Incoterms explained
For the international transport of goods, a lot of things need to be arranged. One of the most important things is to make sure there are clear agreements with the foreign supplier (or customer). To clarify this, Incoterms have been drawn up and it stands for “International Commercial Terms”. Incoterms are an international standard detailing the transportation rights and duties of both buyers and sellers. For example:
- Obligations of the seller versus the obligations of the purchaser;
- Who is responsible for the insurance, licenses, authorizations and other formalities;
- Who arranges the (different kinds of) transportation;
- At what point in the process, the responsibilities, costs and risks shift from the seller to the buyer.
Types of incoterms
There are different kind of Incoterms. Varying from the one the vendor is solely responsible for the entire transport, to the one on which the buyer carries all responsibilities to get the goods from the factory of the seller to his own doorstep and almost everything in between. Below are the different incoterms noted and explained, descending on the extent to which the purchaser bears the risk. The incoterms “Ex Works” up to “Delivery Duty Paid” can be applied to all types of transport. The delivery conditions “Free Alongside Ship” up to “Cost, Insurance and Freight” can only be applied to sea freight shipments. For every kind of incoterm is it important that the place is mentioned where the risks and responsibilities shift from seller to buyer.
1. Ex Works (EXW)
When agreed to deliver goods Ex Works (ready in factory), the seller is only responsible for the availability of the goods at his warehouse or factory. He basically needs to open the door for the person who comes to collect the goods. He ensures that goods with minimal packaging and invoices are ready to be picked up; his responsibilities end there. The buyer has almost all responsibilities of the costs and risks relating to the packing, loading and transportation of the goods. From the factory to the final destination. Moreover, it is his responsibility to arrange all customs procedures such as export declaration, the clearance in the country of production and clearance in the destination country. Ex Works is generally not recommended for sea- and air freight shipping, while at road transport this incoterm is very often used.
2. Free Carrier (FCA)
Free Carrier is a delivery condition that is increasingly being used. Especially instead of Ex Worx and as an alternative of Free On Board for container transport, Free Carrier is gaining popularity. Within this incoterm, the seller is responsible for all customs activities in the country of origin and ensures that the goods are cleared, the invoice and the packing are both taken care of and that an export license is available. Besides this, the seller is responsible for the (optional) transport to a beforehand agreed upon carrier on a beforehand agreed upon place. Since the place can also be on the doorstep of the seller, it is important that the place is included in the incoterm document. When the carrier takes the goods, the buyer bears all responsibilities regarding risks of loss or damage.
3. Carriage Paid To (CPT)
The seller arranges the customs clearance, pays the export fees and arranges and pays a carrier that delivers the goods at a pre-arranged place. At the moment the (first) carrier takes the goods, he takes over the risks, costs and responsibilities of the seller. He carries the responsibilities, until he has delivered the goods. Carriage Paid To is also an incoterm that is being used more and more. Particularly in container transport, it is often recommended to apply CPT instead of CFR.
4. Carriage and Insurance Paid To (CIP)
Carriage and Insurance Paid To is roughly the same as Carriage Paid To, except for the fact that the seller is also obligated to arrange and pay a (minimum coverage) cargo insurance. When CIP is applied, the risks and responsibilities shift from seller to buyer when the seller transfers the goods to the carrier, just like at CPT.
5. Delivery At Terminal (DAT)
The seller delivers the goods to the buyer at the agreed place or port (terminal). The seller bears all the risks and costs associated with bringing the goods; he makes sure the goods are accessible from the transportation vehicle, but has no obligation to unload them himself. At this moment, the risk passes from seller to buyer. The buyer is required to declare the goods to customs and to arrange all customs formalities such as import documents and the payment of import duties.
6. Delivery At Place (DAP)
The seller delivers the goods to the buyer at the time the truck arrives at the agreed place. When the delivery ends, the truck comes to stop and takes place before the goods are unloaded. The buyer is responsible for the unloading, just like for the import duties. In road transport, DAP is very often used.
