Incoterms are used globally to define seller and buyer obligations in international transactions.
When you enter into contracts to sell goods in business-to-business situations, you will negotiate the price, quality, and characteristics of the goods. You’ll also need to negotiate where the goods will be handed over to the buyer and who will be responsible for the goods – and the costs – to that point.
The International Chamber of Commerce (ICC) has designed a set of Incoterms, which are used around the world as the starting point for international trade negotiations. Incoterms stands for ‘international commercial terms’ and they clearly establish, in sales contracts, the legal obligations of the buyer and seller with regard to the delivery of goods.
They are used to make sure the buyer and seller know:
- Who is responsible for the cost of transporting the goods, including insurance, taxes and customs duties
- Where the goods should be collected from and transported to
- Who is responsible for the goods at each step during transportation
Incoterms are beneficial to both parties involved in transactions involving the transfer of goods as they remove any vagueness, misunderstanding and confusion in international transactions.
Each Incoterm clarifies how the functions, risks and costs are to be split between parties. They cover delivery points; division of costs; transfer of risk; mode of transport; and the obligations of the buyer and seller. The ‘delivery point’ is particularly important as this generally is where the seller can claim payment, have no further shipment costs to pay, and have no further responsibility for the goods if they are lost or damaged after that specific named point.
There are 11 incoterms and they are sorted into four groups:
- E Terms
EXW (ex-works) applies to situations where the seller makes the goods available at their premises for the buyer to collect. It represents the minimum obligation for the seller. Whilst it is the only Incoterm in this category, it is perhaps the most well-known.
- F Terms
These terms apply to situations where the seller must deliver goods to a carrier appointed by the buyer. The seller will arrange and pay for delivery of the goods to the carrier but the buyer pays for the carriage from that point forward. FCA (free carrier) can be used for any mode of transport. FAS (free alongside ship) and FOB (free on board) are used only for sea or inland waterway transportation.
- C Terms
The C Terms state that the seller has to contract for carriage but does not assume the risk for loss or damage to the goods or any additional costs due to events occurring after shipment. CFR (cost and freight) and CIF (cost insurance and freight) can only be used for goods shipped by sea or inland waterways. CPT (carriage paid to) and CIP (carriage and insurance paid to) can be used for any form of transport.
- D Terms
These rules apply regardless of the mode of transport used. DAT (delivered at terminal) means delivery takes place when the seller puts the goods at the disposal of the buyer at a named terminal. The seller bears all risks involved in bringing goods to and unloading them at the terminal, including clearing goods for export. DAP (delivered at place) means that delivery takes place when the seller puts the goods at the disposal of the buyer at a named place for unloading. That means the buyer needs to unload the goods. If the seller inadvertently pays the carrier for unloading, it will not be able to recover this cost from the buyer unless the parties expressly agree that this is to be the case. DDP (delivered duty paid) means the seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination including import duties and taxes.
In the early stage of negotiations with buyers, make sure that everyone has a similar understanding of the project so that opportunities aren’t lost because of miscommunication. When ironing out the project details, make sure not to assume that your partner is used to doing things the way that you are, or will understand exactly what you mean even if you don’t say it. Finally, using international standards like Incoterms can help you identify areas for allocating risk, and preventing costly surprises.
Incoterms are seldom negotiated in business-to-consumer transactions. In e-commerce situations, for example, the incoterms are usually incorporated into the company’s trading terms and conditions. Delivery typically takes place at an address stipulated by the buyer and the seller pays all costs.
UPS’s Billing Centre can help you manage shipping costs by allowing you to determine who pays each portion of the shipping charges. Charges can be billed to the shipper, receiver, or a third party payor. Charges for international shipping typically include freight, duties, and taxes. Customers using UPS’s automated shipping systems can choose to have the shipping charges billed to one party and duties & taxes to another. Or, via the “Split Duty VAT” (SDV) option, customers can bill the freight and duty to one party and the tax/VAT to another.