INCOTERMS
and How to Use Them
An Explanation of Its Importance
- Gorian Customs SL
INCOTERMS - What are they?
Imports and exports are regulated by INCOTERMS updated in 2020.
There are currently 11 types of Incoterms.
Very well! But what are INCOTERMS? And what are they used for?
INCOTERMS are used to facilitate international transactions in the sale of goods in terms of the responsibilities to be assumed by the buyer and the seller.
The ICC or International Chamber of Commerce established the INCOTERMS in 1936 with the aim of proposing a series of rules and clauses for contracts of sale in the international transport of goods.
Depending on their form of delivery, INCOTERMS are categorised into 4 groups reflecting who bears the transaction costs and who bears the responsibilities in the international sales transaction:
- Incoterms Group E. Delivery on departure.
- Incoterms Group F. Indirect delivery.
- Incoterms Group C. Indirect delivery, but the seller bears the costs.
- Incoterms Group D. Direct delivery with the seller assuming costs and risks.
A Table of INCOTERMS
The best way to understand INCOTERMS is visually.
INCOTERMS - Meanings In More Details
CARRIAGE AND INSURANCE PAID:
The CIP is an Incoterm similar to the CPT, but including the cost of insurance in the responsibilities of the SELLER/EXPORTER.
The BUYER/IMPORTER is only responsible for the import formalities, the delivery at destination and the expenses derived from the moment the goods are delivered at the agreed point of destination. The insurance must include coverage of the goods until they reach the agreed destination.
The novelty in this Incoterm with respect to the 2010 Incoterms lies once again in the insurance coverages, in this case, the insurance must contain the same coverages as those provided by Clauses A of the Institute Cargo Clause, the goods must be insured until delivery to the carrier at destination.
CARRIAGE AND INSURANCE PAID:
The CIP is an Incoterm similar to the CPT, but including the cost of insurance in the responsibilities of the SELLER/EXPORTER.
The BUYER/IMPORTER is only responsible for the import formalities, the delivery at destination and the expenses derived from the moment the goods are delivered at the agreed point of destination. The insurance must include coverage of the goods until they reach the agreed destination.
The novelty in this Incoterm with respect to the 2010 Incoterms lies once again in the insurance coverages, in this case, the insurance must contain the same coverages as those provided by Clauses A of the Institute Cargo Clause, the goods must be insured until delivery to the carrier at destination.
DELIVERED AT PLACE UNLOADED:
This Incoterm replaces the old DAT and agrees that the SELLER / EXPORTER bears all costs and assumes responsibility for the goods until delivery at the agreed point of destination, including delivery at destination.
The BUYER / IMPORTER is only in charge of customs formalities. This Incoterm is newly created and replaces DAT, in fact what it does is to extend the delivery options since DAT indicated that delivery had to be made at the terminal, now with DPU delivery can be made at another agreed place besides the terminal.
DELIVERED AT PLACE / DELIVERED AT A POINT:
The SELLER / EXPORTER assumes all risks and expenses on the goods until they are delivered at destination, not including unloading, and assumes the insurance in case it is contracted.
The BUYER / IMPORTER shall be responsible for import formalities and unloading costs. This Incoterm is valid for all means of transport, insurance is not compulsory, but in the event that it is taken out, the costs shall be borne by the BUYER / IMPORTER.
DELIVERED DUTY PAID:
In this Incoterm, the SELLER / EXPORTER assumes all the risks and costs of the transport and delivery process, both at origin and destination, including import formalities and unloading costs.
The BUYER / IMPORTER is only responsible for receiving the goods. This is the opposite Incoterm to EXW, in which case the seller assumes all costs and responsibilities instead of the buyer.
The buyer only has to receive the goods and generally unload them, although the seller may also take care of this.
This Incoterm is the opposite of EXW, the seller bears all costs and risks.
EX WORKS / IN FACTORY:
The SELLER / EXPORTER delivers the goods to the buyer at his own premises and therefore his sole responsibility is to pack the shipment correctly.
The BUYER / IMPORTER assumes all costs from the moment he collects the goods from the seller’s warehouse. Insurance is not compulsory, but if it is taken out, the buyer assumes the risk. This Incoterm is not used when the seller delivers the goods to a place other than his premises.
