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INCOTERMS, practical guide:

What are Incoterms?

Incoterms rules (INternational COmmerce TERMS) are a total of eleven terms

published by the International Chamber of Commerce (ICC) based in Paris which
define the conditions of supply of goods in international sales transactions. The first
edition was published in 1936 and subsequently have been making several
revisions and updates (usually every ten years) to the one currently in force which
is Incoterms 2019.

¿What are Incoterms used for?

The purpose of Incoterms is to precisely define three aspects of international trade:

• The allocation of logistics costs between seller an buyer.
• The transmission of risks in transporting the goods.
• The documents and customs formalities necessary for export and import
operations.
 
¿Who needs to understand Incoterms?

The importance of Incoterms is due to its widespread use that makes them
internationally known. Therefore, all professionals involved in foreign trade should
understand Incoterms: exporters and importers, carriers and freight forwarders,
customs brokers, insurers, international credit professionals, sales and purchasing
managers, consultants, etc.

¿What are the 11 Incoterms of 2019 version?

The 11 Incoterms
Incoterms for any mode or modes of transport
EXW (Ex Works): the seller delivers on its own premises (factory or warehouse) the
goods to the buyer, without making the load on the vehicle (truck) that comes to
pick them up or make export clearance. All costs and export risks are borne by the
buyer.
FCA (Free Carrier): the seller delivers the goods at the agreed place to the carrier
nominated by the buyer. The place of delivery determines the obligations of loading
and unloading in the first transport: if delivery is made on the premises of the seller
he is liable for the load; if delivery occurs elsewhere (usually a facility or transport
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infrastructure), the buyer is responsible for the unload. The export customs
clearance is done by the seller.
CPT (Carriage Paid To): the seller contracts and pays for transportation to the place
of delivery at the buyer's country. Transportation risk passes from the seller to the
buyer when the goods are delivered to the first carrier in the chain. The export
customs clearance is done by the seller.
CIP (Carriage and Insurance Paid to): This Incoterm means the same obligations to
the seller that the Incoterm CPT and also the seller has to procure transport
insurance, though, is only required to purchase insurance with minimum coverage.
DAT (Deliver At Terminal): the seller delivers the goods unloaded in the country of
destination in a terminal or transport infrastructure (port, airport, etc.).
Transportation risk passes from the seller to the buyer at the time of delivery to the
destination country. The export customs clearance is done by the seller and the
import customs clearance and the tariffs are paid by the buyer.
DAP (Delivered At Place): the seller delivers the goods ready for unloading in the
country of destination, in a place other than a terminal or transport infrastructure.
The transportation risk passes from seller to buyer upon delivery to the destination
country. The export customs clearance is done by the seller and the import customs
clearance and tariffs are paid by the buyer.
DDP (Deliverd Duty Paid): the seller delivers the goods ready for unloading at the
destination country, usually at the buyer´s premises (factory or warehouse) the
buyer. All costs and risks, including customs clearance of export and import, are
borne by the seller.
Incoterms for sea transport
FAS (Free Alongside Ship): the seller delivers the goods, alongside the vessel at
the port of shipment. From this point all costs and risks are borne by the buyer. The
export customs clearance is done by the seller.
FOB (Free On Board): the seller delivers the goods on board the ship at the port of
shipment. The buyer chooses the ship and pays the freight. The transportation risk
passes from the seller to the buyer when the goods are delivered on board the ship.
The export customs clearance is done by the seller.
CFR (Cost and Freight): the seller assumes transport costs (freight) to the port of
destination, although the risk of loss or damage to the goods is transferred from
seller to buyer once the goods have been placed on board of the ship at shipment
port. The export customs clearance is done by the seller.
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CIF (Cost, Insurance and Freight): this Incoterm means the same obligations to the
seller that the Incoterm CFR and also the seller has to procure transport insurance,
though, is only required to purchase insurance with minimum coverage.

>>> Incoterms 2019 are classified in two categories according to the mode of
transport:

Incoterms for any mode or modes of transport

EXW Ex Works
Ex Works (named place of delivery)

EXW is the Incoterm that represents the minimum obligations, costs and risks for
the seller as he delivers the goods at his own premises (factory or warehouse) in
his country. Not even the seller is responsible for loading the goods onto the first
carrier (usually truck) that sends the buyer to pick them up. It is the only Incoterm in
which the seller does not clear the goods for export, when such clearance is
applicable.
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.
This term is suitable for exporting firms with little international experience and who
make groupage operations (boxes, pallets) in which the buyer sends a truck to
collect the goods at the seller's premises. When sending full containers, it is better
to use FCA as usually the seller makes the loading of the container on the truck
sent by the buyer to the seller's premises.
It is not advisable to use EXW regularly because when the seller delivers the goods
in its own country, normally it is preferable to use FCA.

FCA Free Carrier

Free Carrier (named place of delivery)
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FCA is a very flexible Incoterm because it allows the delivery of the goods, both on
the premises of the seller and at various points such as transports centers, ports,
airports, container terminals, etc., which are located in the country of the seller.
Therefore, when using this Incoterm, it is very important to specify clearly the place
of delivery.
FCA can be used for any type of cargo (general cargo, full load, groupage) and with
different means of payment (open account, bank transfer, letter of credit, etc.).
In the Incoterms FCA, the seller must complete and bear the costs of export
clearance and, therefore, is responsible for obtaining the necessary documents for
it. The import clearance formalities are performed by the buyer.
When the goods are transported in containers and the place of delivery is the port
of shipment, Incoterms 2010 rules advised to use FCA instead of FOB, because the
containers are delivered regularly in the port's container terminal and not loaded
onto the ship.
FCA is one of the most used Incoterms in international trade and will probably
replace EXW for the majority of sales where the seller delivers the goods in its own
country and do not want to manage international logistics.

CPT Carriage Paid To

Carriage Paid To (named place of delivery)
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In Incoterms CPT the delivery of goods occurs when the seller makes them
available to the carrier that he has hired to perform international transport, although
the seller also manages and assumes the costs of international transport to the
place of destination. Therefore, the point where the risk of transport is transferred
(when the goods are delivered to the carrier in the seller´s country) is different from
the point till the seller bears the costs of transport (named place of destination in
the buyer´s country).
In the event that there are several successive carriers, such as multimodal
transport or truck-air or truck-ship, the transport risk passes from the seller to the
buyer when the goods are delivered to the first carrier in the chain.
In CPT, unlike Incoterms CIP, the seller has no obligation to hire insurance transport
to cover the goods from the place of delivery to destination.
In this Incoterms, the seller has to complete the formalities and bear the costs of
customs clearance for export, not the import clearance that corresponds to the
buyer.

CIP Cost, Insurance and Freight

Carriage Insurence and Paid to (named place of delivery)

In the Incoterms CIP, the seller delivers the goods in their own country when
loading them in the first carrier hire by himself, but the seller also pays for costs of
international transport to bring the goods to their destination in the buyer´s country.
The 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.
Under Incoterms CIP the seller must hire insurance to cover the risk borne by the
buyer for loss or damage of goods during international transport. Consequently, the
seller contracts for insurance and pays the premium, although the beneficiary of the
insurance is the buyer. However, the buyer has to take into account that Incoterms
CIP requires the seller only an insurance with minimum coverage (Clause C of the
Institute Cargo Clauses). If the buyer wants a larger coverage, he needs to agree
with the seller to hire additional insurance.
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In this Incoterm, the seller has to complete the formalities and bear the costs of
customs clearance for export, not the import clearance that corresponds to the
buyer.

DAT Delivered At Terminal

Cost, Insurance and Freight (named place of delivery)

In Incoterms DAT the seller delivers the goods unloaded at a port terminal or
another place of destination in the buyer´s country. The terminal concept is quite
broad and includes both terminals of transportation (land, air, sea) and logistics
infrastructure (ports, airports, railway stations) or similar facilities as docks,
warehouses and free zones.
Due to the different places of delivery that allows this Incoterm is important to
clearly mention the specific point that seller and buyer have chosen for delivery so
the contract for international transport made by the seller conforms to that choice.
When the seller carries the goods from the delivery terminal to another point in the
buyer's country such as buyer´s premises (factory or warehouse) Incoterm DAT
should not be used. The Incoterms suitable for that situation are DAP or DDP.
In Incoterms DAT, the seller has to complete the formalities and bear the costs of
customs clearance for export, not the import clearance that corresponds to the
buyer.

DAP Delivered At Place

Delivered At Place (named place of destination)
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In Incoterms DAP the seller delivers the goods, without unloading, at the place of
destination in the buyer's country. The transport risk is transferred from buyer to
seller in the same place where the goods are delivered.
The place of delivery may be the buyer's premises or a place nearby, other than a
transport terminal, in the country of destination. If delivery occurs at a transport
terminal or transport infrastructure (port, airport, etc.) in the country of destination
Incoterms DAT should be used.
In this Incoterms the seller has to complete the formalities and bear the costs of
customs clearance of export, not the import clearance that corresponds to the
buyer. In the event that the seller also clear goods for import Incoterms DDP should
be used.
This is a very useful Incoterms for sales between countries of the same economic
area (e.g. European Union) in which the seller wants to deliver the goods at buyer´s
premises but is not necessary to clear goods for import as there are no customs.

DDP Delivered Duty Paid

Delivered Duty Paid (named place of destination)

In Incoterms DDP the seller delivers the goods, without unloading, at buyer´s
premises or a nearby place in the country of destination. The transport risk is
transferred from buyer to seller in the same place where the goods are delivered.
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DDP is somewhat the reverse of Incoterms EXW; it represents the greatest
obligation for the seller because he assumes all costs and risks of the operation,
including import procedures, to deliver the goods at the agreed place in buyer's
country. The only cost do not assume by the seller is the unloading of goods at
delivery place.
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.
The only difference between Incoterms 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 the event that the seller has no capacity by himself or through his representatives
for doing import clearance, Incoterm DDP should not be used.

Incoterms for sea and inland waterway transport

FAS Free Alongside Ship

Free Alongside Ship (named place of delivery)

Incoterms FAS is used only for sea transport. The seller delivers the goods placing
them alongside the ship named by the buyer at the agreed port of shipment. The
export clearance is done by the seller.
This Incoterm is only used for certain commodities and materials that are not
packed and cannot be individualized, such as grain, timber, minerals, steel
products, etc.; delivery is done in those ports that have specialized terminals for this
type of products. If the goods are carried in containers, Incoterm FCA should be
used as containers are delivered at port terminals and not alongside ships.
The export clearance must be done by the seller. Usually, it is necessary to clear
the goods before placing them alongside the ship.
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.

FOB Free On Board

Free On Board (named place of delivery)
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Incoterms FOB is the oldest Incoterm and together with CIF the most widely used
with sea transport. The seller delivers the goods by placing them on board the ship
named by the buyer in the port of shipment. The terminal costs and export
clearance are borne by the seller.
This Incoterm should be used preferably with bulk, heavy loads and general cargo.
Also, in the case of complex goods (e.g. machinery) whose loading on board the
ship may involve some risk so it is better that the seller assumes this risk till the
loading has been completed and the goods delivered.
When the goods are transported in containers and the place of delivery is the port
of shipment, Incoterms 2010 rules advised to use FCA instead of FOB, because the
containers are delivered regularly in the port's container terminal and not loaded on
board the ship.
Although FOB has traditionally been one of the most commonly used Incoterms the
evolution of sea transport and the importance of logistics as a sales strategy have
diminished the use of this Incoterm that is being gradually replaced by other terms
like CFR or CIF.

CFR Cost and Freight

Cost and Freight (named place of delivery)

In Incoterms CFR the seller delivers the goods on board of a ship in the port of
shipment, but he also manages and pays the cost of freight to the port of
destination. Therefore, the point where the risk of transport is transmitted (port of
shipment) is different from the point to which the seller bears the costs of transport
(port of destination). The terminal costs and export clearance in the port of
shipment are borne by the seller.
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The only difference between Incoterms CFR and CIF is that in CFR the seller is not
obliged to hire an insurance transport from the port of shipment to the port of
destination.
Incoterms CFR is a sea transport Incoterm used mainly for general cargo and large
volumes of goods. When the goods are transported in containers and the place of
delivery is the port of destination, Incoterms 2010 rules advised to use CPT instead
of CFR, because the containers are usually delivered at the terminals of the ports,
that is, before being placed on board of the ships.

CIF Cost, Insurance and Freight


Cost, Insurance and Freight (named place of delivery)

Incoterms CIF has historically been a widely used Incoterm because, in addition to
placing the goods at the port of destination in the buyer's country, the CIF value is
used in most of the customs to apply tariffs and import taxes, so using this Incoterm
facilitates to clear the goods for import.
In Incoterms CIF the seller delivers the goods on board of a ship in the port of
shipment, but he also manages and pays the cost of freight to the port of
destination. Therefore, the point where the risk of transport is transferred (port of
shipment) is different from the point to which the seller bears the costs of transport
(port of destination).
The costs of terminal in the port of shipment are borne by the seller. Unlike
Incoterm CFR, the seller is obliged to hire insurance transport covering at least the
way from the port of shipping to the port of destination. The insurance shall cover
the price of the contract plus 10% (i.e., 110%). The beneficiary of this insurance
and, therefore, the one that must apply to the insurer for compensation in case of
disaster is the buyer.
Incoterms 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 2019 rules recommends the use of Incoterms CIP…

Carriage Insurence and Paid to (named place of delivery)

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In the Incoterms CIP, the seller delivers the goods in their own country when
loading them in the first carrier hire by himself, but the seller also pays for costs of
international transport to bring the goods to their destination in the buyer´s country.
The 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.
Under Incoterms CIP the seller must hire insurance to cover the risk borne by the
buyer for loss or damage of goods during international transport. Consequently, the
seller contracts for insurance and pays the premium, although the beneficiary of the
insurance is the buyer. However, the buyer has to take into account that Incoterms
CIP requires the seller only an insurance with minimum coverage (Clause C of the
Institute Cargo Clauses). If the buyer wants a larger coverage, he needs to agree
with the seller to hire additional insurance.
In this Incoterm, the seller has to complete the formalities and bear the costs of
customs clearance for export, not the import clearance that corresponds to the
buyer.

¿What does it take to use Incoterms correctly?

For the correct use of Incoterms, following the three letters of each term shall be
included the exact place to which delivery of the goods is to be made, and
afterwards the expression “Incoterms 2020".
Some examples of correct use of Incoterms 2020:
FCA Port of New Orleans, United States, Incoterms 2020
CIP Tianjin airport, China, Incoterms 2020
DDP Hampton & Stevens Ltd. Warehouse, Sidney, Australia, Incoterms 2020.

¿Where can I learn more about Incoterms 2019?

The ebook The Practical Guide to Incoterms provides all necessary information on
each of the 11 Incoterms, with numerous charts and tables to understand how work
and tips for use in daily practice.
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