Incoterms

Incoterms are international delivery terms that define how responsibility, risk and costs are divided between buyer and seller in the trade of goods. The rules are used in both domestic and international trade and provide a common starting point for who does and pays for what in connection with the delivery.

What are Incoterms?

Incoterms stands for International Commercial Terms and is published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020, which consists of 11 delivery rules.

The rules define key matters between buyer and seller: Who arranges the transport? Who pays which transport costs? When does the risk for the goods pass from seller to buyer? And who is responsible for export and import formalities?

However, Incoterms do not govern every aspect of a trade agreement. For example, they do not set the price of the goods or the payment terms, and therefore do not replace a sales contract.

What are Incoterms used for?

Incoterms make the division of responsibility for the delivery clear before the goods are shipped. This is especially relevant in international trade, where transport, customs clearance and delivery can involve several parties and countries.

If a company sells goods to a customer in another country, for example, the parties need to decide how far the seller’s responsibility extends. Should the seller simply make the goods available? Should the seller arrange transport to the destination? And who handles import formalities and the associated costs?

The chosen Incoterm sets out a standardized division of these obligations between buyer and seller. This allows the buyer, seller, carrier and other parties involved to work from the same delivery terms.

How are Incoterms used?

The buyer and seller choose the Incoterm that suits the trade agreement, the mode of transport and the desired division of responsibility and costs.

An Incoterm should be stated together with the relevant named place and the version of the rules being used. An agreement could, for example, be stated as DAP [named place], Incoterms 2020. The place is important because it specifies where in the transport process the agreed obligations apply.

The Incoterm should be chosen as part of the trade and shipping setup, so the division of responsibility and costs is agreed before the goods are shipped.

Which Incoterms are there?

Incoterms 2020 consists of 11 rules. They are grouped by the modes of transport they can be used for.

Seven Incoterms can be used for any mode of transport:

• EXW - Ex Works
• FCA - Free Carrier
• CPT - Carriage Paid To
• CIP - Carriage and Insurance Paid To
• DAP - Delivered at Place
• DPU - Delivered at Place Unloaded
• DDP - Delivered Duty Paid

Four Incoterms are intended for sea and inland waterway transport:

• FAS - Free Alongside Ship
• FOB - Free on Board
• CFR - Cost and Freight
• CIF - Cost, Insurance and Freight

The differences between the rules include where the seller’s delivery obligation ends, when the risk passes to the buyer, and how transport- and customs-related obligations are divided.

In international parcel shipping, you may come across DAP and DDP, among others. The two rules have different consequences for how import formalities, customs duties and taxes are handled. That’s why it makes sense to cover DAP and DDP separately rather than going into further detail here.

Incoterms and customs

Incoterms and customs are often linked in cross-border trade and shipping, but the two terms do not cover the same thing.

Customs concerns, among other things, the duties and documentation that may be associated with imports and exports. Incoterms, on the other hand, describe the agreed division of specific obligations, risks and costs between buyer and seller.

For dutiable shipments, it is therefore important to have control of both the necessary customs information and the Incoterm that applies to the trade.

Incoterms and Shipmondo

When you send goods internationally with Shipmondo, Incoterms can be part of your shipping and customs handling.

When filling out customs documents electronically in Shipmondo, Incoterms can be specified under the additional details. Depending on the carrier and shipping product, you can, for example, choose DAP or DDP and thereby specify whether customs duties and import VAT should be borne by the receiver or by you as the sender.

At the same time, Shipmondo can automate the completion of customs documents with product data such as tariff code (HS code), English goods description, country of origin, weight and goods value. The information can be used for the relevant customs documents depending on the carrier’s requirements.

This way, Incoterms can be one part of a connected flow for freight booking and customs handling when you ship goods abroad.