INCOTERMS

Guta Mihai Alexandru Gaspar George Dan Ghergu Andrei Catalin

in using

Trends

What does INCOTERM stand for ?

‣ Def : The  word  INCOTERM  is  an  abbreviation  for  International          

Commercial  Terms  which  provide  a  common  set  of  rules  used  for  defining  the  responsibilities  of  sellers  and  buyers  in  the  delivery  of  goods  under  sales  contracts.  

‣ They  are  widely  used  in  international  commercial  transactions.  

Are they

important ?

For sure !

but...

Why is that ?

‣ Set  international  rules  for  commonly  used  terms  in  foreign  trade  

‣ Define  obligations  of  both  parties  involved  in  the  transaction  

‣ Determine  the  distribution  &  transfer  of  risks  regarding  the  goods  delivered  from  seller  to  buyer    

‣ State  the  clear  sharing  of  expenses  between  the  parties  during  transport

Because they :

So...

When and where did they appear ?

‣ First  conceived  by  International  Chamber  of  Commerce  (ICC)  in  1921  and  implemented  starting  from  1936,  since  they  have  been  updated  6  times  in  order  to  keep  pace  with  the  evolution  of  international  trade.    

‣ In  1923,  a  Trade  Terms  Committee  developed  the  first  6  rules  :  FOB,  FAS,  FOT,  FOR,  Free  Delivered  CIF  and  C&F,  as  the  precursor  for  what  would  later  be  known  as  INCOTERM  rules.  

Revising the INCOTERMS

‣ In  order  to  keep  up  with  the  continuous  evolution  of  commercial  practices,  types  of  goods  and  transport  and  international  law,  INCOTERMS  need  to  be  regularly  updated  by  specialised  experts.    

‣ Some  significant  revisions  :    

1980  -­‐    FCA  was  introduced,  for  dealing  with  cases  where  the  reception          point  was  no  longer  the  ship's  rail,  but  a  point  on  land  where  goods  were  stored  in  a  container  

followed by...

‣ 1990  -­‐  the  seller  was  permitted  to  provide  the  proof  of  delivery  electronically  by  EDI-­‐messages  instead  of  paper  documentation    

‣ 2000  -­‐  export  clearance  and  other  formalities  under  FAS  are  placed  on  the  seller  (previously  buyer)    

                   -­‐  in  FCA,  it  became  the  seller's  obligation  to  load  the  goods  on  the    buyer's  vehicle  or  the  buyer's  obligation  to  receive  the  seller's  arriving  vehicle  unloaded  

Updating INCOTERMS every 10 years -

The  answer  is  Yes  -­‐  because  of  the  rapid  expansion  of  world  trade  and  the  continuous  changes  in  international  market's  structure,  the  same  rules  cannot  be  applied  effectively  in  any  circumstances  without  considering  the  new  factors  and  influences  that  might  occur.    

     The  most  recent  key  drivers  include  :    

‣  a  need  for  improved  cargo  security  

‣ changes  in  the  Uniform  Commercial  Code  in  2004  resulting  in  a  deletion  of  US  shipment  and  delivery  terms    

‣ new  trends  in  global  transportation  

...is it necessary ?

General all types of transport

• EXW • FCA • CPT • CIP

!!

• FAS • FOB • CFR • CIF

INCOTERMS 2010 - latest revision

What is new ?    Entered  into  force  1st  January  2011,  containing  the  following  amendments:  

‣ reduction  from  13  to  11  terms  by  replacing  4  delivery  terms  :  DEQ,  DAF,  DES,  DDU  with  2  new  ones  :  DAT(Delivery  at  Terminal)  and  DAP(Delivery  at  Place)    

‣ terms  grouped  in  2  categories,  according  to  the  means  of  transport  used  :    

Special sea & inland waterway

• DAT • DAP • DDP

More changes...

‣ transfer  of  risks  'on  board'  in  INCOTERMS    FOB,  CFR,  CIF  while  in  previous  INCOTERMS  2000,  the  risk  passed  when  the  goods  were  off  'the  ship's  rail'  

‣ goods  in  containers  can  be  delivered  only  using  Incoterms  for  any  mode  of  transport  but  not  sea  Incoterms    

‣ security  related  information  must  be  provided  by  the  seller  who  has  the  obligation  to  assist  the  buyer  concerning  the  safety  of  goods,  all  costs  being  borne,  however  by  the  buyer.  

