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OLEGARIO LLAMAZARES
Practical
Guide to
INCOTERM
S
Place of delivery
Transfer of risks
Documents and customs
Allocation of logistics costs
Transport insurance
Methods of payment
PRACTICAL GUIDE TO INCOTERMS
28006, Madrid
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ISBN: 978-84-92570-83-6
Composition and design: Rubn Snchez
INDEX
Variants of Incoterms................................................................... 14
EXW Ex Works............................................................................. 28
Incoterms are private law rules and are not supported by the
laws of any country or by a supranational organization. ftey
are rules set by businesses (exporters and im- porters)
within the International Chamber of Commerce in order to
regulate some aspects of foreign trade operations.
Mode of transport used (Incoterms for any mode of transport and sea
Incoterms)
Paym Transfe
Mode
Acrony Incote ent of r of
of
ms rm main risks in
transp
transp transpor
ort
EXW Ex Works Any Bu Origin
mode ye
r
FCA Free Carrier Any Bu Origin
mode ye
r
CPT Carriage Paid To Any Se Origin
mode lle
r
CIP Carriage and Insurance Any Se Origin
Paid To mode lle
r
DAT Delivered At Terminal Any Se Destin
mode lle ation
r
DAP Delivered At Place Any Se Destin
mode lle ation
r
DDP Delivered Duty Paid Any Se Destin
mode lle ation
r
Goods in containers only for Incoterms for any mode of transport but not
for sea Incoterms.
ftis is a big change from the uses and habits that came into
force until now. We must remember that the FOB and CIF
Incoterms are the oldest and most widely used in foreign
trade since a large proportion of goods are transported by
ship and it is also common that deliveries be made in ports.
fterefore, it is expected that the adapta- tion of exporters,
importers, carriers, freight forwarders, etc., to their
modification of Incoterms 2010 will be slow, and for a time
will be common to use FOB, CFR or CIF even when goods travel
in containers. In the event that the seller or buyer use sea
Incoterms with container transport it is advisable to ask
about switching to any mode of transport Incoterm (such as
FCA, CPT or CIP) to match what is the right used according to
Incoterms 2010 rules.
In Incoterms 2010, when using the sea terms FOB, CFR and CIF,
the transfer of risks occurs when the goods are placed on
board in the port of shipment. However, in Incoterms 2000,
the risk passes when the goods pass the ships rail.
Security-related information
Variants of Incoterms
For CPT and CIP Incoterms delivery locations are varied, always
in the buyers coun- try, once the international voyage has
been made. Could be the buyers premises in the case of a
country that does not need to pass customs or a facility or
transport infrastructure. If the goods travel by ship and
container, the most common practice is that the goods will be
delivered at the ports container terminal in the country of
destination. In that case, the costs of unloading the goods
from de ship, usually are bear by de seller.
SEA INCOTERMS
2010
Documents and customs procedures
Mode
Incote Transfer of
of rm risks
Transp
EXW Origin
A FCA Origin
CPT Origin
N
CIP Origin
Y
DAT Destinatio
n
M DAP Destinatio
n
DDP Destinatio
O n
FAS Origin
S FOB Origin
CFR Origin
E CIF Origin
Allocation of logistics costs
Place Conc
ept
1. Packaging and checking
2. Loading in sellers premises
Country of 3. Transport in country of origin (pre-carriage)
origin 4. Customs clearance (export)
5. Terminal charges in origin
6. Main transport
International
7. Transport insurance
FIO (Free In and Out): freight cost does not include loading or unloading.
FILO (Free In, Out Liner): the loading and stowage are for the account of the
goods and the unloading and unstowage for the account of the carrier.
Most appropriate option for FOB.
LIFO (Liner In, Free Out): the loading and unstowage are borne by the
carrier and unloading and unstowage by the account of the goods
account. Most appropriate option for C terms (CPT, CFR, CIP and CIF)
when the goods are delivered at destination port without unloading.
Main transport
Main transport is the one that takes place between the place of
delivery in the country of origin and the country of destination
and usually is the most important logistical costs of all
governing Incoterms. fterefore, the parties should request
quotes and explore various alternatives with different carriers
and freights forwarders to see which of them is getting more
competitive prices.
