Popular Questions Incoterms 2020
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Yes: Many companies have complex agreements with their counterparties and service providers, which will be time-consuming to redraft.
Therefore parties are free to continue to refer to Incoterms 2010, Incoterms 2000 (or any other revision!) – provided that this is specified unambiguously in their agreements.
Where possible use CIF, CIP, CFR or CPT.
For all these rules, delivery takes place before the main carriage. The carrier gives the seller a transport document which (usually) serves as a mechanism for control of the goods – it will be presented to a bank under the letter of credit, and then passed on to the buyer so that the goods can be claimed.
All the other rules are potentially problematical in one way or another.
For example with FCA, the buyer is in control of the main transport, and there are circumstances in which the buyer may be able to frustrate the transaction.
Conversely with DAT, the buyer can be at risk, because seller may be able to get paid under the letter of credit before fulfilling the delivery obligation.
Use of the rules is not limited to cross-border trading.
The Incoterms rules are also applicable to transactions where the buyer and seller are in the same country, or both within a customs union such as the European Union.
All the provisions of the rules are written with this in mind, e.g. if there are issues with import duty or taxes, they need only be considered where appropriate.
The Incoterms rules are silent on the issue of when title in the goods passes from seller to buyer. This should be dealt with elsewhere in the commercial agreement.
The issue of title to the goods is related to that of revenue recognition, which matters to those organisations who want the best figures in their financial reports.
Revenue recognition is defined by accounting standards such as GAAP, and the point of delivery (as defined by the Incoterms rule) is one factor in the decision on this matter.
Hence rules such as DAP and DAT would tend to be disadvantageous in this respect.
In general, the rules are silent on the matter of insurance – the buyer and the seller each decide whether they wish to insure the cargo for that part of the journey for which they bear the risk of loss or damage.
However the CIF and CIP rules have specific provisions.
In both cases, the seller is required to buy cargo insurance for the portion of the journey where the seller is “off risk”, once the goods have been delivered to the carrier.
This insurance is for the benefit of the buyer, who must claim from the insurer if necessary.
General Import -Export Questions
Understanding Incoterms
Incoterms is an abbreviation of ‘International Commercial Terms’. They are terms that represent a universal and easily understandable method of communication between importers and exporters in countries around the world.
Incoterms define the responsibilities and obligations of the buyer and seller in a transaction so both parties understand the costs, the risks and the tasks they are responsible for.
On 1 January, 2020, a new set of Incoterms came into effect. In this glossary, we provide a description of each term, including those that have recently been updated or introduced.
Direct is where the agent acts on our behalf but is not responsible for any mistakes or errors. The University will remain responsible for the accuracy and completeness of all of the information on the declarations abd liable for any duties or Import VAT due. This is the industry standard and the scenario you are most likely to encounter. Indirect representative are where they are jointly and severably liable with the University for any payments due.
The seller is responsible for placing the goods to be exported alongside the ship at the named port, as well as arranging export documentation and clearing export customs. The risk for the loss or damage of those goods then passes to the buyer, who also bears all of the costs from that moment on. This Incoterm should apply to conventional sea freight only, not containerised cargo.
The seller is only responsible for making the goods ready for collection at a named premises, which could be their warehouse or another named location. The buyer is then responsible for the shipment from that point, including loading the goods, export documentation and clearance, payment of transportation costs, and movement of goods to the final destination.
The ICC has recommended that EXW only be used for domestic trade as it is difficult for an overseas buyer to complete export documentation in the country of supply. For overseas trade, FCA (Free Carrier) Seller’s Premises should be used instead of EXW.
As outlined above, this term should be used instead of EXW (Ex Works), which is widely misused for exports. Under this term, the seller bears all risks and costs up to and including loading the goods onto the vehicle at their premises. The seller also has an obligation to arrange export documentation and clear export customs. If used for ocean freight, the seller can obtain a bill of lading.
The seller pays the transport costs within their own country up to unloading at a named place, while also having responsibility for export documentation and customs procedures. A bill of lading can be obtained by the seller for ocean freight. This term can be used for all modes of transport, and the ICC recommends that it replaces FOB (Free on Board) when goods are not being moved by conventional sea freight.
The seller is responsible for loading the goods on board the vessel that has been nominated by the buyer, and also bears responsibility for export and customs duties. Once the goods are on board the ship, the cost and risk for the goods are divided between the two parties. The ICC advises that FOB should only be used for conventional sea freight, with FCA Named Place used for all other modes of transport, including containerised sea freight.
The seller pays the costs and freight for transporting the goods to the named destination port. However, the risk is transferred to the buyer once the goods have been loaded onto the ship. According to the ICC, this term should only be used for conventional sea freight. It isn’t appropriate for containerised cargo, which is better covered by CPT (Carriage Paid To).
The seller is responsible for loading the goods on the vessel chosen by the buyer, clearing the goods for export at the port/airport of loading, and paying freight costs to the named destination. The risk passes to the buyer once the goods are loaded on the first carrier.
CPT can be used for any means of transport and should replace CFR when shipping containerised cargo (as outlined above).
Just as the above, except in this case, the seller is also responsible for arranging and paying for the insurance. Incoterms 2020 states that CIF comes with the basic level of insurance, classed as “Clause C”, and should only be used for conventional sea freight.
The seller pays for the carriage and insurance to the named destination port, clears the goods for export at the port or airport of loading, and arranges insurance to a minimum of “Clause A”. CIP can be used for any means of transport, but the risk passes to the buyer when the goods are handed to the first carrier.
The seller is responsible for all the costs and risks associated with delivering the goods to the named destination in the country of the buyer, including import duties and taxes. The buyer’s only responsibility is unloading the goods. While Ex Works (EWX) represents the minimum obligation for the seller, DDP represents the maximum obligation for the seller. It’s worth noting that DDP trade is not always possible in certain countries.
The buyer is responsible for import customs clearance plus any local taxes and import duties, with the seller responsible for arranging and delivering the goods to a named destination, which might be a port or airport in the buyer’s country. However, the seller is not responsible for unloading the goods at the named place.
The seller bears the cost, risk and responsibility for goods until they arrive at the buyer’s premises in the country of destination, but not unloading the goods from the delivering transport. The buyer is responsible for import customs clearance and the payment of import duties/taxes, with the seller responsible for export clearance. The seller has the option to revert to DAP Arrival Point if import formalities are not completed in a reasonable time.
Under this term, the seller bears the cost, risk and responsibility until the goods are unloaded at a named place. The named place can be an air cargo depot, quay, container port, rail port, warehouse or any agreed place between both parties. This is the only term that requires the seller to unload the goods, but customs clearance is still the responsibility of the buyer.
This term was previously named Delivered at Terminal (DAT), but was changed for Incoterms 2020 as buyers and sellers often want goods delivered somewhere other than a terminal.
If you require any further guidance on Incoterms, HFS will be happy to help. Please don’t hesitate to contact Chris Hill or Simon Joseph on 01473 852781.