Incoterms

What are Incoterms?

Incoterms is short for International Commercial Terms.

Incoterms are a set of standardized trade terms published by the International Chamber of Commerce (ICC) that outline the responsibilities and obligations of buyers and sellers in international trade transactions.

These terms were first introduced in 1936 and are periodically updated to reflect changes in global trade practices. They provide a common language and framework for negotiating contracts, specifying the delivery terms, and allocating risks between parties involved in the sale of goods across borders. The last Incoterm update was in 2020.

Principles behind Incoterms.

At the heart of Incoterms is the principle of defining the point at which the risk and responsibility for goods transfer from the seller to the buyer.

This point is crucial as it determines who bears the costs and risks associated with transportation, insurance, customs clearance, and other logistical aspects of the transaction.

By clarifying these aspects up front, Incoterms help minimize disputes, streamline trade operations, and facilitate smoother international transactions.

Types of Incoterms.

Incoterms are divided into different groups based on modes of transport, with each group containing specific terms tailored to the requirements and practices associated with that mode.

The latest version is Incoterms^® 2020, which consists of 11 terms grouped into two main categories:

• Terms for any mode of transport (known as the “C” terms).
• Terms specifically for sea and inland waterway transport (designated as the “F” and “C” terms).

Terms defined.

The terms below are applicable to all modes of transport, including air, road, rail, and sea.

These terms mainly specify the seller’s obligations regarding the delivery of goods to a designated location and the buyer’s responsibilities for arranging transportation, insurance, and customs clearance.

EXW: Ex Works. The seller fulfills their obligation by making the goods available at their premises or another named place, and the buyer assumes all risks and costs associated with transportation, export clearance, and import clearance.

FCA: Free Carrier. The seller delivers goods, cleared for export, to a nominated carrier at a specified place.

CTP: Carriage Paid To. The seller delivers goods cleared for export and pays for transportation to the named destination.

CIP: Carriage and Insurance Paid To. The seller delivers goods cleared for export and pays for transportation and insurance to the named destination.

DAP: Delivered at Place. The seller delivers goods cleared for import to the buyer at a named place of destination.

DPU: Delivered at Place Unloaded. The seller delivers goods unloaded and cleared for import to the buyer at a named place of destination.

DDP: Delivered Duty Paid. The seller delivers goods cleared for import to the buyer at a named place, covering all costs including duties and taxes.

These terms are specifically for sea and inland water transport.

FAS: Free Alongside Ship. The seller delivers goods alongside the vessel at the named port of shipment responsible for export clearance.

FOB: Free on Board. The seller delivers goods cleared for export loaded on board the vessel at the named port of shipment.

CFR: Cost and Freight. The seller delivers goods cleared for export and pays for transportation to the named port of destination.

CIF: Cost, Insurance, and Freight. The seller delivers goods cleared for export and pays for transportation and insurance to the named port of destination.

Scope of Incoterms.

Each Incoterm defines the precise obligations of the buyer and seller regarding the delivery of goods, the transfer of risk, the division of costs, and the documentation required for the transaction.

For instance, under the EXW (Ex Works) term, the seller’s responsibility is minimal, limited to making the goods available at their premises, while the buyer assumes all risks and costs from that point onward, including transportation, insurance, and customs formalities.

In contrast, terms like DDP (Delivered Duty Paid) place the maximum responsibility on the seller, who is obligated to deliver the goods to the buyer’s premises cleared for importation and pay all applicable duties and taxes. In this scenario, the buyer’s involvement and risk are minimal, limited to receiving the goods at the agreed location.

How Incoterms help organizations.

By clearly delineating these responsibilities and obligations, Incoterms help parties involved in international trade transactions negotiate contracts with confidence, knowing exactly what is expected of them and what they can expect from the other party.

By standardizing trade practices and terminology, Incoterms help businesses navigate the complexities of global commerce with greater clarity, confidence, and efficiency.

How Airbase helps with Incoterms.

While it may not directly address Incoterms, Airbase can indirectly assist in ensuring compliance with Incoterms by providing transparency into procurement processes, tracking costs associated with international trade transactions, and facilitating accurate accounting for expenses related to shipping, customs duties, and other logistics expenses.

Additionally, Airbase can help companies maintain and organized an audit trail of every transaction, which is essential to show adherence to Incoterms and resolving any disputes that may arise during international trade transactions.