How INCOTERMS evolved

1936 EXW

FOR

FAS

FOB

CFR

CIF

EXQ

EXS

2000EXW CIP

FCA DAF

FOB DES

CFR DEQ

CIF DDU

CPT DDP

2010EXW CIP

FCA DAP

FAS DAT

FOB DDP

CFR

CIF

CPT

Beginning PresentR e v i s i n g

I Rules for any mode of transport

EXW (Ex Works)

‣ delivers  goods  at  his  own  premises  (factory/warehouse)  

‣ minimal  obligations,  risks  &costs

‣ responsible  for  loading  goods  onto  carrier  and  all  other  transport  cost,  duties  and  insurance  

‣ clearance  of  goods  for  export  

‣ bears  the  whole  risk  on  his  own

Seller Buyer

     minimal  costs  &  risks  for  exporter  

     lowest  service  offered   loss  of  competitiveness

FCA (Free Carrier)

‣ completes  and  bears  costs  of  export  clearance  and  obtaining  necessary  documents  

‣ delivers  goods  at  agreed  place  to  carrier  

‣ liable  for  the  load  if  delivery  is  made  on  his  premises

‣ import  clearance  formalities  

‣ responsible  for  unload  if  delivery  occurs  in  a  facility  or  transport  infrastructure

Seller Buyer

 flexible,  various  delivery  points  

 any  type  of  cargo  and  different  payment  methods  

 best  suited  for  goods  transported  in  containers  

CPT (Carriage Paid To)

‣ contracts  and  pays  transport  to  the  buyer's  country  delivery  place  

‣ completes  formalities  and  bears  export  customs  clearance  costs  

‣ risk  of  transport  is  transferred  when  the  goods  are  delivered  to  the  first  carrier  in  the  seller's  country  

‣ supports  transport  costs  starting  from  the  moment  goods  have  reached  the  place  of  delivery  in  his  country  

‣ import  clearance  costs  and  formalities  

‣ supports  the  transport  risk  since  the  goods  have  been  delivered  to  1st  carrier  and  the  insurance  for  international  transport  

Seller Buyer

CIP (Carriage and Insurance Paid To)

‣ bears  the  same  costs  and  obligations  as  in  case  of  CPT  

 +    the  obligation  of  hiring  insurance  to    cover  the  buyer's  risk  during  international  transport  

‣ contracts  the  insurance  and  pays  the  premium

‣ beneficiary  of  the  insurance  paid  by  the  seller  

‣ must  take  into  account  that  the  buyer  is  obliged  only  to  a  minimum  coverage  insurance  

‣ he  needs  to  agree  with  the  seller  to  hire  additional  insurance  if  he  wants  a  larger  coverage

Seller Buyer

DAT (Delivery at Terminal)

‣ delivers  goods  unloaded  at  a  port  terminal  or  another  place  of  destination  in  the  buyer's  country  

‣ complete  the  formalities  and  bear  costs  of  customs  clearance  for  export    

‣ transport  risk  passes  to  the  buyer  at  the  time  of  delivery  to  destination  country  

‣ import  customs  clearance  and  tariffs  paid  

‣ clearly  mention  the  specific  point  chosen  for  delivery

Seller Buyer

DAP (Delivery at Place)

‣ delivers  goods  ready  for  unloading  in  the  country  of  destination,  in  a  place  other  than  a  transport  terminal,  such  as  the  buyer's  premises  or  a  place  nearby  

‣ risk  is  transferred  to  buyer  in  the  same  place  where  goods  are  delivered  

‣ complete  formalities  and  bear  export  clearance  costs  

‣ pays  the  costs  of  import  clearance  customs  

Seller Buyer

useful  for  sales  between  countries  of  same  economic  area  (EU)  as  there  are  no  import  customs  

DDP (Delivery Duty Paid)

‣ delivers  goods  ready  for  unloading  in  the  country  of  destination,  usually  at  buyer's  premises  

‣ all  costs  and  risks  borne  by  seller  

‣ customs  clearance  of  export  and  import  also  covered  by  seller  

‣ any  import  tax,  including  VAT  are  paid  by  the  seller  

‣ only  cost  he  assumes  is  the  unloading  of  goods  at  delivery  place  

‣ if  the  parties  agree  in  the  contract  of  sale,  the  VAT  or  other  taxes  can  be  paid  by  the  buyer,  in  what  is  known  as  a  variant  of  DDP,  called  'DDP  VAT  unpaid'    