7. Delivery Duty Paid (DDP)
The seller is responsible for the entire transport process, including the payment of import duties. Delivery Duty Paid is basically the opposite of Ex Works: at EXW, the seller bears almost no risk while at DDP, he bears al the risks and responsibilities. The risks and responsibilities transfer from seller to buyer when the buyer literally receive the goods. Although DDP was initially not used very often for sea- and airfreight, it is becoming a more and more popular incoterm. Within road transport DDP is already used quite often. Besides noting the place, it is advised to add the note “excl. VAT” to this incoterm. This is to prevent any arguments regarding the VAT payment at the entrance of the country of destination. The seller is namely in many cases not authorized to perform or organize a tax deduction.
8. Free Alongside Ship (FAS)
The seller ensures that the goods are packed correctly and includes an invoice and an export license at the agreed port. He is not responsible for boarding the goods. At the quayside the risks, costs and responsibilities shift from seller to buyer. The buyer is responsible for the contract of carriage and he must clear the goods for export. This party is obligated to take out a sea transport insurance against the risk for the seller of loss or damage to the goods during the transport. The buyer arranges the insurance contract, but the seller pays the insurance fee. It is important that the buyer is aware that the seller is only required to provide a minimum coverage insurance.
9. Free on Board (FOB)
The seller is responsible for the invoice, packaging, export license (if necessary) and other customs formalities. He takes care of the costs such as the loading and is responsible for the goods until they pass the railing of the ship. When the goods are on board of the ship at the agreed port, the costs and risks shift from seller to buyer. The delivery condition Free On Board can only be applied to bulk goods.
10. Cost and Freight (CFT)
The seller is bears the responsibility for the costs and risks when bringing the goods to the port of destination and is also obligated to clear the goods. When the goods pass the ship’s rail at the port of destination, the costs and risks shift from seller to buyer.
11. Cost, Insurance and Freight (CIF)
The incoterm Cost, Insurance and Freight is very similar to Cost and Freight; the seller is responsible for all costs and risks during the transport until the goods pass the ship’s rail in the port of destination and for the customs clearance of the goods. From that moment, the costs and risks are for the buyer. However, in CIF the seller is obligated to arrange a sea transport insurance. The seller takes out an insurance policy and pays the insurance premium; it is important that the buyer realizes that the seller is only obligated to provide insurance with minimum coverage. CIF is one of the most widely used incoterm because the costs and risks are quite evenly divided between both parties. Both the buyer and the seller are responsible for the parts in their “own” country. This makes the communication for insurance and customs formalities for example a lot easier.
Why use incoterms?
Although the use of incoterms is not mandatory, it is strongly recommended to use them because it can prevent a lot of confusion and uncertainties. One of the main reasons to use incoterms is that above mentioned terms are available in 31 different languages at the national sections of the International Chambers of Commerce. This means there is always a translation for both the seller and the buyer. At a disagreement, there can always be fallen back on the incoterms, which will always be understood by both the seller and the buyer. This is not always the case within other trade agreements. Incoterms cannot be used for any agreement; it must be clear that the agreement is a buying agreement in which there is cross-border transport. Only in this case, incoterms can be used.
What do incoterms not cover or represent?
Incoterms don’t determine the owner of the goods and on what the agreement is based. The delivery conditions are no rules regarding the payment and other rights outside the delivery. Incoterms don’t protect parties to the risk of loss or damage, but only ensure that both the seller and the buyer know their obligations, costs and risks.
Advice on incoterms
As indicated, in the import or export of goods it is advised to use incoterms in the agreement. Moreover, the measurement to calculate the import duties is among others dependent on the used incoterms. Therefore it is always a factor that needs to be taken into account when calculating shipping costs. If you have any questions regarding the use of incoterms or if you are wondering what incoterm suit you shipment and goods best, you can rely on the expertise of HST Groep. HST has its own customs department that can help you with all your questions regarding customs procedures and incoterms. Moreover, it is also possible to outsource the entire transport and cargo handling at HST Groep. Please ask for a quote or contact us in another way.