For most international shippers, the terms of sales are clear. After payment, the goods ship. The buyer pays any applicable duty and taxes. Sounds simple. There are some complexities to consider for understanding incoterms for international shipping.
Note: Incoterms® is a registered trademark. In this post, we also refer to shipping terms and conditions of sale to convey the same concepts.
Shipping Terms Explained
Shipping terms play such a vital part in global trade. The terms seem to be confusing at first. But, purchasers and sellers must understand how they work. Clarify their obligations across the shipping process. In this post we provide simple explanations to better understand the concepts.
Incoterms® Tool for ICC Regulations
The Incoterms® rules are standard sets of trading terms and conditions designed to assist traders when goods sold and transported. They are created and published by the International Chamber of Commerce (ICC), with the most recent revision being 2020.
What are Inco-Terms
To put it simply, terms of sale are the selling terms that buyers and sellers agree to in cross border transactions. These rules are accepted by governments and legal authorities around the world. The shipping terms clarify when the seller’s costs and risks are transferred onto the buyer.
It is also important to understand that not all rules apply in all cases. Some encompass any mode or modes of transport (this category includes CIP, FCA, CPT, DAT, DDP and DAP). Whereas others only apply for sea and inland waterway transport (FAS, FOB, CFR and CIF).
Why Terms of Sales important
Incoterms® are a set of rules published by the International Chamber of Commerce (ICC), which relate to International Commercial Law. According to the ICC, Incoterms® rules provide internationally accepted definitions. Providing rules of interpretation for common commercial terms used in contracts for the sale of goods. All International purchases processed on an agreed Incoterm define which party legally incurs costs and risks. Include shipping terms on the relevant shipping documents.
Advantages of Including Shipping Terms
The terms of sale communicate a binding agreement between the buyer and seller. They outline the responsibilities between the manufacturer and purchaser of goods in regards to the delivery to the products.
It is not a requirement for sellers to quote terms of sales when selling internationally. The advantage of doing is clarifying the responsibilities between the two parties. As language barriers and cultural differences are commonplace in international trade. These terms simplify an often complicated process. They help communicate parts of the process of transferring the goods from the seller to the buyer. If you’re new to importing and terms of sales, consider working with a freight forwarder to avoid costly misunderstandings.
What’s Not Included in Terms of Sales?
It difficult determining how terms of sales protect buyers from the risk of damage, loss, or theft of cargo. Each term can help define each of these concerns. It is essential to point out, there are only two Incoterms that require the seller to purchase insurance. Unless freight insurance has is agreed before a shipment, the buyer would need to buy insurance on the cargo separately.
Shipping terms do not exist to protect the buyer from fraud or guarantee the products in any way. Incoterms define which party is responsible during the transportation process. Shipping terms do not act as a contractual agreement for the sale.
International Commercial Trade Terms help communicate the terms of delivery of a product purchased internationally. These terms do not define the payment terms of a product or other outside rights. They do not explain how the buyer should pay for the goods. They do not determine who is responsible for the cargo in the event of defective, incorrect, or failed productions.
Terms of sales help communicate a large portion of the logistics and cargo transferring process. This is why most international traders opt to rely on them. While these terms communicate a lot, there is a significant amount of information they don’t explain. Buyers should be aware of not only what these terms mean. Also lean what is not included in each of these terms, as miscommunication could easily lead to misunderstandings and costly mistakes.
Where Can I Learn More About the Incoterm 2020 Rules?
The International Chamber of Commerce updates Incoterms every ten years. While companies appreciate Jet Worldwide support, it is best to consult ICC's terms directl. This is especially true for larger transactions and uncommon terms. You can learn more about the rules on the ICC website.
- Incoterms clarify the responsibilities of all parties to a sales transaction. As noted above, Incoterms are normally part of the sales contract.
- They do not specify which documents must be provided to the buyer, by the seller, to facilitate customs clearance processes at destination
- They do not address liabilities for any failure to provide the goods as defined in the contract of sale, nor dispute resolution mechanisms.
Terms of Sale and Incoterms
The International Chamber of Commerce (ICC) publishes globally recognized cross border trading terms known as Incoterms (the term itself is trademarked by the ICC).
What are the default Shipping Terms for parcels?
When shipping via a common carrier, the goods are shipped - by default -delivery duty unpaid. The seller is responsible for preparing a customs invoice. The invoice is the basis for the customs declaration in the destination country. If the invoice does not include shipping terms, the import fees are charged to the importer.
Delivery Duty Unpaid or EXW
Often referred to as Delivery Duty Unpaid, EXW is the default method of shipping international parcels. EXW is the default term for shipping international via FedEx, UPS and DHL. The international trade clause EXW comes from the term " Ex Works." It implies that the buyer is responsible for all shipping costs. This condition is used even when the seller pays the shipping costs. It gives the carrier more flexibility when it comes to assigning various import related costs to the the receiver.
- EXW imposes a minimum obligation on the seller.
The seller does not need to load the goods on any collecting vehicle. Nor does it need to clear them for export, where such clearance is applicable.