Seller Buyer

II Special INCOTERMS for sea transport

FAS (Free Alongside Ship)

‣ delivers  the  goods  placing  them  alongside  the  ship  chosen  by  the  buyer  

‣ export  clearance  must  be  covered  by  the  seller

‣ responsible  for  loading  the  goods  on  the  ship    

‣ must  have  very  good  knowledge  of  the  practices  in  the  port  of  shipment  

Seller Buyer

 only  used  for  certain  commodities  and  materials  that  are  not  packed  and  cannot  be  individualised  (grain,  timber,  minerals,  etc.)  

 delivery  is  done  in  ports  with  specialised  terminals    

FOB (Free on Board)

‣ delivers  goods  by  placing  them  on  board  of  the  ship  named  by  the  buyer  

‣ covers  the  terminal  costs  and  export  clearance

‣ assumes  the  transportation  risk  after  the  goods  have  been  delivered  on  board  of  the  ship  

Seller Buyer

 oldest  Incoterm  and  one  of  the  most  widely  used  

 preferably  used  with  bulk,  heavy  loads  and  in  case  of  complex  goods  (machinery)  whose  loading  involves  certain  risks    

CFR (Cost and Freight)

‣ delivers  the  goods  on  board  of  a  ship  but  he  also  pays  the  cost  of  freight  to  the  destination  point  

‣ covers  terminal  cost  and  export  clearance  

‣ the  risk  is  transferred  to  the  buyer  after  the  goods  had  reached  the  board  of  the  ship

‣ must  hire  an  insurance  for  transport  from  the  port  of  shipment  to  the  destination,  as  the  seller  is  not  obliged  to  do  this

Seller Buyer

used  mainly  for  large  volumes  of  general  cargo

CIF (Cost, Insurance and Freight)

‣ same  obligations  that  CFR  implies    

+  seller  is  obliged  to  hire  insurance  for  transport  covering  at  least  the  way  from  the  port  of  shipping  to  the  port  of  destination    

‣ insurance  shall  cover  the  price  of  the  contract  +  10%

‣ he  might  want  to  hire  additional  insurance,  as  the  seller  is  only  obliged  to  purchase  a  minimum  coverage  insurance

Seller Buyer

used  for  general  cargo  of  consumer  or  industrial  products  of  high  value    CIF  value  is  used  in  most  of  the  customs  to  apply  tariffs  and  import  

taxes,  facilitating  the  clearance  of  goods  for  export  

After so many types of terms...

Here  is  a  simple  diagram  summarising  the  extent  of  costs  &  risks  covered  by  each  of  the  11  INCOTERMS  that  have  just  been  presented  :  

And a more detailed Bar Chart :

Using INCOTERMS correctly

Following  the  three  letters  of  the  appropriate  chose  term  with  the  exact  destination  place  to  which  the  delivery  of  goods  is  to  be  made,  and  afterwards  the  expression  'Incoterms  2010'  

by...

Such as : FCA Port of New Orleans, USA, Incoterms 2010Or

CIP Tianjin airport, China, Incoterms 2010

will certainly...

Benefit all the parties involved

INCOTERMS  have  become  an  essential  framework  in  daily  language  of  

trade,  providing  clear  rules  and  guidance  to  importers,  exporters,  lawyers,  

forwarders,  insurers,  carriers            and        mainly e ve r y b o dy

taking part in international trade transactions.

as

leading to :

However, if used incorrectly

     Your  contract  may  be  ambiguous,  lacking  some  important  details  or  even  impossible  to  perform,  causing  lots  of  misunderstandings  and  prejudices  

which can turn into...

and eventually cause. . .

Undesirable effects

such as

or

So...

As Eric Ambler stated

' International business may conduct its operations with scraps of paper, but the ink it uses is human blood '

thus in  order  to  practice  commercial  trade  in  a  successful  and  profitable  manner,  you  need  a  deep  understanding  of  all  factors  involved  as  well  as  a  careful  fulfilment  of  the  required  procedures  for  defining  and  avoiding  /  minimising  unnecessary  risks,  obligations  or  costs      

And that is where ...

INCOTERMS have proven their

essentially useful part in daily

l a n g u a g e o f t r a d e