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Incoterms

The term Incoterms stands for "international commercial terms" and regulates the rights and obligations of buyers and sellers in international sales and contractual relationships. The clauses have been published by the International Chamber of Commerce (ICC) since 1936 and are revised every three years. The current 2020 version has been in force since January 1, 2020. Here you will find everything you need to know about this topic!

Everything you need to know about Incoterms in a nutshell

Incoterms are a set of contractual provisions developed for international trade in goods. They are used to standardize and speed up trade between companies from different countries. Incoterms are an internationally recognized system of transport protection provisions approved by the United Nations. They are used to determine which party bears responsibility for the cost of transportation and insurance.  Most Incoterms are based on the "contract for work and services," which determines the performance of the seller. This performance also determines the shifting of liability in the event of a defect in the goods.

In logistics, Incoterms are often used to regulate the rights and obligations when shipping goods. These are a set of international agreements that seem somewhat complicated at first glance. However, once you understand the rules, it is easy to use Incoterms. The rules for Incoterms were originally determined by the International Chamber of Commerce (ICC) and have been protected by the WIPO Convention for over 60 years.

Which Incoterms are there?

There are a total of eleven different Incoterms, which are divided into three categories. The first category includes the four Incoterms for maritime and inland trade, the second category contains the three Incoterms for air transport and finally the third category contains the four Incoterms for road or rail transport. Incoterms (International Commercial Terms) are an international set of commercial terms that determine how the costs and responsibilities of buying and selling goods are divided between the buyer and seller. They were originally issued in 1936 by the International Chamber of Commerce Committee. The current version of the Incoterms, known as Incoterms 2020, was published on January 10, 2020 and contains 11 different clauses. The 11 Incoterms can be divided into 4 groups. Each of these term classes has specific instructions about the costs, responsibilities and risks of the seller and the buyer:

  • E - EXW (Ex Works): The seller must have its goods ready for collection at a specified location, but does not provide any other services.
  • F - FCA (Free Carrier): The seller must deliver its goods to a carrier, freight forwarder or other means of transport at a specified location.
  • C - CPT (Carriage Paid To): The seller is responsible for the transportation of his goods to the destination.
  • D - DAP (Delivered at Place): The Seller shall bear all transportation, insurance and customs clearance costs to the Buyer's destination.

It is important to note that each country has its own legal requirements when it comes to importing/exporting goods. Therefore, before buying or selling products abroad, one should make sure that one has all the necessary information about the respective legal system. In addition, one should also ensure that one has considered all relevant fees and taxes before entering into a contract.


How are Incoterms applied?

The use of Incoterms is crucial to clarify rights and obligations between buyer and seller in international trade contracts. When choosing the right Incoterms, a number of factors must be taken into account, such as the type of transport or the structure of the supply chain network. Incoterms are included in the commercial contract between buyer and seller and describe the obligations of both parties in terms of transportation, insurance, duties, shipping documentation, customs formalities, etc. Incoterms also determine when the risk of loss of goods passes from the buyer to the seller. The difference between Incoterms lies mainly in which tasks the buyer and which tasks the seller have to take over. Depending on which Incoterm is used, one party may have to take on some or all of the logistics tasks - from organizing transportation to preparing necessary documents. When selecting a particular Incoterm, buyers and sellers should carefully consider and ensure that it meets their specific needs. The wrong Incoterm can cause costly mistakes and create significant legal problems. Therefore, it is important to work with an expert who can help you select the right Incoterm. In addition, it is very important that buyers and sellers know the regulations of their respective countries. It is not advisable to carry out international trade transportation without a thorough knowledge of all relevant laws and regulations regarding customs duties and taxes. It is therefore advisable to involve specialized consultants or law firms to ensure that the laws are complied with. In summary, the correct application of Incoterms provides you with all the information about the delivery process, as well as rights and obligations of all parties involved - from the manufacturer to the end user.

The Differences between the Incoterms

Incoterms define the responsibilities and rights of the parties in an export or import transaction. There are different types of Incoterms used for different trade practices. Depending on the nature of the transaction, the terms may vary, so it is important to be aware of the relevant Incoterms before entering into a contract.

The differences between the Incoterms are mainly in the rules and responsibilities regarding transportation and customs clearance. Some Incoterms describe where the goods are shipped from, others describe when the buyer receives the goods and whether the buyer is responsible for customs clearance. Some types of Incoterms are also used to determine which costs must be paid by the seller or the buyer.

