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WHAT ARE 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.
FAS (FREE ALONGSIDE SHIP)
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.
EXW (EX WORKS)
Can be used for any transport mode, or where there is more than one transport mode. This rule places minimum responsibility on the seller. The seller is only responsible for making the goods ready for collection suitably packaged, at a named premises, usually the seller’s factory or depot. 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.
FCA (FREE CARRIER) SELLER’S PREMISES
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.
FCA (FREE CARRIER) NAMED PLACE
Can be used for any transport mode, or where there is more than one transport mode. A very flexible rule that is suitable for all situations where the buyer arranges the main carriage. The seller pays the transport costs within their own country up to unloading at a named place (Which can be a terminal or transport hub, forwarder’s warehouse etc. ) while also having responsibility for export documentation and customs procedures.
Delivery and transfer of risk takes place when the truck or other vehicle arrives at the named place, ready for unloading – in other words, the carrier is responsible for unloading the goods. (If there is more than one carrier, then risk transfers on delivery to the first carrier.)
In all cases, the seller is responsible for export clearance; the buyer assumes all risks and costs after the goods have been delivered at the named place.
FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage.
FOB (FREE ON BOARD)
Free On Board (FOB) is a shipment term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping. « FOB shipping point » or « FOB origin » means the buyer is at risk and takes ownership of goods once the seller ships the product.
For accounting purposes, the supplier should record a sale at the point of departure from its shipping dock. « FOB origin » means the purchaser pays the shipping cost from the factory or warehouse and gains ownership of the goods as soon as it leaves its point of origin. « FOB destination » means the seller retains the risk of loss until the goods reach the buyer.
CFR (COST AND FREIGHT)
The seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain them from the carrier.
With a cost and freight sale, the seller is not responsible for procuring marine insurance against the risk of loss or damage to the cargo during transit. Cost and freight is a term used strictly for cargo transported by sea or inland waterways.
CPT (CARRIAGE PAID TO)
Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for loading the goods on the vessel chosen by the buyer, clearing the goods for export at the port of loading, and paying freight costs to the named place however not for insuring the goods to the named place. 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).
CIF (COST, INSURANCE & FREIGHT)
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.
CIP (CARRIER AND INSURANCE PAID)
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.
DDP (DELIVERED DUTY PAID)
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.
DAP (DELIVERED AT PLACE) ARRIVAL POINT
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.
DAP (DELIVERED AT PLACE) BUYER’S PREMISES
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.
DPU (DELIVERED AT PLACE UNLOADED)
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.
Please note: French and Dutch Translations for this page are unavailable at this time.
Information on the European Commission’s website:
- Getting ready for the end of the transition period
- Withdrawal of the United Kingdom from the EU
- Market Access Database: Information on trade with third countries
- Brexit: Situation, negotiations and preparedness
Information on the European Council’s website
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