¿What are Incoterms?
The Incoterms are terms established to determine the exporter’s and importer’s responsibilities when making international transactions. These terms demarcate the operation’s conditions, both on costs level and the responsibility each side assumes.
Incoterms is the abbreviation for “International Commercial Terms”. They were created in the year 1936, as part of the International Chamber of Commerce (ICC). Nowadays, they constitute a set of 11 rules. Incoterms are an essential requirement in any commercial bill, therefore reducing the risk of misunderstanding between the two partis, thanks to the tasks, risks and costs’ specifications that involve each one.
Markets keep developing, and so do the Incoterms. On 2020, several aspects of some Incoterms have been modified. We will tell you about it in this post.
Types of incoterms
Incoterms can be classified in different ways. The easiest one, though reveals less information than the rest, is following the means of transport.
Whenever the merchandise is being sent through one unique way, maritime or terrestrial, one must choose between these:
- FAS (Free Alongside Ship).
- CFR (Cost and Freight).
- FOB (Free On Board).
- CIF (Cost, Insurance and freight).
On the other hand, they can be classified according to the combination of the means of transport. On these cases, they receive the denomination of “multimodal”, and may include these types:
- EXW (Ex Works).
- FCA (Free Carrier).
- CPT (Carriage Paid To).
- CIP (Carriage and Insurance Paid To).
- DPU (Delivered at Place Unloaded).
- DAP (Delivered At Place).
- DDP (DDP Delivery Duty Paid).
Now we will see the classification according to the group they are part of:
Group E: Delivery at exit
- EXW: Ex Works. In this case, the merchandise is delivered at the seller’s facilities. It is the one that less obligations, costs, and risks implies. It is the only Incoterm in which the seller doesn’t take responsibility for the export clearance. On the other hand, being the Incoterm that offers the minimum service possible, it is also the least competitive for the seller. Given the fact that some parts of the process will be lost, thanks to good logistics, it can result in a bigger income. We recommend it for exporter companies with little international experience, that operate with low-volume groupage. When dealing with bigger quantities (containers), it is better to choose the FCA Incoterm, described in the following group.
Group F: Direct Delivery.
- FAS: Free Alongside Ship. The seller delivers the merchandise in the established dock of the chosen loading port. The seller is in charge of the transportation of the merchandise only until the moment before it is loaded on the ship, but assumes the management and costs of the customs office of export. It is normally used for bulk cargoes or basics, that don’t require packaging and cannot be individualized. It is, therefore, an Incoterm used exclusively for maritime transport. When sticking to FAS, the buyer, who is responsible for loading the merchandise on the merchant ship, must know about the loading port’s way of functioning. The seller must deliver the merchandise besides the ship, and the buyer has the obligation of picking up the merchandise in the designated dock and specific place. This agent is in charge of hiring the transportation from the loading dock to the final destination.
- FOB: Free On Board. The seller delivers the merchandise in the ship, and the buyer is the one in charge of hiring the main transport. It is one of the most-used Incoterms, preferably for maritime transport in general load regime or when the cargo is complex and risk-taking. The seller must supply the buyer with all the documents that justify the delivery, besides obtaining the necessary documentation for the export clearing (certifications, licenses, and authorizations). None of the agents are obliged to hire an insurance policy. Both easy and documentary means of payment can be used with FOB, for the B/L is also used for transferring the possession of the cargo.
- FCA: Free Carrier. Here, the seller is responsible for delivering the merchandise at an agreed point of the country of origin or at the seller’s facilities. In order to do this correctly, it is necessary to clearly specify the delivery place. It could be used in any means of transport, so it is a very flexible Incoterm. The seller must complete the procedures and assume costs for the export clearing. He is responsible for obtaining the required documentation. None of the parties are obliged to hire an insurance policy, although we recommend doing it for international transport at least.
Group C: Indirect delivery, but the main transport is paid.
- CFR: Cost and Freight. The seller is in charge of every cost until the cargo gets to the destination port, but it becomes the buyer’s responsibility once the cargo is loaded. This time, assuming transportation risks are done at the loading port, and the seller assumes these risks at the destination port. Terminal expenses in the loading port and export clearing must be covered by the seller. Recommended for maritime transport only. The only difference with CIF is that in CFR, the seller does not have the obligation of hiring an insurance policy.
- CIF: Cost, Insurance and Freight. As in CFR, the seller is in charge of loading and transportation costs, and it is the buyer’s responsibility once the merchandise is loaded in the ship. Terminal expenses in the loading port and export clearance are on behalf of the seller. This party is obliged to hire an insurance policy covering, at least, the route from the loading port to the destiny port. CIF is used exclusively in maritime transport, and for convencional or general cargo. If it is traveling in containers, we recommend to use CIP. CIF has historically been the most used Incoterm, for it is used by most customs in applying the taxes, making easier the custom clearince in the country of destination.
- CPT: Carriage Paid To. Here, the seller is in charge of the costs until the cargo arrives to the destination point. Nevertheless, the risk is transferred to the buyer since the moment the merchandise is delivered to the shipper in the country of origin. This Incoterm can be use in any type of transport. Unlike CIP, the seller has no obligation of hiring an insurance policy, he complies with his delivery obligation when the cargo is available for the shipper that he hired himself, and the chosen place. Transportation risks are transferred once the merchandise is delivered to the shipper in order to take it to its destiny. When several shippers are involved, the risk is assumed in the delivery by the first of them.
- CIP: Carriage and insurance Paid. The seller delivers the merchandise in his own country, when it is available for the shipper he hired. He must also pay for the international transportation costs. The buyer assumes the risks produced once the cargo is delivered to the shipper at the seller’s country. This last party must hire an insurance policy that the buyer assumes for any loss or damage of the cargo during the international transportation. The seller must complete the procedures and assume customs export costs, not for the import’s (this corresponds to the buyer).
Group D: Direct delivery.
- DPU: Delivered at Place Unloaded. This time, the seller delivers and unloads the cargo in the place required by the buyer. The seller is in charge of the custom imports, and must complete procedures and assume costs for custom exports. Great for multimodal transportation, and used when choosing to deliver at a transport terminal.
- DAP: Delivered At Place. The seller delivers the merchandise, without unloading, at the established point in the country of destination. Risk transmission for transport is produced in the same place the delivery is made. The seller is in charge of the custom imports, and must complete procedures and assume costs for custom exports.
Great for sales between countries of the same economic region in which the delivery is made at the buyer’s facilities.
- DDP: Delivered Duty Paid. In this last type, the seller delivers the cargo without unloading, in the buyer’s facilities or somewhere in the buyer’s country. Risk transmission for the transport is produced in the same place that the delivery is made. It is the one that represents the greatest obligation for the seller, for he assumes every cost and risk of the operation, including import procedures, until delivering the cargo in the agreed place. Unloading the cargo is the only cost not assumed by the seller. The only difference with DAP is that in DDP, every cost and tax for the importation clearance are assumed by the seller. When, between two countries, there is no customs clearance, DAP must be used (not DDP).
¡Incoterms don’t cover everything!
Remember this, not every aspect of the transaction is covered by an Incoterm. This is why these other aspects must be agreed upon apart from the chosen Incoterm:
- Breach of contract.
- Means of payment.
- Rights for property and transfer of possession title.
- Mayor force.
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