Incoterms- The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. Incoterms, widely-used terms of sale, are a set of 11 internationally recognized rules which define the responsibilities of sellers and buyers.
Incoterms specifies who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities.
Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.
Importance of Incoterms-
Incoterms have major importance by way of the indirect taxation system since the duty charges of supplies are worked out on the basis of several of these terms. Taxes remitted by the importers to the Government also vary on the basis of Incoterms that have been notified by multiple countries.
Apart, from the duty costs, the responsibility to pay duty also shift from one person to another (Seller or buyer) based on the incoterms in which such contracts are entered into. Hence, businesses are required to clearly define the same before venturing into global trade.
Also, Incoterms act as a standard guideline for businesses across the globe and it eliminates the confusion arising from various understandings of law in various countries.
Types of Incoterms
CIF (Cost, Insurance and Freight) – CIF means that the seller delivers when the suitably packaged goods, cleared for export, are safely stowed on board the ship at the selected port of shipment. The seller must prepay the freight contract and insurance. The seller is only obliged to procure the minimum level of insurance coverage.
CIP (Carriage and Insurance Paid to) – CIP means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover.
CFR (Cost and Freight) – Cost and Freight means that the seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. The CFR term requires the seller to clear the goods for export.
CPT (Carriage paid to) – CPT stands for when the seller delivers the goods to a carrier, or a person nominated by the seller, at a destination jointly agreed upon by the seller and buyer. The seller is responsible for paying the freight charges to transport the goods to the named location. Responsibility for the goods being transported transfers from the seller to the buyer the moment the goods are delivered to the carrier.
The seller should ensure that they make it clear on their quotation that their responsibility for the goods ends at loading and, from this point forward, the buyer should arrange appropriate insurance.
DAT (Delivered at Terminal) – The seller delivers the goods to the buyer at the agreed place or port (terminal). The seller bears all the risks and costs associated with bringing the goods; he makes sure the goods are accessible from the transportation vehicle, but has no obligation to unload them himself. At this moment, the risk passes from seller to buyer. The buyer is required to declare the goods to customs and to arrange all customs formalities such as import documents and the payment of import duties.
DAP (Delivered at Place) – A recent addition by ICC to the Incoterms is DAP or Delivered at Place. As the name suggests, in these types of contracts, the responsibility of delivering the goods at the site of the buyer falls on the seller. The entire responsibility, from the supplier’s place of residence until the buyer’s location, falls in the hands of the seller. The entire risk associated with the supply is in the hands of the seller.
DDP (Delivery Duty Paid) – DDP means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
EXW (Ex Works) – EXW means that the seller has delivered when they place or deliver suitably packaged goods at the disposal of the buyer at an agreed-upon place. The goods are not cleared for export. In such a contract, the seller has a minimum responsibility since the ownership is transferred before transit and all costs related to shipment is incurred for such foreign buyer. The buyer will also be required to arrange the export by clearing goods at various customs ports.
FAS (Free Alongside Ship) – Free Alongside Ship means that the seller fulfils his obligation to deliver when the goods have been placed alongside the vessel on the quay or in lighters at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot carry out directly or indirectly the export formalities.
FCA (Free Carrier) – FCA means that the seller fulfils their obligation to deliver when the goods are handed, suitably packaged and cleared for export, to the carrier, an approved person selected by the buyer, or the buyer at a place named by the buyer. Responsibility for the goods passes from seller to buyer at this named place.
If no precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge. When, according to commercial practice, the seller’s assistance is required in making the contract with the carrier the seller may act at the buyer’s risk and expense.
FOB (Free on Board) – FOB means that the seller fulfills his obligation to deliver when he places the goods on board at the port departure. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point. The FOB term requires the seller to clear the goods for export.
Incoterms generally have seen in UAE with international trade. There is no perfect incoterm method to do business as each of these has its own merits. As an Importer, you will have to review each contract to identify the incoterm associated with it as the same have multiple tax implications