Today’s post is written by Stathis Kampylis of Shiptheory.
Since January the 1st, 2021, UK retailers are trading with the EU under a new Free Trade Agreement (FTA) called the Trade and Cooperation Agreement (TCA). EU member states are now treating goods entering the EU from the UK in the same way as international shipments. As a result, several UK retailers that used to trade primarily with EU costumers must now become familiar with various international shipping terms and rules to continue shipping frictionless to the EU. One of the most critical sets of terms and rules are the Incoterms.
The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) related to International Commercial Law. Incoterms are an internationally recognised set of instructions used in the global transportation of goods, and they define the division of responsibility between the shipper (usually the supplier or seller) and the consignee (usually the buyer).
What the Incoterms rules do
Incoterms are a series of eleven three-letter trade terms (more specifically three-letter acronyms followed by one of the following: the place of delivery, the place of destination, the port of loading, or the port of destination, depending on the specific term) that are intended to clearly define which party is responsible for paying for and managing various elements throughout the different stages of the shipping process.
These include:
- Packing, loading of cargo, and transportation of the shipment
- Terminal charges
- Cargo insurance
- Export clearance and formalities
- Customs clearance and documentation
- Import duties and taxes
- Cargo unloading and delivery to the agreed place
Incoterms also define the precise moment the risk of loss or damage to goods transfers from the seller to the buyer. The Incoterms rules are developed to reflect trade practice for any type of goods, but they are not substituting for a contract of sale or deal with the transfer of ownership of the goods sold.
Incoterms 2020
Incoterms 2020 is the ninth set of International Contract Terms, with the first set published in 1936. Similar to the previous version (Incoterms 2010), Incoterms 2020 defines eleven rules. One rule of the 2010 version (DAT: “Delivered at Terminal”) was replaced by a new rule (DPU: “Delivered at Place Unloaded”) in the 2020 version.
In prior versions, the rules were divided into four categories, but the eleven terms of Incoterms 2020 are subdivided into two categories based only on the method of delivery. The larger group of seven rules may be used regardless of the method of transport (road, rail, air, and sea), while the smaller group of four applies only to shipments that solely involve transportation by water where the condition of the goods can be verified at the point of loading an onboard ship. They are therefore not suitable for containerised freight, or other combined transport methods.
As a retailer, you should review, understand, and identify what Incoterms your business typically uses and include each option’s costs in your pricing. Incoterms are one of the mandatory fields on a commercial invoice.
Rules for any mode or modes of transport
EXW: Ex Works (plus place of delivery)
The seller makes the goods available at the seller’s location, so the buyer can take over all the transportation costs and bears the risks of bringing the goods to their final destination.
FCA: Free Carrier (plus place of delivery)
The seller is responsible for the goods, including costs, until they are delivered to the buyer’s chosen carrier at an agreed location. The seller is responsible for export clearance, after which the responsibility transfers to the buyer. If the agreed location is the seller’s place of business, they are responsible for loading the goods. At all other named locations, the buyer is responsible for loading.
CPT: Carriage Paid To (plus place of destination)
The seller bears all costs of transporting goods to the carrier at an agreed place.
CIP: Carriage and Insurance Paid To (plus place of destination)
CIP terms indicate the same seller responsibilities as CPT but with the additional inclusion of insurance.
DPU: Delivered at Place Unloaded (plus place of destination)
The exporter arranges carriage and delivery of the goods, ready for unloading at the named place of delivery. The seller is required to unload the goods at this destination. After the goods’ arrival, the buyer must complete the customs clearance in the importing country and pay for all the customs duties and taxes. DPU has replaced now DAT (Delivered at Terminal), making it clear that delivery can happen anywhere, not just at a terminal.
DAP: Delivered at Place (plus place of destination)
Similar to DPU, with the difference that the buyer is responsible for unloading the goods at the named place of delivery. Buyer assumes responsibility from the point of unloading the goods, including import customs clearance, duties, and taxes.
DDP: Delivered Duty Paid (plus place of destination)
The seller is responsible for all the costs and risks involved in bringing the goods to the named place of delivery. The seller must also clear the products for export and import, pay any duty for both export and import, and carry out all customs formalities.
Rules for sea and inland waterway transport
FAS: Free Alongside Ship (insert name of the port of loading)
The seller must place the goods alongside the ship at the named port. The buyer bears all the costs and the risk of loss or damage to the goods from that moment on.
FOB: Free on Board (insert name of the port of loading)
The seller is responsible up to the arrival for boarding the ship, including charges at the loading port. The buyer is responsible from loading onwards until the goods reach their final destination.
CFR: Cost and Freight (insert named port of destination)
The seller is responsible for the cost of transporting the goods to the port of discharge (not including local charges). The buyer pays the costs and is responsible for the risks from then on.
CIF: Cost Insurance and Freight (insert named port of destination)
This is the same as CFR. However, the seller must also obtain and pay for the insurance.
Incoterms is something that every retailer should be aware of should they wish to ship internationaly. After become familiar with these international trade terms, using a shipping management platform like Shiptheory that allows access to the world’s best carriers, can offer you the best shipping solutions for your e-commerce business, saving you money and time.
Disclaimer: The above information has been provided as a resource to familiarise retailers with Incoterms. The information on this article does not classify as legal advice, and the definition of each Incoterm provided is not the official, legal, or full one. For more information on Incoterms, visit the International Chamber of Commerce website, and seek legal advice if necessary.
Author: Stathis Kampylis
Stathis Kampylis is the marketing and communication coordinator at Shiptheory, a best-in-class shipping management platform that connects retailers with the world’s best carriers to automate shipping labels, customs documentation, manifests, and tracking. He is the main contributor to Shiptheory’s E-commerce and Shipping Blog.
