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A Simple Guide to Incoterms
The EU-UK Trade and Cooperation Agreement, now in place, means change. It will require adapting to new trading arrangements, rules and regulations. This information for cross-border SMEs in Ireland and Northern Ireland introduces 11 Incoterms (rules for the sale of goods), covers FAQs and provides important points for businesses attention.
Incoterms stand for International Commercial terms are a series of 11 pre-defined commercial terms widely used to spell out exactly what delivery terms are being agreed.
WHAT DO INCOTERMS MEAN?
Where the goods will be delivered, who arranges the transport, who is responsible for insuring the goods and who pays for insurance and who handles customs procedures and who pays any duties and taxes.
REVIEW YOUR incoterms
Review your existing contracts to see if they contain Incoterms and assess whether these will need to be updated, you may find these written on your invoice, alternatively you can contact your supplier or purchaser.
important INCOTERM INFORMATION
Incoterms revised in ten-year intervals to reflect international commercial practice. The last revision was 2020 and while not law, Incoterms become legally binding when incorporated into a commercial sales contract.
There are 11 Incoterms, each has a three digit code followed by the full name of the Incoterm. The Incoterms below apply to any mode of transport.
EXW: Ex Works
EXW: The seller makes the goods available at the seller’s location, so the buyer can take over all the transportation costs and also bears the risks of bringing the goods to their final destination.
DDP: Delivered Duty Paid
DDP: The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination. Import custom clearance and import duties must be made by the exporter.
The Incoterms below apply to any ocean only.
FAS: Free Alongside Ship
FAS: Requires the seller to place the goods alongside the vessel nominated by the buyer.
FOB: Free on Board
FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel. Once on the ship, all liability transfers to the buyer.
CFR: Cost and Freight
CFR: The seller of the goods is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain the items from the carrier.
CIF: Cost, Insurance & Freight
CIF: The seller is responsible for the cost and freight of bringing the goods to the port of destination specified by the buyer.
There are several factors to consider when deciding on the most appropriate Incoterm for your business to adopt with a particular supplier/customer. These include:
How much responsibility is your business comfortable with? When it comes to the transport and safe delivery of goods, it is important to decide if you want to engage a transport company and have the responsibility for the shipment or whether you want to pass this onto your customer or supplier. Businesses who prioritise efficient delivery periods and/or minimising the level of damaged goods delivered may wish to retain more control of the transportation process, therefore, they would select an Incoterm which gives them this control.
How familiar is your business with customs processes? The levels of international trade experience within a business will play an influencing role in the Incoterm agreed, as this will set out which party is responsible for the completion of customs documentation at the various stages of the distribution process.
Businesses with extensive experience in completing import and export documentation may wish to take on greater levels of responsibility than those with limited or no levels of customs knowledge to ensure that the goods arrive at their destination without hindrance or delay.
What is the operating capacity of your trading partner? Even though your suppliers/customers may have some prior knowledge of supply chain processes, the level of operating capacity at a given time in the business may have a significant bearing on the Incoterms that they are willing to accept. For example, businesses who do not have specialist teams dedicated to ensuring efficient logistics processes may be less likely to be willing to assume responsibility for transportation. The seller must pay the costs and freight to bring the goods to the overseas port of destination. The buyer pays costs and takes risk from then on.
The Incoterm agreed is subject to negotiations between the buyer and seller. Other parties who may influence the Incoterm agreed include, but are not limited to:
It is imperative prior to agreeing an Incoterm that a business understands the full requirements of each specific Incoterm. It should also be noted that your business is under no obligation to sign up to the use of any given Incoterm or transport arrangements which it is not comfortable with.
Whilst there are 11 different Incoterms, there is only one Incoterms where the seller of the goods is responsible for completing both Export and Import Customs Declarations along with the payment of any applicable duty. This incoterm is Delivered Duty Paid (DDP). Businesses should be aware that whilst this may appear to be the most beneficial incoterm for buyers many sellers may not be willing to consider a DDP Incoterm or may at least charge the buyer accordingly.
One of the most common Incoterm agreed between businesses in GB and Northern Ireland/Ireland is DAP (Delivered at Place). Under this Incoterm, the supplier of the goods is responsible for everything until the goods reach the buyer’s premises or another agreed place of delivery. At this stage, the responsibility switches to the buyer who is then responsible for the unloading of the goods and the completion of any import customs clearance.
If a buyer does not wish to be responsible for the unloading of the goods, they should consider agreeing a DPU (Delivered at Place Unloaded). This Incoterm is the same as Delivered at Place with the addition of covering the offloading of goods. Under a DPU Incoterm the buyer is still responsible for the Import Customs Clearance.
Supplier: As a supplier using DDP terms, a business will have full responsibility for all transport, insurance, delivery and both Export and Import Customs Clearance. It is important to consider whether the business has the required level of resources internally to fulfil these requirements.
Buyer: As a buyer using this Incoterm there are minimal requirements with all responsibility falling on the supplier of the goods. Buyers should however beware that many suppliers may charge substantially more in exchange for agreeing DDP terms.
A detailed description of the obligations associated with the use of each Incoterm can be found in the International Chamber of Commerce publication, Incoterms 2020. This can be purchased from a range of online retailers and the information contained will be valid until the next planned revision of Incoterms in 2030.
A Closer Look at Incoterms
The infographic below from BANSARD provides a very useful overview of each Incoterm clearly showing seller and buyer obligations and where the transfer of risk exists at each stage. Each of the 11 Incoterms are presented as a three-letter acronym.