Choose Incoterms®

Definition

Incoterms® (INternational COmmercial TERMS) are a set of codifications created by the International Chamber of Commerce (ICC). Their goal is to standardize the most commonly used terms in international trade for the carriage of goods. Incoterms® define the seller's and the buyer's obligations in a commercial transaction concerning:

  • the breakdown of carriage costs of goods (packaging, handling, transport, customs procedures and duties, insurance, etc.)
  • the point of risk transfer, i.e. the point from which the buyer will be responsible for the goods in the case of loss or damage
  • the documents and information that the seller must provide to the buyer.

Incoterms® do not define the other contractual items such as transfer of ownership or the settlement of commercial or technical disputes that must be specified in the contract or the general sales conditions.

When they refer to one of the 11 existing Incoterms®, the buyer and the seller avoid misunderstandings linked to commercial practices that vary from one country to another. Although Incoterms® are optional, they constitute internationally standardized and recognized clauses, that are used to prevent disputes related to the elements that they cover.

The International Chamber of Commerce just published the Incoterms® 2020 rules that took effect on January 1, 2020. These rules do not necessarily replace the Incoterms® 2010 rules that would have been previously chosen by the seller and the buyer. To prevent any difficulty of interpretation, however, it is recommended to specify, in the contract and invoices, which version of Incoterms® rules apply, Incoterms® 2010 or Incoterms 2020®.

In addition, the Incoterms® rule chosen must always be followed by the specific mention of the place of delivery.

For example: CPT New York (Incoterms® 2020 CCI), FOB Port of Amsterdam (Incoterms® 2020 CCI), etc.

Related Organizations

Any company that buys or sells goods internationally must, with their trading partner, define each other's obligations during the transaction with respect to the carriage of the goods. The company can specify these obligations in the contract by mentioning the Incoterms® rule applicable to the situation.

Incoterms® are valid if they have been agreed upon by the seller and the buyer, that is, if they are an integral part of the contract or if they are subject to a separate agreement. They apply exclusively to the relations between the seller and the buyer and do not concern the third parties implied in carriage such as forwarders, carriers or others.

Categories of Incoterms®

The 11 Incoterms® are divided into two families:

  • Incoterms® used regardless of the mode of carriage (multimodal Incoterms®)
  • Incoterms® used for carriage by sea or inland waterway (maritime Incoterms®).

In these two families, "sale on departure" or "sale on arrival" set the breakdown of costs and risks between the seller and the buyer:

  • sales referred to as "on departure" (SD) designate sales for which the seller completes its obligations upon exiting its factory, or later, when the goods are handed over to the carrier. The seller thus does not assume the risks linked to the contingencies of carriage. In practice, SD Incoterms are thus the most advantageous for the seller, who would have full interest in using it to transport goods to faraway destinations with more risk of loss or damage.

SD Incoterms® may represent a tax risk if the seller does not obtain proof of exportation or international transport of the goods. The seller in fact is required to keep these documents to justify, in the case of a tax audit, the VAT exemption of its sales. . The Incoterms® 2020 rules specify the buyer’s obligation to provide the seller with the appropriate proof of delivery.

 

  • sales referred to as "on arrival" (SA) designate sales for which the seller bears the costs and risks linked to the international carriage to the agreed-upon place of destination. This type of sale is advantageous for the buyer since he does not have to assume the carriage operation. He simply receives his goods the same as if they had been purchased locally. The seller can also choose sale on arrival to control the local distribution of its product.

Regardless of the Incoterm chosen, it must always be followed by the precise mention of the place of delivery. It is also recommended to indicate whether Incoterm® 2010 or 2020 rules are applicable.

2020 Multimodal Incoterms®

       Multimodal Incoterms®

Incoterm®

SD/SA

meaning

EXW

SD

EX-Works 

The seller makes the packaged goods available at the agreed-upon place (workshop, factory, warehouse, etc.)

The buyer organizes, at its own costs and risks, the loading and transport of the goods to their destination.

FCA

SD

Free CArrier

The seller provides the loading of the truck, car, or ship, that is, it places the packaged goods on the carriage chosen by the buyer to the agreed place after having declared it to customs on export.

The buyer next organizes at his own cost and risk the carriage of the goods to the named destination.

CPT

SD

Carriage Paid To…

The seller pays for loading and pre-transports the goods to the first carrier (or primary carriage) after having made its customs export declaration.

The risks are transferred to the buyer when the goods are handed over to the carrier at the agreed-upon location.

