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In an era of globalization, one might think that exporting is very simple. But the reality is different: ways of doing things vary from one country to another, languages, customs, different judicial systems and non-tariff barriers can make life difficult for us. Fortunately, Incoterms offer us an undeniable advantage: predictability. Recognized around the world, they provide a common language for companies working internationally.
Definition of an Incoterm
The term INCOTERM is taken from the English International Commercial Terms (IN. CO. TERMS). It is a series of three-letter terms. These terms reflect the distribution of costs (e.g. transport costs) and risks between the parties. They therefore define certain obligations, costs and risks involved in the transfer of a product. Incoterms will help the buyer and seller to define which of them will bear the costs. They will also make it possible to specify the time at which the risk is transferred. On the other hand, it does not define the transfer of ownership! This confusion is sometimes made, it is the full payment of the invoice, whatever the incoterm used, which allows the buyer to be the owner of the goods.
There is now a list of 11 incoterms that define the sharing of risk and costs between seller and buyer. The International Chamber of Commerce (ICC) has defined new Incoterms to be used as from 01 January 2020, which modify the 2010 Incoterms used until then.
What is the purpose of an Incoterm?
Once agreement has been reached on prices, product, guarantee, means of payment and applicable law, all that remains is to agree on the transport. That's when the Incoterms come into play. There are currently 11 (2010 revision). They define which of the buyer or seller bears the transport and ancillary costs (e.g. customs clearance costs, loading, taxes). They also define who bears the risks during transport. Thus, the buyer and seller benefit from legal security throughout the world by integrating an Incoterm into a commercial contract. For example, they may define that the buyer must collect the goods from the supplier by his own means (Incoterm EXW). They may also define that the seller is responsible for all risks and costs related to the entire transport (Incoterm DDP), and that the seller is responsible for including these costs in the price of the goods sold. They are therefore used for any business that needs a supply of goods between a buyer and a seller, whether on the national territory or worldwide.
When should Incoterms be defined?
It is essential to define before a call for tenders which Incoterm best corresponds to the buyer's needs. Is your company able to manage the transport? Customs clearance?
All these questions must be asked before the RFQ is written. The defined Incoterm must clearly appear on the call for tenders so that suppliers can build their pricing according to the Incoterm chosen. As you have understood, the Incoterm defined will then directly impact the price as well as the logistics of the delivery between the seller and the buyer.
Sometimes, therefore, it is the buyers who define the Incoterm at the time of the call for tenders. Other times it is imposed by suppliers, as is often the case for Asian manufacturers who prefer FOB to make their goods available (this implies that the container is transported on a ship but that the main transport remains to be paid).
Which Incoterm to choose?
Incoterms can be distinguished according to the mode of transport used. It can be multimodal, i.e. any type of transport, or maritime/river. We can also talk about incoterm of departure and incoterm of arrival.
On the diagram above, we find an overview of the Incoterms 2020
Simplify your life, don't try to learn them by heart but remember:
- Incoterms that start with an E: are said to be initial incoterms, i.e. the buyer takes care of everything, the seller simply makes the goods available. For example EXW.
- Incoterms that start with an F: these are incoterms whose main transport is not paid for by the seller, it is the buyer who will have to pay for them, for example FOB, FCA or FAS.
- Incoterms that start with a C: these are incoterms where the main transport is paid for by the seller, for example, CIF, CIP, CFR, CPT.
- Incoterms that start with a D: these are incoterms called incoming incoterms, i.e. the buyer takes care of nothing, everything is managed and paid for by the seller. For example DAP, DPU, DDP.
What modification with Incoterms 2020?
Since 1990, Incoterms have been revised every 10 years, with updates in 2000 and 2010. These revisions are carried out in order to comply as closely as possible with the various laws in force. The last revision is applied on 1 January 2020 and affects the habits of importers and exporters.
For the first time, representatives from China and Australia are among the members of the International Chamber of Commerce. Together with representatives from France, England, Germany, the United States and Turkey, they are in charge of proposing the final version of the Incoterms 2020.
