What is INCOTERM?
Incoterms is short for International Commercial Terms and are a set of 11 rules defining who’s responsible for what during international transactions.
Incoterms are internationally recognized and have become an essential part of the daily language of trade since they were first published in 1936. They are maintained and developed by the International Chambers of Commerce (ICC). They provide rules and guidance to importers, exporters, lawyers, transporters, insurers and everyone involved in trade, and as such are regularly used in contracts for the sale of goods all over the world.
Why are they important?
Incoterms rules clarify the tasks, costs and risks involved in the delivery of goods by sellers to buyers, their use significantly helps to avoid costly misunderstandings. An added advantage is that they are also recognised by UNCITRAL (the United Nations Commission on International Trade Law) as providing the global standard for the interpretation of the most commonly used terms in foreign trade.
For customs clearance, Incoterms are important as they determine who bears the transport cost. In most countries transport cost must be included in the customs base on which duty and taxes are due. A clear awareness of the Incoterms principles coupled with their correct use and application can therefore really help you and your customers avoid problems in exporting and importing goods.
They summarise the tasks, responsibilities and risks relating to an international shipment. They define what the sender and receiver agreed upon before shipping and prevent misunderstandings regarding the shipping costs – like finding out the sender didn’t insure the goods or having to pay the shipping costs when they arrive. They’re a requirement on a commercial invoice.
The clauses applicable to all modes of transport (irrespective of the mode of transport and their number)
- EXW (Ex Works): the merchandise is made available to the buyer at the seller’s premises; the buyer is responsible for the payment of the transport and the cost of the insurance;
- FCA (Free Carrier): the seller deliver the goods to the carrier called by the buyer, in a predetermined place, with the clearance for export;
- CPT (Carriage Paid To): the seller pays the cost of carriage to the agreed destination; the risks of loss or damage to the goods, or any other risks, pass to the seller at the time of delivery of the goods to the first carriage; the seller has the obligation to ensure the export clearance;
- CIP (Carriage and Insurance Paid To): the seller has the same obligations as the CPT clause and in addition, covers and secures the goods for loss or damage during transport; the seller has the obligation to ensure the export clearance;
- DAT (Delivered at Terminal): the seller assures the delivery and unloading of the goods in the destination terminal agreed with the buyer, where the destination terminal can be: quay, warehouse, terminal or yard; the seller has the obligation to cover the export clearance as well as the delivery and unloading costs at the agreed destination terminal; demurrage or detention charges may apply to seller;
- DAP (Delivered at Place): the seller delivers the goods at the place agreed with the buyer; the seller has the obligation for export clearance and covers all transportation, delivery and unloading costs at the agreed destination; DAP replace old terms DAF and DDU;
- DDP (Delivered Duty Paid): delivery is considered done when the goods was shipped at the buyer’s agreed destination place; the seller is responsible to cover all costs and risks associated with the delivery of the goods in the agreed place, including customs duties, both export and import at the place of destination, as well as other legal import clearance, duties and taxes;
Clauses applicable for sea and inland waterway transport
- FAS (Free Alongside Ship): the seller has fulfilled his delivery obligation when the goods are alongside the ship (on quay or barges), at the named port terminal of loading; seller is responsible for export clearance;
- FOB (Free On Board): the seller has fulfilled his delivery obligation when the goods passes the ship’s rail at the named port terminal of loading;
- CFR (Cost and Freight): the seller is responsible for paying the costs necessary to bring the goods to the agreed port of destination, but the risk of loss or deterioration of the goods is taken over by the seller when the goods pass the ship’s rail at the named port terminal of loading;
- CIF (Cost, Insurance and Freight): the seller has the same obligations as the CFR clause and in addition covers also the insurance of goods for loss or damage during transport; also implies the seller’s obligation to cover the export clearance;