26
FCA
Any mode S S S S B B b B B B B
FAS
Only sea S S S S B B b B B B B
FOB
Only sea S S S S S B b B B B B
CPT
Any mode S S S S S S b B B B B
CFR
Only sea S S S S S S b B B B B
CIP
Any mode S S S S S S S B B B B W
H
A
CIF
Only sea S S S S S S S B B B B T
A
R
DAT E
Any mode S S S S S S s S B B B IN
C
DAP O
Any mode S S S S S S s S B S B T
E
R
DDP M
Any mode S S S S S S s S S S B S
U
S: Seller s: no obligation to obtain an insurance contract, though the risks are
bear by de seller B: Buyer b: no obligation to obtain an insurance contract, though
the risks are bear by de seller
OBLIGATIONS
OF THE SELLER AND THE BUYER
2 OBLIGATIONS OF THE SELLER AND THE BUYER
8
EXW
Ex Works (named place of delivery)
On the contrary, with EXW, the seller offers the lowest service
of all Incoterms and represents a loss of competitiveness in
comparison with other companies that assume part of
international logistics.
Mode of transport
EXW can be used with any mode of transport (land, sea, air) and
specially with multimodal transport (containers).
Loading/unloading of goods
Delivery document
fte seller has only the obligation to provide the buyer with the
commercial documents accompanying the goods (invoice and packing
list). However, the seller should help the buyer to obtain other
documents necessary for the export operation such as licenses,
permits, certificates, etc.; the cost of obtaining these
documents is borne by the buyer.
Transport contract
Insurance contract
Methods of payment
EXW is the first Incoterm out of the eleven and the one that
implies fewer obligations to the seller; he only has to deliver
the goods at his own premises and the buyer will send a carrier
to collect them.
EXW allows the seller to give the lowest price quotation and not
assume the costs and risks in international operations
management. In this sense, the seller may quote prices
immediately, without having to make any calculations about the
costs of the export operation: it is like a sale in the local
market.
EXW
In contrast, EXW means the less service given by the seller and
requires the buyer to assume full logistics management. Sellers
commercial offers will lose competitiveness in relation to those
of other providers that includes international logistics
management among the services offered.
Pre-shipment Buyer.
inspection
Costs Risks
Documents
Modo de transporte
Delivery document
Transport contract
Insurance contract
Methods of payment
Costs Risks
Documents
When using FAS, the buyer is responsible for loading the goods
on the ship. For this reason, the buyer must know very well the
practices in the port of shipment because in the case of
problems arise there.
FAS MAIN CHARACTERISTICS
Mode of transport
fte seller must deliver the goods alongside the ship named
by the buyer in the dock of the designated port of shipment.
fte delivery should be made on the date or deadline agreed.
fte goods should be placed in the dock where the ship will
dock to perform inter- national transport. fte choice of the
dock depends on the type of merchandise and the shipping line
that is to perform transportation. In this sense, the buyer
must notify the seller the name or number of the pier and the
name of the ship that will collect the goods at the
designated port. If within the port area, the buyer has not
indicated a specific place for the loading, the seller can
choose the most convenient for delivering the goods.
Loading/unloading of goods
Transport contract
fte buyer bears all risks of transport from the time the
merchandise is delivered in agreed time and place if:
Does not notify the seller the loading dock, the name of the
ship and the precise date of loading, within the agreed
period time.
fte ship named by the buyer does not come at the agreed
time or cannot take care of the goods.
In either of these circumstances, the buyer bears all costs
(warehousing) and risks (loss
or damage) in transporting the goods from the agreed delivery
date or, if there is no specific date, from completion of the
agreed delivery period.
Insurance contract
the seller; in this case the costs are borne by the seller.
Methods of payment
When using FAS, the buyer is responsible for loading the goods
on the ship and for this reason must know very well the
practices in the port of shipment that is where, if any, there
may be problems.
FAS is used mainly for two types of operations:
Loading/unloading of
Prepared for loading in the ship designated
the goods by the buyer.
