What are Incoterms?
Short for ‘International Commercial Terms’, the Incoterms rules are a series of standardised trade terms published by the International Chamber of Commerce (ICC) that relate to international commercial law.
Designed to make international trade easier and smoother, the Incoterms clearly communicate all the tasks, costs and risks associated with transporting and delivering goods. They are contractually determined by the seller and the buyer of those goods, and put simply they’re there to help them understand each other better.
What you need to know
The most recent version of these rules is Incoterms 2010, which was published on January 1, 2011. However, it’s important to note that the parties to a contract can agree to use any version of the Incoterms rules, as long as they clearly state which version they’re using, for example, Incoterms 2000 or Incoterms 2010.
In countries where the customs value for calculating duties and taxes needs to include the freight cost, verifying the commercial invoice for an Incoterm reference is mandatory as this term defines whether the total amount given on the commercial invoice already includes freight cost or not. There are, however, no common standards yet as to the acceptance of Incoterms by the customs authorities. Each national administration dictates the conditions themselves.
Two examples of different conditions
- For Delivered Duty Paid (DDP) eligibility, some European Union (EU) countries explicitly require the named place of destination next to the DDP Incoterm. If that part is missing, the Incoterm will be disregarded.
- Some EU countries have a requirement regarding the explicit mentioning of the freight cost and duties/taxes cost on the commercial invoice. If the term DDP is used but no freight cost is mentioned on the CI, the DDP Incoterm will also be disregarded.
The general rule applied by the FedEx clearance teams is: for the terms within category ‘E-’ and ‘F-’, FedEx freight cost is added to the total value indicated on the commercial invoice. For the terms within category ‘C-’ and ‘D-’, no FedEx freight cost is added.
All FedEx Express customers should be aware that the Incoterm indicated on the commercial invoice can result in customs in various countries adjusting the duty and tax assessment of the shipment.
Common causes of Incoterms problems
Despite the fact that Incoterms were developed to simplify international transactions and to make their application in international trade more precise, there are still a number of reasons why they often fail to achieve their intended purpose. In most cases, it is due to a lack of knowledge of the terms as well as inaccuracy.
Problems arise when:
- Shippers use a sea-freight term such as Free On Board (FOB) or Cost, Insurance and Freight (CIF) when consigning goods by air or road freight.
- People are unaware that a new version of the Incoterms was issued in January 2010 and that some original Incoterms - including Delivered Duty Unpaid (DDU), Delivered Ex Ship (DES), Delivered at Frontier (DAF) and Delivered Ex Quay (DEQ) - are advised not to be used any longer.
- Incoterms are not quoted at all in the contracts. In that case the Incoterm used for customs clearance defaults to the base Incoterm programmed in the customs clearance system.
- A non-international freight included Incoterm is put on the invoice combined with an international freight cost quote.
- Parties choose to use DDP but the seller is unable to meet the registration requirements of some overseas customs authorities.
Some tips on using Incoterms correctly
- Agree on the specific Incoterm with the other party prior to shipping
- Ensure the term used applies to the mode of transport being used
- Confirm the responsibilities are understood by both parties as cited in the sales contract
- Properly cite the agreed Incoterm on the shipment’s commercial invoice
- Regularly review the Incoterms being used and revise if necessary
If you have any other questions, please contact FedEx Express Customer Services on 03456 070809. We send over 13 million1 shipments worldwide a week, so it’s our business to know all about Incoterms and how best to use them.