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.

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.

 

• 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.

2020 Multimodal Incoterms®

       Multimodal Incoterms®

 

2020 Maritime Incoterms®

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: