Incoterms® provide standardized rules for traders engaged in cross border trade that define obligations, responsibilities, liabilities and allocation of costs between buyer and seller. The International Chamber of Commerce (ICC) maintains the Incoterms 2020 and released the latest version in 2019, effective 1 Jan 2020. In this version there are 11 terms. The previous version of the Incoterms was released in 2010.
The main differences between the 2020 version of the Incoterms and the 2010 version are:
- CIP term now requires a higher level of insurance cover
- DAT term has been changed to DPU
- FCA provides for an option to cut a Bill of Lading with on-board notation prior to loading on vessel
- Traders should keep in mind that all existing contracts will remain under the scope of the version of the Incoterms that were in force at the time of signing the contract, or specified therein
What don’t Incoterms do?
- Incoterms do not define the point of title transfer
- Incoterms do not define the point of revenue recognition
- Incoterms do not define issue resolution
- Incoterms do not define how or when payment should be made
- Incoterms do not define the currency payment should be made in nor the FX rate to be used
Common errors made with Incoterms:
- Not defining the exact place of delivery when using FCA. FCA terms by default allow 2 points of delivery, either the seller’s warehouse or an agreed point after. It should be defined in the contract up front.
- Using FOB, CFR or CIF for containerized cargo. In these terms, the risk passes when the goods are placed on the vessel. If cargo is containerized, there is no way to ascertain the condition of the goods at this time.
- Using DDP when the seller is not able to handle import clearance requirements. DDP requires the seller to clear Customs in the destination. If the seller is not familiar with the Customs procedures in that country, the shipment may not get delivered.
- Using EXW when the buyer is not able to handle export clearance requirements. EXW requires the buyers to handle export clearance. If the buyer is not familiar with the Customs procedures for export, it may create delays of the shipment.
- Not using the complete naming convention when mentioning Incoterms 2020 on documents. Incoterms without year, port and/or location information are incomplete and legal complications can quickly arise if there is a need to make a claim for damaged or lost cargo.
A final word…
All traders should review Incoterms 2020 against actual practices every year and ensure that ground operations are being executed in accordance to expectations. Variations can create issues with Customs especially relating to valuation, as the basis for computing Customs value can refer to an Incoterm such as CIF, FOB or EXW. If commercial documents mention the CIF term but freight is being billed separately, this could mean that the total landed costs were under-declared to Customs and hence the base for collection of duties was suppressed. This is a serious offense in most countries and the trader can expect heavy fines and penalties to follow.
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