Import related costs to the receiver can go beyond simply duty and taxes and can include:
- Entry preparation fees
- Disbursement Fee
- Import bond Fee
- Import processing / administration fee
- Paper transfer fee
- Other government agency approval fees
International shipments transported under the EXW term give the carrier authorization to charge the receiver for all import related fees.
FOB -Free on Board
The seller delivers the goods to the vessel.
The buyer assigns the carrier, port of shipment or procures the goods already delivered. The risk of loss or damage to the goods passes when the products are on board the vessel. The purchaser bears all costs from that moment onwards.
The Risk of Loss or Damage
The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.
FCA – Free Carrier
Specify as explicitly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another designated place.
CPT – Carriage Paid To
The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller delivers the goods to the carrier. Or to another person nominated by the seller at an agreed place (if any such site is agreed between parties).
CPT requires that the seller clear the goods for export (but not for import). Read more about CERS Canadian Export declaration.
CIP – Carriage And Insurance Paid To
The seller has the same responsibilities as CPT. They also contract 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. Additional insurance protection can be made with express agreement between both parties.
DAT – Delivered At Terminal
The seller delivers when the goods unloaded from the arriving means of transport. They are placed at the disposal of the buyer at a terminal at the designated port or place of destination. “Terminal” includes a place, whether covered or not. This include such places as such as a wharf, warehouse, container storage area, or cargo terminal.
The seller bears all risks involved in bringing the goods unloading them at the terminal at the named port or place of destination.
Point of delivery shipping term
This section outlines where the goods will be transferred from the seller to the buyer.
The responsible party for transportation costs – The section defines which party will cover the freight costs. This component is often characterized as Freight Prepaid or Freight Collect.
Incoterms in government regulations regarding value to duty
Duty costs of the goods may be calculated against a specific Incoterm value. Some customs calculate duty on the CIF value (read more about valuation). Other countries calculate duty as a percentage of the FOB value of the goods. In each case, ensure that the points at which costs and risks pass are clarified with the customer.
Shipping Terms on the Bill of Lading-BOL
A bill of lading is a legally binding agreement that outlines the responsibility and control of goods being shipped. It confirms the conditions of carriage and shipping terms. For example, under delivered at place, the seller is responsible for delivering the goods only till the point of first port, so the buyer is the consignee. For CIF, the responsibility for duties, insurance etc lies with the seller. Be sure your BOL includes the correct details, including the shipping terms!
Export and import requirements.
Each term defines the responsible party for covering the costs and facilitating the export and import of the cargo.
The responsible party of freight insurance.
In some Incoterms, freight insurance is mandated. Each Incoterm will define who must pay for freight insurance. Useful information: Insuring international shipments.
Delivery Duty Paid or DDP
Often companies who ship internationally want to ensure the buyer is not charged import duty and taxes. This is often the case when shipper such things as product samples and warranty or replacement parts.
There are multiple terms related to delivery duty paid and can include DAP (delivery at place) and DAT (delivery at terminal). DDP is commonly understood term for shipping individual orders or parcels.
Under the DAP goods are deemed delivered when they are put at the disposal of the buyer. On the transportation vehicle ready for unloading at the place of destination or an agreed point within such place.
Delivery duty paid is not an option for goods shipped via postal services (Canada Post, USPS, Royale Mail, La Poste, Japan Post, Correos , etc).
Delivery Duty Paid but what about Import Tax?
The largest single aspect of import fees is often not duty, but taxes. Many countries have a form of valued added tax that can average around 10%-20%.
Sending DDP to a business may be a disadvantage. In countries with a value added tax, the VAT can often be claimed back. However, this cost cannot be claimed by the a shipper who paid the VAT via DDP.
- DDP imposes the maximum responsibility on the seller as it is the only Incoterm requiring import clearance by the seller.
For online orders, the payment of value added tax is mandated at time of import. Shipments to the UK, European Union and Australia is to be made by the seller or marketplace.
Read more: Payment of VAT for online orders to Europe.
Incoterms rules: The more you ship, the more you should know
For the vast majority of shippers and shipments, Incoterms are simple and easily understood. However, shippers should become familiar with the concepts and terms as they change often and cans significantly impact international transactions. This is especially true for large transactions, carriage by sea and multimodal complex logistics processes.
To confirm the correct meaning of conditions of carriage, it is best to have clear written communication backed by the official up to date definitions directly from ICC publications.
Shipping Terms for Shipment of Online Orders
International online orders are, by default, shipped delivery duty unpaid. However, some countries are demanding pre-payment of value added tax be facilitated by Shopify, eBay and other online platforms.
Verifying the correct declared value
Important understanding: HS Codes Explained
Necessary elements for an invoice for customs
What is a bill of lading
Benefit from Canada's Free Trade Agreements
Goods shipped via the post are always EXW. The receiver is responsible for import duty, taxes and other fees.
The default shipping option is EXW or more commonly understood as delivery duty unpaid. This means the consignee is responsible for import duty, tax and fees.
Most commercial carriers offer delivery duty paid option.
The default option for most freight forwarders is delivery duty unpaid (EXW). Most offer the possibility of delivery duty paid.
Jet Worldwide provides logistics support and expertise. A trusted brand for over 40 years. Our services also include discount access to global carriers.
Ocean shipping is best for large commercial orders with several months lead time.