoice

Contents of Pro Forma Invoice: The information included in a pro forma invoice can be adjusted, added, or removed based on the buyer's needs or transaction requirements. There is no standard template or mandatory details for pro forma invoices. However, common elements typically included are:

• Title of the Document: "Proforma Invoice"
• Buyer and Seller Information: Names, addresses, and contact details
• Description of Deliverables: Detailed list including specifications and quantities
• Estimated Cost: Breakdown of costs including unit prices, additional costs, and discounts
• Payment and Shipping Terms: Payment methods, currency, shipping methods, and estimated delivery date
• Validity: The expiration date of the pro forma invoice

Details mentioned in Commercial Tax Invoice: Commercial tax invoices must include specific details required by government regulations in origin countries. In Saudi Arabia, e-invoices must feature elements such as a QR code, digital signature, Universally Unique Identifier (UUID), and other requirements set by ZATCA. Key details commonly included in tax invoices are, but not limited to:

• Invoice Number: A serially generated unique number designated to identify each invoice
• Buyer and Seller Information: Names, addresses, contact details, and tax ID numbers
• Description of Deliverables: Detailed description including specifications and quantities
• Cost Breakdown: Detailed account of costs, including unit costs and total amount
• Country of Origin: The country where the goods were manufactured
• Date of Transaction: The date when the transaction occurred or when the invoice was issued
• Tax ID Numbers: Tax identification numbers of both buyer and seller
• Net Weight of Goods: Weight of the goods without packaging
• Bill of Lading Number: Reference number for the shipping document
• Payment and Shipping Terms: Terms related to payment and shipping
• Final Cost: Total amount payable, including any applicable duties and taxes

Accounting Treatment

Pro Forma Invoice: Generally used for preliminary budgeting, estimates, and financial planning but not for official accounting records.

Commercial Invoice: Used for accounting purposes, including recording transactions, financial reporting, and ensuring compliance with tax regulations.

Conclusion

A proforma invoice serves as an estimation tool, providing potential buyers with a preliminary breakdown of costs and terms before a purchase is finalized. It aids in negotiations, budgeting, and securing necessary permits or credits. On the other hand, a commercial tax invoice is a legally binding document, mandated by government regulations to ensure compliance with tax laws. It formalizes the sale, requests payment, and provides essential details required for customs clearance and financial reporting.