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Background
• Incoterms® were first created in 1936 by the International Chamber of Commerce (ICC),
and they are in their eighth version since their inception.
• In recent decades, Incoterms have been reviewed and published with updates every ten
years. The most recent updates have been in 1990, 2000, and 2010.
• The Incoterms® 2010 drafting committee at the ICC began in redrafting in 2007. There
were 9 drafting meetings, 4 drafts and 2000 comments from 92 ICC sub committees
prior to approval in May 6, 2010.
• The current Incoterms are published in the Incoterms® 2010 Book.
o Refer to the online bookstore:
o http://www.iccwbo.org/copyright-and-trademarks/
• “INCOTERMS” is an abbreviation for International Commercial Terms. Incoterms and the
Incoterms® logo are trademarks of the International Chamber of Commerce. It is
important to know that Incoterms is not a generic name for international trade terms,
but is a trademark used to designate the rules devised by the ICC.
• Proper citing of Incoterms: Incoterms® 2010
• Incoterms are business terms. They are not recognized by U.S. Government Regulations
• They help traders avoid costly misunderstandings by clarifying tasks, costs and risks
involved in delivery of goods from buyers and sellers.
If you want to learn about Incoterms, a good start is to read the book. The Incoterms book is
insightful and offers examples to explain the terms.
Many people refer to the 2010 version as the “new Incoterms.” In 2010 there were many
changes that updated the terms to be more progressive to today’s way of doing business.
Incoterms – Domestic
U.S. Sellers / Exporters (aka Shippers) have historically been confused over Incoterms versus
their local state Uniform Commercial Code (UCC) business terms.
As companies start selling outside the United States, their company domestic UCC terms do not
translate to international commerce transactions. The current Incoterms®2010 allow for
domestic trade as well as international.
As the new 2010 terms have been rolled out over the past five years, states are beginning to
replace their local UCC with the Incoterms. This has allowed U.S. corporations to adopt
Incoterms for domestic and international use.
• Incoterms divide costs, risks and responsibilities between sellers and buyers.
– Carrier responsibility is not mentioned
• Incoterms guide the seller or buyer into additional contracts required to fulfill
designated tasks such as carriage and insurance.
– Example: CPT
• They are not used by the U.S. Federal Government to communicate trade.
– You cannot call Customs & Border Protection and discuss the INCOTERM of a
shipment. They will quickly respond that they do not use INCOTERMS as they
are not regulatory, they are business terms only.
• Incoterms do not remedy breach of contract or address more than one contract.
– Example: When a buyer sells the product and ships to the new sold party. This is
commonly called a “drop shipment or triangle shipment.” These shipments
require more than one contract and therefore different Incoterms and
commercial documents.
• Incoterms do not automatically apply. They must be specified and cannot be assumed.
• Incoterms will only define the delivery point if disclaimed after the term and should be
based on what has been defined in the contract or sales agreement.
• GAAP and IFRS (International Financial Reporting Standards) do discuss issues dealt with
by Incoterms, such as control, delivery and risk transfer.
• When does the sale become a receivable under GAAP, IFRS rules?
• Sarbanes-Oxley has made strict adherence to accounting regulations more important
• “Delivery” as defined in the Incoterms rules, is a factor in revenue recognition
– Important to use the terms correctly and understand their implication
– D-Group terms delay Revenue Recognition
• An exporter / importer should discuss their options with an accountant that is
knowledgeable in the recognition of inventory in international trade.
The Incoterms Book has clear definitions in order to create an equal understanding across
cultures and languages.
Commonly, the parties involved want to relate the Incoterms to the party financially
responsible for each part of the move. The basic question is: Is the shipment collect or
prepaid?
If you are knowledgeable about international transportation you will know that this question
needs more definition in order to know who is really paying for each part of the transportation
move.
EXW – Ex Works
FCA – Free Carrier
CPT – Carriage Paid To
CIP – Carriage and Insurance Paid To
DAT - Delivered at Terminal
DAP – Delivered at Place
DDP – Delivered Duty Paid
These terms are designed to be used strictly with Sea and Inland waterway transport:
Mode of Transportation
The next consideration is how is the shipment is moving. Some of the Incoterms are designed
mainly for Sea.
Sea
Air
Road
Rail
Multimodal (a mix of any of the four)
The party responsible to declare an Electronic Export Invoice (EEI) via the Automated Export
System (AES) will change if the cargo is ROUTED or NOT ROUTED:
ROUTED = the buyer is taking responsibility to hire the freight forwarder and select the
exporting carrier to export the cargo.