In most cases, Ex-Works Incoterms differ from the Free Carrier Incoterm in that the buyer is given more responsibility for transportation and customs clearance. With the Free Carrier-Incoterm, the buyer is allowed to hire a freight forwarder or courier service himself. In contrast, with Ex-Works-Incoterm, the seller must deliver the goods directly to the buyer and is responsible for all delivery costs incurred. Another difference exists between the Cost Insurance and Freight (CIF) Incoterm and the Free On Board (FOB) Incoterm: The CIF Incoterm states that the seller is responsible for all delivery costs incurred as well as insurance costs; in contrast, with the FOB Incoterm, the buyer is responsible for all delivery costs incurred as well as insurance costs.

The handling of tax matters can also vary depending on the type of transaction. In the Delivery Duty Paid (DDP) incoterm, the seller steps into the role of payer; therefore, he must pay for all necessary tax duties and also handle all related documentation. With all this work, it is his responsibility to ensure that all legal requirements are met, and no mistakes are made.

In contrast, for Delivery Duty Unpaid (DDU) Incoterms, the buyer must handle the fiscal matter himself. There are other differences between the various Incoterms depending on the transaction - therefore, interested parties should inform themselves about their respective details before concluding any contract in order to exclude legal consequences for the protection of all parties!

How are Incoterms used in logistics?

In logistics, Incoterms are used to regulate the responsibility for the transport of goods between the buyer and the seller. The Incoterms determine who bears which costs and when the goods are handed over. In addition, the Incoterms provide information about where the goods are unloaded and whether the buyer must transport the goods himself or pick them up. The most commonly used Incoterms are DAP (Delivered at Place), DDP (Delivered Duty Paid) and FOB (Free on Board).

  • DAP bedeutet, dass der Verkäufer die Güter bis zum angegebenen Bestimmungsort liefert und alle anfallenden Kosten trägt.
  • DDP means that the seller delivers the goods to the specified destination and bears all costs incurred, including customs and import taxes.
  • FOB means that the seller brings the goods on board the ship. The buyer is responsible for further transportation and all costs incurred.

Examples of the use of Incoterms in practice

In practice, Incoterms are used for a wide range of commercial transactions. Below are some examples where these rules are applied.

  1. FOB (Free On Board): This Incoterm is often used for sea transports and means that the seller delivers the goods up to the board of the ship and takes over the costs of the transport, but from here on the buyer's responsibility starts.
  2. EXW (Ex Works): The EXW Incoterm is a very simple way to transfer ownership of a product. With this Incoterm, the seller transfers ownership of the goods to the buyer as soon as they are ready to be picked up at the seller's storage location. However, the buyer bears all transportation and insurance costs for moving the goods from the seller's storage location to the destination.
  3. CIF (Cost Insurance and Freight): With this Incoterm, both the buyer and the seller bear some assumption of risk: the buyer is responsible for selecting and paying the shipping company and bears all risks associated with the transport; the seller is responsible for organizing the transport as well as ensuring that the goods are fully insured.
  4. DDU (Delivered Duty Unpaid):With this Incoterm, the seller assumes the risk and cost of transportation, but not the duties or taxes that may be imposed by the destination. The duties or taxes are paid by the consignee and must be paid upon delivery.
  5. DDP (Delivered Duty Paid): The DDP-Incoterm offers the greatest possible service and convenience for the buyer: the seller organizes the shipment, insures the goods and also takes care of any customs duties or taxes incurred in the destination country. Therefore, the buyer does not have to bear any additional financial burden to collect his goods after delivery on site. Companies with international operations in particular should therefore definitely familiarize themselves with the various Incoterms in order to be able to conduct their commercial transactions in a legally secure manner. It is also advisable to consult a specialist lawyer or legal advisor in order to clear up uncertainties in advance and prevent misunderstandings - especially with regard to global business relationships and international contract drafting.

List of all Incoterms

Incoterms are important because they inform the seller and buyer of an international transaction, who will bear which parts of the transportation and customs costs. It is important that both parties determine the Incoterms by mutual agreement before entering into the contract. There are 11 Incoterms in total, divided into 3 groups:

  • Group E (EXW): These rules concern the seller's obligation to bear the costs of transport to the place of destination and the buyer's obligation to bear the further costs.
    • EXW – Ex Works,
    • FCA – Free Carrier
    • CPT – Carriage Paid To.
  • Group F (FAS): Here the seller bears the costs until delivery on board the ship at the port of destination. The buyer bears all other costs.
    • FAS – Free Alongside Ship,
    • FOA – Free On Board
    • DES – Delivered Ex Ship
  • Group C (CIF): In this group, the seller pays all transportation and insurance costs to the destination, but not customs clearance costs or taxes for importation into the buyer's country.
    • CIF – Cost Insurance and Freight
    • CFR – Cost and Freight
    • DDU – Delivery Duty Unpaid

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