FREE CARRIER:
The SELLER / EXPORTER delivers the goods to a place previously agreed with the buyer, and therefore bears all the costs of delivery, assuming all the risks up to that moment. Even customs duties are borne by the seller until the goods are delivered to the place agreed with the buyer. In this way, the seller is responsible for internal transport and customs export formalities, except if the designated place is the seller’s premises (FCA WAREHOUSE), since, in this case, the goods are delivered at that point loaded onto the means of transport provided by the buyer, with the buyer bearing the cost.
The PURCHASER / IMPORTER bears the costs from loading on board to unloading, including insurance if taken out as he bears the risk when the goods are loaded on the first means of transport.
FREE ALONGSIDE SHIP :
The delivery of goods is carried out by the SELLER / EXPORTER at the loading dock, next to the ship where the transport will take place. The seller bears all costs and risks up to this point, including the costs of export clearance. In this case, the buyer is responsible for the costs of loading on the ship and those derived until its arrival at the final destination of loading on board, stowage, freight and other costs until delivery at destination, including import clearance and insurance if contracted as it is not compulsory. It also assumes the risks once the goods are on the loading dock before being loaded onto the ship.
The risk of the BUYER / IMPORTER on the goods is assumed as soon as the seller deposits them on the loading dock.
This Incoterm is only valid for sea transport and is generally used for special goods that have particular loading requirements, not usually for palletised cargo or containers.
FREE ON BOARD :
The SELLER / EXPORTER bears all risks and costs until the goods are loaded on board the ship carrying them, including export and origin charges. The buyer bears the costs of freight, unloading, import formalities and insurance. From the moment the goods touch the floor of the ship the risk is transferred to the BUYER / IMPORTER.
The FOB Incoterm can only be used for sea transport.
It should be noted that this Incoterm is not recommended for goods travelling in containers as it is difficult to identify where the damage occurs if an incident occurs, because liability is transferred when the goods are loaded on board the ship (the goods are physically touching the floor of the ship), but in this case, containers are not loaded as soon as they arrive at the terminal, therefore, if the goods were damaged while in the container it would be very difficult to establish when it happened.
The most feasible option in this case is to choose the FCA option.
COST, INSURANCE AND FREIGHT:
The SELLER / EXPORTER bears all costs and has full responsibility for the goods until they reach the port of destination.
The BUYER / IMPORTER is responsible for the import and transport costs from arrival at the port to the final destination of the goods.
The buyer assumes the risk on the goods from the moment they are loaded onto the ship, so insurance is usually taken out, and the buyer takes care of the import formalities and transport to the destination. The buyer also assumes the risk when the goods are on board, so although it is not compulsory, insurance is usually taken out.
This Incoterm is only used in maritime transport.
COST, INSURANCE AND FREIGHT:
This Incoterm is the same as the CFR, but with the obligation to take out insurance at origin, regardless of whether the risk is transferred from the cargo on the ship from the seller to the buyer.
In 2020, this Incoterm is updated to state that the compulsory insurance must cover the goods until they reach the port of destination.
The SELLER / EXPORTER assumes as in CFR all costs up to the arrival at the port of destination including export clearance, costs at origin, freight and generally unloading but in addition originally has to take out insurance although the risk is transferred to the buyer once the goods are loaded on board. The PURCHASER / IMPORTER bears the import and transport costs to the destination.
The novelty of this Incoterm in the 2020 version refers to the insurance coverage that the seller must contract, pointing out that it must be the same as that provided by Clauses C of the Institute Cargo Clauses, i.e. the insurance must cover up to the arrival at the port of destination. This is an Incoterm that is only used for maritime transport and is widely used as it determines the customs value.
INCOTERMS -
Indications to Take into Account
The chosen type of Incoterm must be indicated on the invoice containing the commercial payment agreement, and must be previously understood by both parties (the obligations that the Incoterm confers on them). Indicate that INCOTERMS 2020 apply in the sales contract, otherwise the previous incoterms from 2010 or 2000 may apply.
The most commonly used INCOTERMS in international transport are FOB, FAS, FCA, CFR and CIF, with the seller usually assuming most of the costs and responsibility for the goods.
The difficulty of customs procedures means that companies (and individuals) hire the services of GORIAN Customs Agents to take care of the whole process, thus saving time, effort, money and the feeling of being in professional hands.
Smile! Gorian makes it difficult…. we make it easy!
