What are Incoterms?

Put simply, Incoterms® are international commercial sales terms. These were published by the International Chamber of Commerce (ICC) and are now internationally recognised as a standard in international commercial transactions.

Incoterms® are most often used to allocate cost and risk responsibilities between buyers and sellers, reflecting modern transportation practices. These terms should be agreed between the seller and buyer in the contract of sale ahead of shipment.

Closely corresponding to the U.N. Convention on Contracts for the International Sale of Goods, the first version of Incoterms was introduced in 1936, and is reviewed every few years. The most recent version is Incoterms® 2020, however Incoterms® 2010 is still in effect.

Here we have listed the 11 Incoterms® rules, and their meanings.

Any Mode or Modes of Transport

DAP (Delivered At Place)

DAP puts the Seller in charge of Export clearance and cost of transport to the named place of destination not unloaded. The Buyer will need to Import clear, pay any applicable duties and taxes and unload the goods at the named place of destination. In this case, unloading is at the buyer's risk as this is passed from the seller when the goods are ready to be unloaded.

Please ensure to stipulate the named place of destination as it could be assumed to be at any point between the collection and delivery point if not specified. 

DDP (Delivered Duty Paid)

With DDP, the seller will be responsible for Export and Import clearance, pay for any applicable duties and taxes and transportation costs and will bear all risk until the goods arrive at the named place of destination. The buyer is responsible for unloading the goods.

Please ensure to stipulate the named place of destination as it could be assumed to be at any point between the collection and delivery point if not specified. 

Beware, taxes such as VAT must not be considered prepaid and therefore, do not normally represent a direct cost for the importer. Such costs will be recovered against the sales in the local market, therefore this Incoterms® is best suited for domestic sales. 

EXW (Ex Works) 

Ex Works (EXW) is where the seller makes goods available to the buyer at their premises. The buyer is then responsible for all charges and risk from loading the goods onto the collection vehicle to off-loading at destination address. 

This term, while easy to administer, may not be in either party’s best interests as there is no real control over the final delivery location of the goods, raises questions regarding insurance coverage and all the risk is passed to the buyer.

Additionally, the buyer will need to be registered to export from the origin country in order to make export declarations.

Although, it may be possible for the seller to negotiate better freight rates, using this Incoterms®, it is best suited to domestic deliveries.

FCA (Free Carrier) 

With FCA, the seller hands over the goods, cleared for export and into the custody of the first carrier at the named location. It is important to specify the named place to ensure it is clear where risk and cost passes. A better option for international delivery than EXW.

The Buyer will therefore be responsible for transport costs, Import clearance and any applicable duties and taxes at destination.

The Seller can, (although not required to), arrange transport at the buyer’s cost and risk if requested.

CPT (Carriage Paid To) 

CPT stipulates the seller would cover the Export clearance and cost of transport to the named destination location, but the risk passes to the buyer when the goods are handed over to the first carrier. The buyer is responsible for Import clearance, Duties and taxes (where applicable).

Please ensure to stipulate the named place of destination as it could be assumed to be at any point between the collection and delivery point if not specified. 

CIP (Carriage and Insurance Paid To)

This is essentially the same as CPT, however, the seller insures the goods to the named place of destination.

DPU (Delivered at Place Unloaded)

This is the new name for DAT (Delivered At Terminal). The Seller is responsible for transport costs, Export clearance and unloading at named place of destination. The Buyer is responsible for Import clearance and any applicable duties and taxes. Risk passes at the point of unloading. 

Please ensure to stipulate the named place of destination as it could be assumed to be at any point which best suits the seller’s purpose, if not specified. 

Sea and Inland Waterway Transport

FAS (Free Alongside Ship) 

With FAS, the seller is responsible for delivering the goods alongside the vessel at the port of shipment, Export cleared. The Buyer is responsible for transport costs to the named place of destination, import clearance and any applicable duties and taxes. 

Please ensure to stipulate the named place of loading as it could be assumed to be at any point which best suits the seller’s purpose, if not specified. 

FOB (Free on Board)

FOB means the seller must deliver the goods on board the nominated ship (nominated by the buyer) at the port of shipment with the cost and risk being passed at ship's rail. The seller must handle Export clear the goods while the buyer will pay for transport costs, Import clearance, Duties & taxes if applicable. 

Not suitable for containerised freight. If goods are in containers, consider using FCA Incoterms® instead.

Please ensure to stipulate the named place of loading as it could be assumed to be at any point which best suits the seller’s purpose, if not specified. 

CFR (Cost and Freight)

CFR requires the Seller to deliver the goods onto the vessel export cleared as well as pay for transport to the named place of destination. The buyer bears the risk once the goods have been handed over to the carrier, handles Import clearance and pays any applicable duties and taxes at destination.

CIF (Cost, Insurance and Freight) 

This Incoterms® is the same as CFR, except the buyer insures (minimum cover) the transport risk at their cost.

How to show Incoterms® on paperwork.

Scenario:

Max’s company in England, agrees with Hans’ company in Norway to ship goods to their address (Sun Street, on DAP Terms. This is shown on the Purchase order and Commercial Invoice as below:

• Incoterms® 2010 DAP 2 Sun Street, Loen. 

You could also input the full address if desired, especially if there are several Sun Streets in Loen.

Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website: iccwbo.org.

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