What are Incoterms and Why are they important?

Incoterms are international commercial terms which are used in the assignment of costs and responsibilities between buyers and sellers around the globe, which are very often mistaken and treated as shipping terms.

Incoterms were proposed by the International Chamber of Commerce to provide a framework when dealing with matters of sales contracts such as:

  • arranging and paying for transportation;
  • customs clearance;
  • duty and VAT payments;
  • arranging necessary documentation and
  • agreeing on the point where risk and insurance responsibility is passed over from the seller to the buyer.

Incoterms have been revised in ten year intervals to reflect international commercial practice. The last revision effected in INCOTERMS 2010 and we are expecting the next one to be available in 3 years’ time which will be known as INCOTERMS 2020.

 

Importance of Incoterms

Although there are 11 different incoterms, sellers and buyers regularly underestimate the importance of them and their impact on international trade. Many traders believe that the clear and plain language used in the contract will be enough to ensure that all parties keep their trading obligations. Traders very often cannot see that incoterms eliminate discrepancies in contract language by giving the same definition of specific trade agreement to all parties and reducing the risk of problems that may occur during the shipment.

Incoterms are only relevant for a sales contract, however the agreement between parties to use certain incoterms has also an effect on other contracts. For example a seller who has agreed on FOB incoterm, is bound to choose sea transportation as he has to present a bill of lading to the seller. Therefore other transportation methods are completely inadequate. Failure to understand the correct definition of each Incoterm used will lead to problems throughout the supply chain and may affect payment of goods, delivery schedules and even cause conflict between seller’s and buyer’s responsibilities, including who completes the customs declarations and makes duty payments.

The Incoterms rules have become an essential part of the daily language of trade and it is extremely important that the terms of sale are discussed upfront, which will help you to reduce the risk in a transaction. By specifying the seller’s and buyer’s obligations, there is no confusion with regards to rules of transportation from one country to the other. However, it is worth remembering that Incoterms do not cover ownership or title transfer of the goods. These terms have to be agreed upon separately between the two transacting parties.

 

Incoterms Categories

Incoterms are divided into 4 categories:

Category E – which is representing minimum obligation to the seller, who makes available goods at the premises in order for the buyer to collect.

  • EXW (Ex Works)

Category F –where the seller arrange, pay and deliver the goods to a carrier appointed by the buyer however the buyer pays for everything after that.

  • FCA (Free Carrier)
  • FAS (Free Alongside Shipping)
  • FOB (Free on Board)

Category C– where the seller has obligation to contract for carriage however the risk will pass to the buyer in the country of departure.

  • CPT (Carriage Paid To)
  • CIP (Carriage and Insurance Paid To)
  • CFR (Cost and Freight)
  • CIF ( Cost, Insurance and Freight)

Category D– where the seller bears all risk involved in bringing the goods to the agreed destination.

  • DAT (Delivery at terminal)
  • DAP (Delivery at place)
  • DDP (Delivery Duty Paid)

Also, incoterms are divided in relation to the form of transportation of goods where EXW, FCA, CPT, CIP, DAT, DAP and DDP are used for any mode or models of transport and where FAS, FOB, CFR and CIF are used for sea and inland waterway transport only.

 

It is worth remembering that regardless of the type of agreement concluded between the EU and UK after Brexit, a customs declaration will still be required on export from the UK and import into the UK. The correct incoterm is one of the requirements while lodging your customs declaration, and if traders wish to maintain compliant with laws in international trade they should become familiar with Incoterms 2010. We would encourage traders that as part of their Brexit preparation they look at incoterms agreed to ensure that they are not taking responsibility for customs duty, Vat or submitting the customs declarations in the country of destination.

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Vicki Caplin | | 0 comments

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