NOT ROUTED = the seller is taking responsibility to hire the freight forwarder and select
the exporting carrier to export the cargo.
Many time Incoterms are used as a tool to assist to know who will take on this responsibility.
While the consideration works most of the time it is not a complete correlation and requires an
agreement between the buyer and seller on who will decide to select the carriers.
Routing of a Shipment
Commonly, the Incoterm can be correlated to routed or not routed. However, there are
scenarios that a shipment can be an F - term and Collect; however, the Seller is selecting the
freight forwarder and carrier. Or the buyer is selecting the freight forwarder and carrier and
the shipment is a C – Term. As said previously, the Incoterms can’t be directly correlated to the
U.S regulations.
You may read more about a routed shipment on the Census website.
https://aesdirect.census.gov/support/routed_transactions.html
• Place where the shipment begins: The F-Terms starts at the agreed location between
the seller and buyer.
• The agreement may be at the seller’s door, or it may be at the port of export.
• These terms are considered to be “collect” and the buyer will be “routing” the cargo
(refer to the census website discussed in the EXW slide). While the EXW, is from the
loading point at the seller’s pick up location the F – term may be anywhere that has
been agreed upon in the origin country of the shipment.
• The buyer has agreed to purchase the product and pick it up at the agreed door
location of the seller.
• Multimode Term
• Contract Type: Shipment (departure)
• Insurance: Not specified
• Risk passes: At the time the buyer receives the goods with their chosen carrier
• Place: Seller must deliver the goods, cleared for export, to the carrier provided by the
importer/buyer at a named point on the exporter/seller’s side
– If no point is named the seller can choose a point best suited for them
– The named point can be the seller’s facility
• Seller is responsible for:
– Packaging
– Loading
– Pre-carriage (if any)
– Compliance documentation
• Buyer responsible for everything beyond loading
• The seller not responsible for unloading on the side of the buyer
• FCA should be considered as an alternative to EXW. Since EXW includes bringing labor
to load the shipment.
– FCA is very flexible and can be used from door up to port.
• FCA door Madison, Wisconsin
• FCA CFS station Chicago
• FCA Ramp Chicago
• FCA Port of Houston
• Multimode Term
• Contract Type: Shipment (departure)
• Place: Seller delivers goods, packaged for shipment, to the first carrier for transportation
• Risk passes: Once the cargo is loaded on the first carrier to the final destination country.
• Insurance: Not specified
– Risks and costs transfer at different places.
• Contracts should clearly state where risk passes vs contract of carriage is paid to.
• The buyer responsible for unloading at place of destination
• The buyer is responsible for the Import customs clearance process is
• CPT is a very flexible term to the said final destination terminal. It can be a Port, Airport,
Terminal, Rail Ramp etc.
• Compliance: The seller is responsible to assume the risk and expense to apply for any
export licenses, authorization or security clearances. Furthermore, the seller is
responsible for any security or export customs regulations in transit prior to arrival to
the final named place. The buyer is responsible to assume the risk and expense to apply
for any import licenses or import authorizations.
• Multimode Term
• Contract Type: Shipment (departure)
CFR – Cost and Freight & CIF – Cost, Insurance and Freight (named port of destination)
CFR
• Sea and inland water way term.
• Responsibilities and risks are similar to CPT
• Seller must pay freight charges to the agreed port of destination.
CIF
• Sea and inland water way term.
• Responsibilities, risks and insurance requirements are similar to CIP
• Seller must pay freight charges to the agreed port of destination.
CFR & CIF Compliance: The seller is responsible to assume the risk and expense to apply for any
export licenses, authorization or security clearances. The buyer is responsible to assume the
risk and expense to apply for any import licenses or import authorizations.
• D- Terms are not recommended for Letters of Credit (L/C) since B/L and AWB’s do not
show actual arrival.
• Multimode Term
• Contract Type: Arrival
• Insurance: Not specified
• Place: Seller delivers goods, packaged for shipment, to named destination terminal
• Seller obtains export clearance and handles appropriate export compliance
documentation
• Seller pays for unloading at the named destination terminal on importer/buyer’s side
• Terminals include
– Quay
– Warehouse
– Container Yard
– Road, Rail or Air Cargo Terminal
• Compliance: The seller is responsible to assume the risk and expense to apply for any
export licenses, authorization or security clearances. Furthermore, the seller is
responsible for any security or export customs regulations in transit prior to arrival to
the final named place. The buyer is responsible to assume the risk and expense to apply
for any import licenses or import authorizations.
