The Incoterms are an initiative of the International Chamber of Commerce (ICC); the International Chamber of Commerce. The goal is actually simple; make international commercial transactions easier. The Incoterms are actually a set of rules recognized worldwide by both the Buyer and the Seller of the goods. This means that both parties should know what their obligations are and what they have to arrange. By using the Incoterms, you do not have to record all these agreements separately in a purchase contract, but it is clear with one simple reference which party should do what.
It is therefore wise to include the Incoterms in your purchase contract or to mention them on the commercial invoice. This way you can avoid a lot of discussion if something goes wrong during transport. The ICC determines a new set of Incoterms every 10 years in consultation with the business community. However, you must know what the different Incoterms mean, but we will explain that to you! We will explain the following Incoterms to you:
They actually describe 3 things that are very important in (international) business:
- Obligations: What does the Seller and the Buyer arrange with regard to transport, insurance, transport documents and any import and export documents;
- Risk: Where and when the Seller “delivers” the goods, that is when the Risk passes to the Buyer;
- Cost; Which party is responsible for which costs. Then you can think of the transport and insurance costs, but also packaging, loading or unloading costs of the shipment.
The Incoterms are a so-called Clause law. So it only applies if both parties agree. The Incoterms can actually be divided into a number of variants:
- The “E” Term (Ex-Works)
- The “F” Terms (FCA and FAS, FOB for sea freight)
- The “C” Terms (CPT, CIP and CFR, CIF for ocean freight)
- The “D” Terms (DAP, DPU, DDP)
The different variants are actually the sum of each other. The Ex-Works term is the variant in which the Seller has the least to do. If the Buyer and Seller agree to use one of the “D” terms, the Seller must arrange a great deal. There are quite a few pitfalls when using the Incoterms. We regularly see that agreements are made by a Selling party that can be quite disadvantageous for the Seller. An example of this is for example:
A machine builder sells a machine to Russia. This is the first time that he sells a machine to Russia and the Seller is completely happy with the nice order. He has stated in the contract that he will deliver the machine DDP, just as with the deliveries he makes in the Netherlands and Belgium. In short, the Seller must arrange everything. The Buyer is happy, because he will receive the machine, cleared and well, delivered to Russia. And there is the problem, because the Seller of course has no idea of the customs clearance tariffs in Russia, it is possible that 30% import duties are levied in Russia on these types of machines. That would mean that the Seller would have to pay those import duties. He had not taken that into account beforehand. He also needs to find a broker in Russia who will clear the shipment for him. That is not as easy as a Dutch party that has to clear something in Russia. In short, DDP is a very unwise choice in this story. Unfortunately, our customs declarants from TTS Customs still encounter this with some regularity. Request information in advance if you are not sure.
The new terms have a number of changes compared to those of the year 2010. The most important change compared to the previous terms is that the Incoterm: DAT - Delivered At Terminal is no longer included, it has been replaced by DPU - Delivered at Place Unloaded. The last variant has more options for indicating an unloading location. With DAT, the shipment had to be delivered to a terminal, for example a customs shed at the border or a port terminal. At DPU, this can also be a place or other destination designated by the Buyer.
Another change that is less well known is that cargo insurance requirements have been tightened at the Incoterm CIP (Carriage and Insurance Paid to) and CIF (Cost Insurance and Freight).
What a common mistake is that the parties do not use the Incoterms in full. For example, it is recorded that the Incoterm FCA is used. But the Incoterm is only complete if the place name is also stated where the delivery will take place. Example:
A trade organization from Groningen produces and trades in furniture panels. The Buyer has purchased a batch of furniture panels under the Incoterm FCA. This means that the Buyer must arrange the transport, he sends the truck to the Seller's production location in Groningen. This is the only address known to the Buyer. However, it appears that the goods are stored in the port of Rotterdam. If the Incoterms 2020 FCA Rotterdam had been used, the Buyer could already have known that the goods were not in Groningen and he could have given the transporter better instructions. It would have been even better if the parties had agreed as follows: FCA Street name 123, Rotterdam, Netherlands Incoterms® 2020. Then there was no doubt whatsoever where the goods will be delivered. Always refer to the year of the Incoterm used!
The Seller has minimum obligations and the Buyer the maximum obligations. This Incoterm means that the Seller prepares the goods for the Buyer for collection at its location on an agreed date. That is often the basis for discussion; who is responsible for loading? According to Ex-Works, the risk is transferred when the goods are made available to the Buyer. The Seller does not have to load the truck with this.
You often see that the parties agree to deliver Ex-Works, the Buying party arranges the transporter, who reports properly. The Selling party puts the shipment in the truck with his forklift, signs the consignment note and the carrier leaves. That is often how it goes. But what if the Vendor drops the expensive machine from the forklift during loading? Who is responsible then? Legally, the Selling Party could say; “I sell ex works and I have made the goods available in my factory, I am not responsible for the loading, so Buyer, too bad!”. The Buyer will of course not be happy about this and this is a basis for a solid discussion. To prevent this, in this case it would be better to agree to use the Incoterm FCA when the Selling Party loads the goods.
Never use Ex-Works for an international trade transaction and certainly not if it is EU-cross-border. The reason for this is that the Selling Party does not have to take care of the customs formalities, in practice this often happens, but it is not what has been agreed. However, the Buyer does need it to get the shipment out of the EU. In addition, the Seller has tax problems when using the VAT 0% rate when exporting the goods, because he cannot demonstrate that the goods have left the EU. Therefore, never use Ex-Works for international trade transactions, but rather FCA.
The Seller pays for transport up to the point where the goods are delivered to the first carrier, at which point the risk also passes to the Buyer. However, FCA is widely used when the goods are delivered from the Seller's warehouse address. Therefore, specifically record the location of the FCA delivery! Normally, the Buyer arranges most of the transport, the Seller loads the vehicle, arranges a customs clearance and the correct transport documents. The risk transition point is reached when the Seller has fulfilled its obligations. There are no agreements on possible insurance of the goods in FCA.
The Seller pays for the transport, the risk passes to the Buyer when the goods are handed over to the first carrier. The Buying Party must pay attention in this respect, the Seller pays and arranges the transport, but the Buyer of course has less influence on this. The risk therefore passes to the Purchasing Party if the Seller has loaded the goods in, for example, the truck at the agreed place. However, he then pays for the route to the Purchasing Party. However, if the goods are damaged in transit, this is at the Buyer's risk. Certainly with high values of goods, the Buying Party must be careful with this Incoterm and it is better to choose the following term: CIP.
The Seller pays for transport and insurance up to the destination point specified in the agreements. The risk passes when the goods are handed over to the first carrier. This is therefore almost the same as CPT, but it is specifically stated that the Seller must take out insurance for the risk that the Buyer runs for damage to or loss of the goods up to at least the point of destination.
The Seller pays for transportation to the agreed place, except for customs clearance costs. All risks up to the moment the goods are unloaded by the Buyer are for the Seller. This is also a widely used Incoterm in international road transport. The Seller takes a large part of the risk in this and actually ensures that the goods are properly made available up to the place of agreement. The Buyer must take care of any customs clearance and unloading of the vehicle. The risk is therefore transferred when the carrier has offered the goods to the arriving means of transport at the agreed destination. In the DAP term nothing has been agreed about taking out transport insurance, but the greatest risk lies with the Seller.
The Seller bears all risks related to the delivery of the goods to and the unloading of the goods at the agreed destination. DPU was also referred to as DAT in the Incoterms 2010. This goes one step further than DAP, the Seller must also ensure that the goods are unloaded. The place of risk transfer is therefore the moment that the goods are unloaded at the agreed point. This can be a warehouse, but also a quay, storage place, container, road, rail or air freight terminal. Describe it accurately, that prevents discussion.
The Seller has the maximum obligations under this Incoterm. He is responsible for delivering the goods to the agreed place in the Buyer's country and pays all costs to bring the goods to their destination, including import duties and taxes. The Seller does not have to unload, as with DPU. It is therefore very clear that almost all responsibility lies with the Seller. This is quite risky for the Selling Party because it must also provide customs clearance in the country of destination. Certainly with EU cross-border transport you can only use this Incoterm in our view if you know very well what you are talking about.
The Seller must place the goods alongside the ship at the port of embarkation. If these are containers, they are usually presented at a terminal, but this Incoterm is never actually used when it concerns transport in sea containers. If the goods are alongside the ship, the transport risk is transferred to the Buyer. Where it is sometimes used is for provisions for the crew of ships. This Incoterm only applies to waterborne transport and cannot be used for other transport modalities.
Under this Incoterm, the Seller must load the goods to be delivered on board the ship. The risk passes to the Buyer when the goods are loaded. FOB is a widely used Incoterm. For example, with sea freight from China, we see that the supplier in China delivers FOB Shenzen, for example. They then take care of the customs clearance in China, the transport to the terminal, pay the local costs and the risk only passes to the Buyer when the goods pass the ship's railing. This Incoterm only applies to transport by water.
CFR is actually very similar to FOB, the only difference is that the Seller pays the cost of the freight to bring the goods to the port of destination. However, the risk passes to the Buyer when the goods are loaded on board, just as with FOB. The costs of insurance are not included. The Seller must deliver the goods to the port of shipment, but pays until the goods are at the destination port. This Incoterm is primarily intended for water transport.
As we wrote at the very beginning, the Incoterms are actually every time an addition, that also applies to CIF. This is the same clause as the CFR, only here is the cost of insurance for the Seller. The risk here therefore shifts further and further to the Seller. This Incoterm is intended for transport by water.
The new terms have a number of changes compared to those of 2010. The most important change compared to the previous terms is that the Incoterm "DAT - Delivered At Terminal" is no longer included, it has been replaced by "DPU - Delivered at Place. Unloaded ".
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