Costs Risks
Documents
FOB is the oldest Incoterm and together with CIF the most
widely used with sea transport. fte seller delivers the
goods by placing them on board the ship named by the buyer in
the port of shipment. fte terminal costs and export
clearance are borne by the seller.
Mode of transport
fte seller must deliver the goods on board the ship named by
the buyer in the port of shipment. fte delivery should be
made on the date or deadline agreed. If no specific loading
point has been indicated by the buyer, the seller may select
the point within the port of shipment that best suits him.
Loading/unloading of goods
Delivery document
fte seller must provide the buyer with a document showing
the delivery of the goods at the agreed conditions, usually a
copy of the bill of lading B/L is used. A mates receipt can
also be used because is a document signed by the First
Officer which acknowledges receipt of the goods on board.
fte advantage of the latter is that the seller can obtain it
directly while in the case of bill of lading B/ L must ask
the carrier of the buyer. fte carrier is obliged to give the
seller a copy of the bill of lading B/ L because constitutes
title of the goods and the owner is the seller.
Documents for export/import procedures
Transport contract
fte buyer bears all risks of transport from the time the
merchandise is delivered in agreed time and place if:
Does not notify the seller the loading dock, the name of the
ship and the precise date of loading, within the agreed
period time.
fte ship named by the buyer does not come at the agreed
time or cannot take care of the goods.
In either of these circumstances, the buyer bears all costs
(warehousing) and risks (loss or damage) in transporting the
goods from the agreed delivery date or, if there is no specific
date, from completion of the agreed delivery period.
To transfer the risk, it is necessary that the goods transported
can be identified and individualized as the goods object of the
sale contract. Also, the seller must notify the buyer in a
reliable way that he has put the goods at his disposal at the
place of delivery.
Insurance contract
Methods of payment
Loading/unloading of
On board the ship named by the buyer.
the goods
(machinery).
Costs Risks
Documents
Mode of transport
CPT can be used with any mode of transport (land, sea, air),
including multimodal transport (containers).
Loading/unloading of goods
fte goods are delivered loaded in the first carrier who has
been hired by the seller. fterefore, all costs and risks of
unloading the goods at destination are borne by the buyer.
Delivery document
fte seller must give the buyer the usual transport document for
the type of transport to be hired like carriage of goods by road
CMR (land transport), bill of lading B/L (sea transport), airway
bill AWB (air transport), railway bill of lading CIM (train
transport) or FIATA bill of lading FBL (multimodal transport).
ftese documents are usually nominal, i.e. the goods are
consigned to a persons name or company.
In the case of the bill of lading B/L also can be to the
order, so that the holder of the original documents can
transmit the possession of the goods to another person or
company by endorsement.
Transport contract
It is the seller who must arrange transportation from the
place of delivery to the place of destination. When the
seller hires transportation will choose a common transport
route between the two places (delivery and destination) and a
means of transportation (truck, aircraft, ship) that is
appropriate for the type of goods being transported.
Transfer of risk in transport
Insurance contract
If the buyer wants to cover the goods with insurance for the
international transport he must hire the insurance or use
Incoterm CIP which is equivalent to CPT but with transport
CPT
Methods of payment
For the buyer, Incoterm CPT is not too favorable from the
standpoint of risk in trans- port. Most of the times the
buyer will prefer to use other Incoterms as CIP, DAP or FCA;
in CIP the goods are covered by transport insurance paid by
the seller; in DAP the risk of transport is transfer in the
destination country; and in FCA, although the buyer has to
bear the risk of transport and the goods are delivered in its
own country origin, it is the buyer who makes the decisions
regarding the hiring of transport insur- ance and, therefore,
carries out a better control of the risks.
CPT is useful for the following types of international
operations:
Loading/unloading of
Loaded in the international transport hired
the goods by the seller.
Costs Risks
Documents
Mode of transport
Loading/unloading of goods
fte goods are delivered on board the ship and ready for
unloading. fterefore, all costs and risks of unloading the
goods at the port of destination are borne by the buyer,
unless the contract of carriage states that this costs are
borne by the seller. In that case, the seller cannot claim a
refund to the buyer, unless both parties agree.