CIP

SD

Carriage and Insurance Paid to…

The seller has the same obligations as in CPT, but must also insure the goods against risk of loss or damage that could occur during carriage.

The risks are transferred to the buyer when the goods are handed over to the carrier at the agreed-upon location.

DAP

SA

Delivered APlace

The buyer is in charge of the main carriage of the goods after having made the export declaration and has completed its obligations when the goods are delivered to the buyer, ready to be unloaded at the agreed-upon place. The seller is not responsible for customs import clearance nor for the payment of duties and taxes.

The costs and risks are transferred to the buyer at the time of the delivery at the agreed-upon place. The buyer's only obligations are to unload the goods and clear the imported goods through customs.

DPU

 

SA

 

Delivered at Place Unloaded

The seller takes charge of the main carriage of the goods after having made its customs export declaration and has completed its obligations when the goods are unloaded and provided to the buyer at the agreed-upon place.

The risks are transferred to the buyer after the carriage and unloading of the goods at the agreed-upon place. The buyer’s only obligation is to clear the imported goods through customs.

DDP

 

SA

 

Delivered Duty Paid

The seller has the same obligations as in DAP or in DPU, but must also clear the imported goods through customs and pay the required duties and taxes.

The costs and risks are transferred to the buyer at the time of delivery at the agreed-upon place. The seller’s only obligation is to clear the goods through customs if the seller does not take charge of this.


 

2020 Maritime Incoterms®

Maritime Incoterms®

Incoterm®

SD/SA

meaning

FAS

SD

Free Alongside Ship

The seller has completed its obligation for delivery when the goods have been placed alongside the ship, on the dock or on a barge at the agreed-upon port of embarkation, and the customs export declaration has been completed.

The buyer must then pay all costs, damages and risks of loss that could occur to the goods.

FOB

SD

Free On Board

The seller has completed its obligation for delivery when the goods are placed on the ship at the designated port of embarkation and the customs export declaration has been completed.

The transfer of risks to the buyer occurs when the goods are on board the ship (port passage). The buyer will then bear all the risks and costs of maritime freight.

CFR

SD

Cost and FReight

The buyer must choose the ship, make the customs export declaration and pay the costs and freight necessary to shipping the goods to the designated port of destination.

The transfer of risks to the buyer occurs when the goods are on board the ship (Incoterm equivalent to the Incoterm CPT of multimodal carriage).

CIF

SD

Cost, Insurance and Freight

The seller has the same obligations as in CFR, but must also provide maritime insurance against risk of loss or damage that could occur during carriage.

The transfer of risks to the buyer occurs when the goods are on board the ship (Incoterm equivalent to the Incoterm CIP of multimodal carriage).

Contracts & Incoterms®

To use an Incoterm® in a contract, the contracting parties must follow certain rules:

  • to avoid all ambiguity, only Incoterms® recognized by the ICC should be used and preferably the latest version (Incoterms® 2020)
  • the previous versions are still valid but the reference year must be stipulated (Incoterm® 2000 or 2010)
  • the Incoterm® must always be followed by the precise mention of the place of delivery

For example: CPT New York (Incoterms® 2020 ICC), FOB port of Amsterdam (Incoterms® 2020 ICC), etc.

  • other additional wording or restrictions may be added, for example the exact time of cost and/or risk transfer of seller to buyer or the exact address of the warehouse/port/airport.

For example: CPT Paris – Aéroport Charles de Gaulle, 95700 Roissy-en-France, France – excluding duties and taxes (Incoterms® 2020 ICC).

Basic rules of international contracts

When drafting contracts for international use, certain rules must be followed:

The contract must be written in a language that is understandable by both parties. English remains the language of business and its use is preferred.

When a Luxembourg company establishes a contract with a foreign company the law of only one country applies in the case of a dispute. The parties can freely decide on the applicable law.  In some cases, the parties may decide to apply different laws to different parts of the contract. Unless an applicable law is mentioned in the contract, the judge will rely on international agreements in order to determine the applicable law.

The seller is normally responsible for packaging the goods that are the object of the sales contract. Transfer of this obligation to the buyer must be clearly mentioned and without ambiguity. The standards applied to packaging and packing must be those of the standard packaging for the same type of goods. When there is no standard usage, the ICC will refer to the ordinary usages in international commerce, and when none exists, to those of the place of the seller's business headquarters.  When there is no standard usage, the packaging must allow to preserve and protect the goods until the time when the goods are provided to the buyer.

The contract must include the method of payment (check, bank transfer, postal order, bill of exchange or promissory note), as well as the payment time.

