Choosing the right Incoterms® rule is only one part of planning an international shipment. If your company needs support with Importer of Record (IOR) services, customs requirements, duties, taxes, or cross-border equipment shipments, One Union Solutions can help you plan the import process based on the destination country and shipment requirements.
Choosing the right Incoterms® rule is only one part of planning an international shipment. If your company needs support with Importer of Record (IOR) services, customs requirements, duties, taxes, or cross-border equipment shipments, One Union Solutions can help you plan the import process based on the destination country and shipment requirements.
When a company buys or sells goods internationally, there are several things to sort out besides the price. Someone has to organise the transport, deal with customs, pay the different shipping charges and take responsibility for the goods while they are being transported. The buyer and seller need to be clear about who will handle each of these tasks.
Incoterms® 2020 help make these arrangements clearer. The rules are published by the International Chamber of Commerce (ICC) and give buyers and sellers a simple way to agree on who will handle different parts of the sale and delivery.
The 2020 edition has 11 Incoterms® rules. Each rule explains how certain costs and responsibilities are divided between the buyer and seller. This includes arrangements for transportation, export and import formalities, specific charges, the point at which risk passes from the seller to the buyer, and, where applicable, the seller’s responsibility for insurance.
Incoterms® 2020 took effect on 1 January 2020 and remains the current edition of the ICC Incoterms® rules.
For businesses involved in international shipping, choosing a suitable Incoterms® rule can make the delivery process easier to understand. It can also reduce confusion about who is expected to pay for a particular service or deal with a specific part of the shipment.
A shipment moving from one country to another may pass through several hands. Manufacturers, suppliers, freight forwarders, carriers, customs brokers, exporters, importers and the final customer may all be involved.
With so many parties involved, it is important to know who is handling what. Without a clear agreement, questions can come up during the shipment. For example, the buyer and seller may disagree over who should arrange transport, pay a particular charge or take care of a customs requirement.
Incoterms® 2020 help set out these responsibilities before the goods are shipped.
For example, under DAP (Delivered at Place), the seller generally takes care of the risks and costs involved in getting the goods to the agreed destination. Once the goods arrive, they are made available to the buyer on the arriving means of transport and are ready to be unloaded. The buyer is responsible for unloading the goods and handling the import formalities.
This is why the Incoterms® rule and the exact delivery location should be agreed carefully. The named place or point can affect where delivery takes place, when the risk passes to the buyer and which costs are handled by each party.
With DDP (Delivered Duty Paid), the seller takes on considerably more responsibility. This includes import clearance as well as applicable import duties and taxes.
The named place or point in an Incoterms® rule is particularly important. It can determine where delivery takes place, when risk transfers and which party is responsible for certain costs. For this reason, the ICC recommends identifying the delivery location as precisely as possible.
The 11 rules are split into two groups.
The first group can be used with any mode or combination of transport. The second group is intended specifically for sea and inland waterway transport.
Rules for Any Mode or Modes of Transport
Seven Incoterms® 2020 rules can be used regardless of the mode of transport.
EXW – Ex Works
Under EXW, the seller makes the goods available at the agreed named place.
From that point, the buyer takes on most of the transportation responsibilities. The seller is generally not required under EXW to load the goods onto the collecting vehicle or arrange export clearance.
FCA – Free Carrier
Under FCA, the seller delivers the goods to the carrier or another person nominated by the buyer at the agreed location.
The rule can be used with different modes of transport and is particularly relevant where goods are moved using more than one mode of transport.
CPT – Carriage Paid To
With CPT, the seller arranges and pays for carriage to the named destination.
However, paying for transportation does not mean the seller carries the risk until the goods reach that destination. Risk transfers to the buyer when the goods are handed over to the carrier.
CIP – Carriage and Insurance Paid To
CIP works in a similar way to CPT when it comes to carriage. The seller arranges and pays for transportation to the named destination.
The difference is that CIP also places an insurance obligation on the seller under the rule.
DAP – Delivered at Place
Under DAP, the seller takes on the risks and costs of bringing the goods to the named destination.
The goods are placed at the buyer’s disposal on the arriving means of transport and are ready for unloading. The buyer is responsible for unloading the goods and handling the import formalities.
DPU – Delivered at Place Unloaded
DPU requires the seller to deliver the goods at the named destination after unloading them.
The ICC identifies DPU as the only Incoterms® rule that requires the seller to unload the goods at the destination.
DDP – Delivered Duty Paid
DDP places the highest level of obligation on the seller among the 11 Incoterms® rules.
The seller is responsible for delivering the goods to the named destination. This includes import clearance and applicable import duties and taxes.
Four Incoterms® 2020 rules are specifically designed for sea and inland waterway transport.
FAS – Free Alongside Ship
Under FAS, the seller delivers the goods alongside the vessel at the named port of shipment.
Risk transfers to the buyer when the goods have been placed alongside the ship.
FOB – Free On Board
With FOB, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment.
Risk transfers when the goods are on board the vessel.
CFR – Cost and Freight
Under CFR, the seller pays the costs and freight required to bring the goods to the named destination port.
However, risk does not remain with the seller until the goods reach that port. Risk transfers to the buyer once the goods are on board the vessel.
The seller also has no insurance obligation under CFR.
Incoterms® 2020 give buyers and sellers a common framework for deciding how goods will be delivered in domestic and international trade.
The 11 rules help clarify how transportation responsibilities, costs, risks, insurance and customs-related responsibilities are divided between the parties.
Choosing the right Incoterms® rule is about more than finding the lowest shipping cost. It should fit the shipment, the delivery location and the type of transport being used. Businesses should also consider customs requirements and make sure both the buyer and seller can meet their responsibilities under the agreed terms
For importers and exporters, Incoterms® work best when they are considered alongside proper customs planning and a clearly defined import strategy. This can help reduce confusion over responsibilities and make international shipments easier to manage.
Incoterms® rules were first introduced by the International Chamber of Commerce (ICC) in 1936 to create a globally accepted standard for defining delivery responsibilities, costs, and risks between buyers and sellers in international trade. The latest official edition is Incoterms® 2020, which remains the current ICC version used by businesses worldwide.
Incoterms® 2020 are used to define key responsibilities between buyers and sellers when goods are delivered. They clarify costs, transportation, risk transfer, delivery points, and certain customs and insurance responsibilities.
There are 11 Incoterms® 2020 rules. Seven can be used with any mode or combination of transport, while four are specifically intended for sea and inland waterway transport.
DDP (Delivered Duty Paid) places the highest level of obligation on the seller. The seller is responsible for delivering the goods to the named destination, including import clearance and applicable import duties and taxes.
Incoterms® 2020 and Importer of Record (IOR) responsibilities are not the same. An Incoterms® rule defines contractual responsibilities between the buyer and seller, while the IOR is responsible for meeting applicable import requirements under the destination country’s laws.
No. Incoterms® 2020 do not replace a sales contract. They address specific matters such as delivery, costs, risks, and responsibilities, while other commercial terms should be covered separately in the sales agreement.
