International commerce terms, more commonly known as Incoterms, are a set of international rules for the interpretation of the most commonly used trade terms in foreign trade. These terms are published by the International Chamber of Commerce (ICC) and are used to help traders avoid costly misunderstandings by clarifying the tasks, costs, and risks involved in the delivery of goods from sellers to buyers.
What Are Incoterms?
Have you ever ordered something online that upon delivery, and to your surprise, had additional charges due? This is an excellent example of not knowing your Incoterms. These extra charges are often related to the Customs duties and taxes that were incurred upon import, that the seller did not agree to include in the cost of the goods they sold you. This is a scenario that we have all encountered and is an excellent example of a DPU Incoterm (Where the Seller is responsible for everything except the Customs clearance).
Incoterms 2020 Updates
The most recent update to the Incoterm rules was published this year and took effect as of January 1, 2020.
The most notable changes to the Incoterms® 2020 rules are:
- Order change: DAP (Delivered at Place) now comes before DAT (Delivered at Terminal)
- The DAT (Delivered at Terminal) rule has been changed to DPU (Delivered at Place Unloaded)
- Insurance: CIF (Cost of Insurance and Freight) requirements remain the same, while the CIP (Carriage and Insurance Paid To) insurance requirements have increased
- Cost Obligations: Allocations of costs between both buyer and seller are clearly outlined in order to decrease disputes, especially those concerning the port or place of delivery
- Security Requirements: Obligations around security are emphasized, and the costs are outlined for each rule
- FCA and FOB: Generally FOB (Free On Board) is used for shipments of containers where the seller assumes the cost and risk until the container is loaded. The FCA (Free Arrival) rule now allows for the buyer to instruct the carriers to remit the on-board bill of lading to the seller, after loading.
When this option is used, the seller is obligated to tender the bill of lading to the buyer but does not take on an obligation to the buyer with respect to the terms of the contract of carriage.
- Clarity of Terms: The Guidance Notes have been moved from the beginning of each section to a new, separate section called, Explanatory Notes for Users. These provide helpful notes and images in order to clarify each incoterm.
The Updated 11 Rules Are:
Any Mode Of Transportation Other Than Maritime:
EXW Ex Works (named place)
FCA Free Carrier (named places)
CPT Carriage Paid To (named place of destination)
CIP Carriage And Insurance Paid To (named place of destination)
DAP Delivered At Place (named destination place)
DPU Delivered At Place Unloaded (named destination place)
DDP Delivered Duty Paid (named destination place)
FAS Free Alongside Ship (named loading port)
FOB Free On Board (named loading port)
CFR Cost And Freight (named destination port)
CIF Cost, Insurance and Freight (named destination port)
Using the correct terms is vital to the customs process. To a customs broker, the correct usage of these terms on shipment documentation can identify the Importer of Record and potential deductions to the declared value for duty.
Is your organization comfortable using Incoterms? If so, what do you find are some of the benefits and drawbacks of using them?