• Multimode Term
• Contract Type: Arrival
• Insurance: Not specified
• Risk Passes: At point of delivery to at foreign destination
• Place: Seller delivers goods, packaged for shipment, to named destination at buyer’s
side.
• Customs clearance is the responsibility of the seller, and should be defined clearly in the
contract. Buyer is responsible for import duties and taxes. Typically DAP refers to a
door delivery at final destination without Customs Clearance, duties and taxes.
• Seller must provide appropriate documentation for release of goods on importer/buyer
side
• Suitable for Domestic use. (Duty Neutral)
• Multimode Term
• Contract Type: Arrival
• Insurance: Not specified
• Risk passes: At final destination, when unloaded
• Not suitable for domestic shipments (duty doesn’t apply)
• Place: Seller delivers goods, packaged for shipment, to named destination at buyers side
• Seller pays for:
– Transportation
– Foreign duties
– Export and import licenses
– Export compliance documentation
• Seller clears goods through customs in foreign country for delivery to a named place on
the importer/buyer’s side
– VAT or other taxes are for the sellers account
• Recommended to avoid VAT and other taxes. Must be written separately
in the contract
• May be foreign exchange risk
• Risky for exporter
– Dealing directly with foreign customs and government agencies
• Buyer typically responsible for unloading at the point of delivery
• A buyer under DDP is not the importer of record, since they are not clearing the goods
through customs
– Duty Drawback considerations?
Incoterm Tidbits
• Incoterms are agreed upon between two private parties, they have no legal standing on
their own. If they are included in a contract the Incoterms become legally binding.
• At times one party does not understand the Incoterms or the agreed upon destination
which causes difficulty for one part and potential additional expenses.
• Many agreements are negotiated by using a purchase of a product and the Incoterms
only. The use of Incoterms does not replace a contract or agreement.
• Incoterms cannot be used to determine ownership.
• Once a shipment is in movement, Incoterms are recommended not be changed.
Changing Incoterms midstream can cause additional costs and delays if not followed
through correctly.
Conclusion
o www.ict.org
o www.ictrade.org
o www.incoterms.gov
o www.iccwbo.org
o 1 – English
o 5 major languages
o 30 languages
o 52 languages
Guide the buyer into additional contracts required to fulfill designated tasks such
as carriage and insurance.
Guide the seller into additional contracts required to fulfill designated tasks such
as carriage and insurance.
Guide the seller or buyer into additional contracts required to fulfill designated
tasks such as carriage and insurance.
Guide the bank to fulfill designated tasks such as carriage and insurance.
7. Incoterms, if used correctly, can guide the seller or buyer into additional contracts
required to fulfill designated tasks such as carriage and insurance.
True
False
True
False
E, F, C, D
A, B, C, D
E, F, A B
G, A, C, D
EXW, FAS, FCA, FOB, CFR, CIF, CPT, CIP, DAT, DAP, DDP
EXW, FAS, FCA, FOB, CFR, CIF, CPT, CIP, DAT, DAP, DDP, DEQ
EXW, FOB, CFR, CIF, CPT, CIP, DAT, DAP, DDP
EXW, FCA, CFR, CPT, CIP, DAT, DAP, DDP
12. When using the Incoterm EXW, who will be responsible to arrange and pay for the
loading?
The seller
The buyer
The bank
The carrier
13. When using the Incoterm DDP, what are the insurance requirements from the
Incoterm?
14. When using the Incoterm FOB, what is the best way to describe an airfreight
shipment?
The seller
The buyer
The bank
The carrier
17. Who is responsible to pay for loading at origin with an FCA Incoterm?
The seller
The buyer
The bank
The carrier
18. Which of the following Incoterms does the buyer pay for main carriage?
DDP
DAP
CIP
FCA
19. At what point does the risk pass to the buyer in the CPT, CIP, CFR or CIF Incoterm?
20. If there is an E-Term or F-Term, is the buyer always responsible for the export customs
clearance?
Multimode Term
Contract Type: Shipment (departure)
Insurance: Not specified
Seller is NOT responsible for: Packaging, Loading, Pre-carriage (if any),
Compliance documentation
24. Which of the following Incoterms is not suitable for domestic cargo?
CPT
FCA
DDP
EXW
25. Can Incoterms be used to determine ownership without any assistance from a
contract or agreement?
Yes
No