International Commercial Contracts – "Incoterms" Explained
Incoterms stands for International Commerce Terms – an internationally recognised set of rules governing the responsibilities of buyers and sellers when transporting goods.
Incoterms are maintained by the International Chambers of Commerce and cover whether it is the buyer, or the seller, who is responsible for things like the cost and risk of transportation either domestically or overseas, insurance, duties payable and clearing customs.
The very first set of incoterms were published in 1936, and have been updated on 8 occasions since; the most recent set of Incoterms were set out in 2010, and implemented officially on 1st January 2011. Incoterms 2010 defines 11 rules, 2 less than the last set, defined in 2000.
Incoterms 2010 is subdivided into 2 categories based upon method of delivery; seven rules are used regardless of the method of transport, whilst four are applicable only to sales that involve transport by water only, where the condition of the goods can be verified at the point of loading on board ship, which therefore excludes containerised freight.
Incoterms, or the types of incoterms used, can differ from country to country, and can be used to determine the duty costs of goods, for example in India or South Africa. This can result in goods being shipped via certain countries to take advantage of favourable incoterms, even when the countries are outside of the quickest trade route.
When applying incoterms, to avoid unwanted disputes, it is essential that you make clear in all contracts with buyers and sellers which you are using, and which country’s legal terms apply. If all the countries involved are signed up to the UN convention, this will clarify who is legally responsible in case a dispute does arise.
Incoterms do not cover VAT payments; so, if an international trade transactions requires the paying of VAT, it must be established, outside of the incoterm, who will pay any import or export VAT due.
In the UK, VAT is generally paid at the same rate as if they had been supplied within the country – if the country you are importing from is within the EU, VAT can be declared on a VAT return, and claimed back.
When exporting, if you are exporting outside the EU goods can usually be zero rated, provided they leave the EU within a set time rate, and records of sale and transportation are kept.
There are many different types of incoterms; some common incoterms include Delivered at Terminal (DAT), where the seller bears the risks until the goods are delivered to a specified terminal, Delivered Duty Paid (DDP), where the seller assumes all risks and must clear the goods for import and export, and ex works (EXW), where the buyer must arrange all the transport, and assume all the risk after picking the goods up from the seller’s business location.
Incoterms that are specific to sea and inland waterway transport include Free on Board (FOB) where buyer or seller delivers via a specified vessel, and Cost, Insurance and Freight (CIF), which means it is the seller’s responsibility to pay the insurance and transportation costs and for the loading of the goods onto the vessel.
Free on Board, Free Alongside Ship, Cost and Freight, and Cost Insurance and Freight are all specific to sea and inland waterway delivery.
Overall, there is a fairly even split across all incoterms as to who takes responsibility for customs, carriage to port of export, unloading, loading, carriage, insurance, customs clearance and import duties and taxes.
The next set of incoterms are expected to be determined in 2020 – the ICC tends to review incoterms every ten years to ensure that they remain appropriate and contemporary. The lead up to the latest set has already begun, with many organisations from all over the world having a vested interest in making sure the rules are fair and comprehensive.
There will doubtless be plenty of discussions had and the ICC welcomes input from most organisations, whilst retaining the right to make the final decision. The ICC is headquartered in Paris.
This article was completed with the help of NIBusinessInfo.co.uk and Zack Alami has written a useful blog post on some proposed changes for the 2020 Incoterms.