Delivery document
Transport contract
Insurance contract
If the buyer wants to cover the goods with insurance for the
international transport he must hire the insurance or use
Incoterm CIF which is equivalent to CFR but with transport
insurance hired by the seller though in the case of damage
the beneficiary of the insurance is the buyer.
Methods of payment
Moreover, in this three terms (FOB, CFR and CIF) the risk in
transporting the goods is transferred from seller to buyer in
the same place, i.e. once the goods have been placed on board
the ship at the shipping port in the selling country.
Loading/unloading of
On board the ship chosen by the seller.
the goods
Costs Risks
Documents
fte buyer assumes all the risks once the goods have been
delivered to the carrier in the country of the seller. If
subsequent carriers are used to bring the goods to the place
of destination, the risks are transferred from seller to
buyer when the goods have been delivered to the first
carrier.
Mode of transport
CIP can be used with any mode of transport (land, sea, air)
and especially with multimodal transport (containers).
Loading/unloading of goods
fte goods are delivered loaded in the first carrier who has
been hired by the seller. fterefore, all costs and risks of
unloading the goods at the destination are borne by the buyer.
Delivery document
Insurance contract
Methods of payment
fte only difference between CPT and CIP is that in CIP the
seller is required to hire and pay for insurance transport of
goods to the destination, although the beneficiary of
insurance and the one that must claim compensation from the
insurance company in case of disaster is the buyer.
fterefore, before closing a transaction with Incoterm CIP the
buyer must require the seller to hire an insurance with a
well known insur- ance company and payable in the buyers
country.
One advantage for the seller of using CIP is that once he has
placed the goods at the buyers country he does not to clear
them for import; that is important because
in some countries customs is very complex. However, using this
Incoterm facilitates customs clearance in the country of
destination as the CIF value for sea transport (or its
equivalent for different means of transport) is used in most
customs to apply import taxes.
On the other hand, when the buyer uses Incoterm CIP and
payment is made at the same moment of the delivery of the
goods, the buyer must ensure that the seller can- not
instruct the carrier to change the destination of the goods.
For this, the transport documents (CMR, B/L, AWB) provide the
buyer with a duplicate original that it is used to prevent
the seller from giving new instructions to the carrier. In
the case of bill of lading B/L does not usually have this
preventive function, but allows for a disposal clause which
prevents the seller to order the carrier to deliver the goods
to a third party in a different place that stipulated.
It is advisable to use CIP:
CIP
Loading/unloading of
Loaded in the international transport hired
the goods by the seller.
Costs Risks
Documents
CIF is used only for sea transport and usually for general cargo
of both consumer products and industrial products of high value.
If the goods travel in containers Incoterms 2010 rules
recommends the use of Incoterm CIP.
CIF MAIN CHARACTERISTICS
Mode of transport
Loading/unloading of goods
fte goods are delivered on board the ship and ready for
unloading. fterefore, all costs and risks of unloading the
goods at the port of destination are borne by the buyer,
unless the contract of carriage states that this costs are
borne by the seller. In that case, the seller cannot claim a
refund to the buyer, unless both parties agree.
Delivery document
Transport contract
It is the seller who must arrange transportation from the
shipping port to the desti- nation port. When the seller
hires transportation will choose a common transport route
between the two ports and a type of ship that is appropriate
for the kind of goods being transported.
Transfer of risks in transport
Insurance contract
Loading/unloading of
On board the ship chosen by the seller.
the goods
transport
Costs Risks
Documents
When the seller carries the goods from the delivery terminal
to another point in the buyers country such as buyers
premises (factory or warehouse) Incoterm DAT should not be
used. fte Incoterms suitable for that situation are DAP or
DDP.
Mode of transport
DAT can be used with any mode of transport (land, sea, air)
and especially with multimodal transport (containers).
Loading/unloading of goods
DAT
Delivery document
fte seller must provide the buyer with a document that allows
him to collect the goods at the destination place. Normally,
this document is a delivery note of the car- rier hired for the
seller that should be signed by the buyers carrier. When
delivery takes place in a port, the document used is a bill of
lading B/L with the reference discharge, meaning the cost of
unloading is included in the price.