Incoterms 2020 are intended to be easier to understand. In any case, this is the wish of the International Chamber of Commerce. The aim is to remove grey areas and provide more clarity for a better understanding. The committee is well aware of the consequences caused by misinterpretations of an Incoterm. Emily O'Connor, committee member, says: "I can tell you that there is a real focus on making the rules easier to understand and use...".
— ICC WBO (@iccwbo) September 10, 2019
Interview with Jonathan Zarah - Sales manager @DocShipper
Nine years after the 2010 version of the Incoterms, which took effect in 2011, the new update will come into effect on 1 January 2020. A version published in September by the International Chamber of Commerce (ICC) that does not include any major changes from previous versions, according to Jonathan Zarah. A few points of detail need to be explained.
What changes have you noticed in the new 2020 version of the Incoterms just published by the International Chamber of Commerce (ICC), which comes into effect on 1 January 2020?
In the new version, this is an update but not a great revolution. The number of Incoterms is still eleven. Only one of them is evolving seriously. DAT (the Delivered at terminal) becomes DPU, i. e. Delivered at place unloaded.
The onboard bill of lading option added to the FCA
Beyond this change, have you noticed any other minor changes?
There will also be an evolution for the Incoterm FCA (Free Carrier). The 2020 version provides an FCA rule with the option "Bill of Lading on Board". In this rule, it is the buyer who always manages the transport but if there is a documentary credit, the seller cannot recover the maritime transport document.
In Incoterms 2020, there is therefore an innovation with the bill of lading on board. The buyer and the seller may agree that the seller may obtain the bill of lading. But it is a change that will probably be a source of difficulty.
"The DAT (Delivered at terminal) becomes DPU (Delivered at place unloaded)"
You suggested that the new rules provide for insurance changes for the terms CIP (Carriage and insurance paid to) and CIF (Cost, insurance and freight)...
Indeed, in terms of transport insurance, Incoterms 2020 make the difference in terms of coverage. The term CIP requires all-risk coverage while CIF requires a minimum coverage, namely the "FAP except" guarantee.
Do you have any other new features to comment on in the new version?
First of all, the 2020 version incorporates the notion of own-account transport, or more simply the fact that a seller or buyer uses his own means of transport to transport his goods, i.e. without calling on a transport professional. However, this new feature is only applicable to the terms FCA, DAP, DPU and DDP. Then, the 2020 version includes detailed explanations on how to choose the Incoterms rule most appropriate for a given transaction and also how the sales contract is articulated with other contracts such as the transport or insurance contract.
As for the guidance notes that existed in the 2010 version and that were not part of the Incoterms rules, they are now included in the rules.
FAQ | INCOTERMS 2020
📃 What is an incoterm?
Incoterms were created to define transactions between importers and exporters in order to have knowledge of the risks, costs and their responsibilities in terms of logistics and transport of the transaction until it is received by the importing country. There are 11 Incoterms in total.
⏳ How often are the Incoterms renewed?
Incoterms have been renewed every 10 years since 1990 by the ICC (International Chamber of Commerce) in order to adapt to new laws concerning different countries.
✅ What are the changes for the Incoterms in 2020?
The International Chamber of Commerce wanted to make the Incoterms easier to understand by 2020 in order to avoid the risk of misunderstandings. Also, the incoterm DAT (Delivered At Terminal) has been renamed DPU (Delivered at Place Unloaded), however this name change does not infect its content. There is also an evolution regarding the FCA (Free Carrier) incoterm including a Bill of Lading on Board option.
🔎 Who should be able to understand Incoterms?
Incoterms are quite complex to master, however it is very important to know them and know how to use them because it is a tool for all professionals involved in business abroad, whether exporters, importers, insurers, sales and purchasing managers.
📚 What are the different types of Incoterms?
Incoterms are generally classified according to their different modes of transport. Incoterms specialising in maritime and air transport are FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight). The remaining Incoterms, i.e. EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Cost, Insurance and Freight), DPU (Delivered at Place Unloaded), DAP (Delivered At Place) and DDP (Delivered Duty Paid) can be used for all types of transport.
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