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.

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 must specify these obligations in the contract by mentioning the Incoterm adapted 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

 

  • 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.

2010 Multimodal Incoterms

Multimodal Incoterms

Incoterm

SD/SA

meaning

EXW

SD

EX-Works 

The seller makes the packaged goods available in its premises (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 after having made its customs export declaration.

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.

DAT

SA

Delivered At Terminal

The seller takes charge of the main carriage of the goods after having made its customs export declaration and has completed its obligations when it is unloaded and delivered to the buyer at the "designated terminal," that is, in the port, air, road or rail terminal agreed-upon with the buyer.

The risks are transferred to the buyer after the carriage and unloading of the goods at the agreed-upon place.

DAP

SA

Delivered At Place

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 obligation is to unload the goods.

DDP

SA

Delivered Duty Paid

The seller has the same obligations as in DAP, but must also clear the goods through customs and pay the required 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 obligation is to unload the goods.

2010 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 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).

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