Transport contract
Insurance contract
country.
Methods of payment
DAT as well as the two other Incoterms in which the goods are
delivered at destina- tion (DAP and DDP) must not be used
with documentary methods of payment such as letter of credit.
In this case a transport document should be requested,
normally a carriers delivery note signed by the buyers
carrier, that serves as a proof of reception of goods at
destination. In that sense, the seller is dependent on the
effectiveness and speed of the carrier to obtain the document
in order to collect the credit. Moreover, in the case of sea
transport will be a delay of several weeks to complete the
necessary documentation to collect the credit.
fte reason for this new Incoterm is the great number and
diversity of international logistics infrastructures that
exist nowadays and can be considered a terminal. fterefore,
when using this Incoterm is very important to specify the
DAT
In this Incoterm the seller has to hire freight from the port
of shipment to the port of destination and must do so in a
type of freight (known as liner terms) in which the cost of
unloading the goods are included in the price of freight,
because in Incoterm DAT the costs at the port of destination
are paid by the seller.
Costs Risks
Documents
Mode of transport
DAP can be used with any mode of transport (land, sea, air)
and especially with multimodal transport (containers).
Loading/unloading of goods
DAP
Delivery document
Transport contract
Insurance contract
Methods of payment
DAP as well as the two other Incoterms in which the goods are
delivered at destina- tion (DAT and DDP) must not be used
with documentary methods of payment such as letter of credit.
In this case a transport document should be requested,
normally a carriers delivery note signed by the buyers
carrier, that serves a proof of reception of goods at
destination. In that sense the seller is dependent on the
effectiveness and speed of the carrier to obtain the document
and proceed to collect the credit. Moreover, in the case of
sea transport will be a delay of several weeks to complete
the documentation to collect the credit.
On the other hand, if the letter of credit do not request a
document certifying receipt of goods at destination, the
seller may collect the credit only with documents gener- ated
by himself (invoice, packing list, certificate of origin,
transport document, etc.), but if the goods do not arrive on
time at destination, the buyer would not be required to pay
the letter of credit and therefore a conflict would arise
once the seller would have already collect the credit.
DDP
Delivered Duty Paid (named place of destination)
Costs Risks
Documents
Any import tax and specifically VAT, are paid by the seller,
unless the parties agree in the contract of sale that VAT or
other taxes are paid by the buyer. In that case a variant of
DDP, known as DDP VAT unpaid, should be used.
Mode of transport
DDP can be used with any mode of transport (land, sea, air)
and especially with multimodal transport (containers).
Loading/unloading of goods
DDP
Delivery document
Transport contract
Insurance contract
Methods of payment
DDP as well as the two other Incoterms in which the goods are
delivered at destina- tion (DAT and DAP) must not be used
with documentary methods of payment such as letter of credit.
In this case a transport document should be requested,
normally a carriers delivery note signed by the buyers
carrier, that serves as a proof of reception of goods at
destination. In that sense, the seller is dependent on the
effectiveness and speed of the carrier to obtain the document
in order to collect the credit. Moreover, in the case of sea
transport will be a delay of several weeks to complete the
necessary documentation to collect the credit.
Besides, in DDP, import taxes and VAT are paid by the seller
and that could be a significant percentage of merchandise
value that will be difficult to recover. ftere- fore, these
taxes should be included in the price or agreed with the
buyer that VAT be on his account. In that case a variant of
DDP, known as DDP VAT unpaid, should be used.
fte only difference between DDP and DAP is that in DDP all
costs and taxes of import clearance are paid by the seller
while in DAP are paid by the buyer. In this sense, when two
countries have no customs (e.g. European Union) DDP should
not be used because clear goods for import will not be
necessary.
Pre-shipment Seller.
inspection
Here are ten basic tips that exporters and importers should
take into account when using Incoterms in international trade
transactions.
Incoterms for any mode of transport fit much better than sea
Incoterms with the current logistics applications, especially in
terms of loading and unloading in ports. In this sense, sea
Incoterms should be used only for goods loaded by the ships
rail as general cargo, bulk or large loads (e.g. heavy
machinery).
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