For example: invoice payable within 60 days from the date of the invoice by bank transfer on our account, etc.

 

Transfer of costs & risks

in Incoterms®

Definition

The term cost transfer refers to the time when the buyer assumes the financial cost of carriage, insurance, and customs formalities on importation or exportation (duties and taxes).

The term risk transfer refers to the transfer of responsibility for the goods from the seller to the buyer. This transfer implies that the consequences for any loss or damage of the goods will be assumed by the buyer.

  • the transfer of risk may occur independently of the transfer of property: the buyer may bear the risks linked to the transport of the goods before he becomes the legal owner of the goods
  • it is thus important to specify the time when the risk transfer occurs in order to know who will be responsible for the financial consequences in the case of damage.

For example: a contract signed between seller X and buyer Y stipulates that the risk transfer occurs when the goods are unloaded from the ship. If the goods fall into the water when they are being unloaded, the buyer will be liable.

Transfer of costs and risks depending on Incoterms

Each Incoterm® sets a degree of participation in terms of risk and cost that is more or less advantageous for the seller or the buyer:

In this regard, Incoterms® rule may also be classified into groups:

  • group E (EXW) – This group represents the seller's minimum obligation to simply make the packaged goods available to the buyer (at the factory of departure)
  • group F (FAS, FCA, FOB) – the seller transfers the responsibility for the goods in terms of risks and costs at the time they are handed over to the transporter previously designated by the buyer. The seller does not bear all the risks and costs linked to the main carriage
  • group C (CFR, CIF, CPT, CIP) – the seller organizes the main carriage and assumes the costs but not the risks:  it is responsible for the cost of main carriage, including any cost of transport insurance, but the buyer will be responsible for the goods in the case of any damage
  • group D (DAP, DPU, DDP) – the seller's responsibility is maximum since it assumes the risks and costs of carriage until delivery to the buyer at the designated place of destination.

The table below shows the breakdown of costs between the seller and buyer depending on the Incoterm® rule chosen:

Impact on taxes & duties

with Incoterms®

The choice of an Incoterm® rule has an impact on the amount of import duties and taxes.

In fact, the Customs value, which serves as the basis of computation of customs duties, anti-dumping duties, anti-subsidies duties even retaliatory duties, includes the cost of transport and insurance of the goods up to the point of entry in the customs territory of the European Union (EU).

Moreover, the tax basis of the import VAT is itself calculated on the customs value to which the following elements are added:

  • customs duties, anti-dumping duties, anti-subsidy duties even retaliatory duties
  • fees after the introduction of the goods, until their first destination in the territory of the EU.

Depending on the Incoterm® rule chosen, the value of transport, transport-related services and insurance must be added or deducted from the invoice amount to obtain the customs value and the base for calculating the import VAT.

It is important to verify the place of delivery that is specified for the Incoterm® rule, and whether the contract between the purchaser and the seller specifies any adaptation of the Incoterm® rule.

The following table summarizes, according to the Incoterm® rule chosen, the fees to add or exclude from the value of the importer's purchase invoice, to determine the import customs value in the EU and the base for calculating the import VAT due:

Summary of fees to include by  Incoterms® rule chosen

 

 

EXW

FCA

FAS

FOB

CPT

CFR

CIP

CIF

DAT

DAP

DDP

 

Seller's premises

Agreed port of embarkation

Agreed destination port

Purchaser's premises

To include in the customs value

Loading, pre-carriage

+

Included

Included

Included

Included

Included

Included

Included

Included

Included

Included

Customs export procedures

+

Included

Included

Included

Included

Included

Included

Included

Included

Included

Included

Transport, pre-carriage 

+

+

Included

Included

Included

Included

Included

Included

Included

Included

Included

Unloading, pre-carriage

+

+

Included

Included

Included

Included

Included

Included

Included

Included

Included

Loading, main transport

+

+

+

Included

Included

Included

Included

Included

Included

Included

Included

Main transport

+

+

+

+

Included

Included

Included

Included

Included

Included

Included

Transport insurance

+

+

+

+

+

+

Included

Included

Included

Included

Included

To exclude from the customs value

Unloading, at the point of arrival

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT



VAT


VAT


VAT

Customs import procedures

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT



VAT

Loading, post-carriage

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT



VAT


VAT

Unloading, at destination

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT

VAT



VAT


VAT

 

Legend

Included

Fees included in the importer's purchase invoice

+

Fees to add to the importer's purchase invoice to obtain the customs value

Fees to deduct from the importer's purchase invoice to obtain the customs value

VAT

Fees to include in the calculation base of the import VAT

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