Know Your Incoterms: An OverviewIncoterms
Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. Shippers worldwide use standard trade definitions (called Incoterms) to spell out who’s responsible for the shipping, insurance, and tariffs on an item; they’re commonly used in international contracts and are protected by International Chamber of Commerce copyright. Incoterms significantly reduce misunderstandings among traders and thereby minimize trade disputes and litigation. Familiarize yourself with Incoterms so you can choose terms that will enable you to provide excellent customer service and clearly define who is responsible for which charges.
What are the Current Incoterms?
In 2010, the two main categories of Incoterms were updated and are organized by modes of transport. Used in international as well as in domestic contracts for the first time, the new groups aimed to simplify the drafting of contracts and more clearly stipulate the obligations of buyers and sellers:
Group 1. Incoterms that apply to any mode of transport are:
- EXW Ex Works
- FCA Free Carrier
- CPT Carriage Paid To
- CIP Carriage and Insurance Paid To
- DAT Delivered at Terminal
- DAP Delivered at Place
- DDP Delivered Duty Paid
Group 2. Incoterms that apply to sea and inland waterway transport only:
- FAS Free Alongside Ship
- FOB Free on Board
- CFR Cost and Freight
- CIF Cost, Insurance, and Freight
- View Incoterms 2010 with Definitions
Most B2B ecommerce agreements will use EXW, CPT, or CIF; most business-to-consumer (B2C) transactions will use CPT or CIF (and sometimes DDP). Except for DDP, the Incoterms mentioned above require the buyer to pay all tariffs and taxes upon arrival. To make sense of all these terms, you should take the time to understand their usage. For more on ecommerce and exporting, visit the eCommerce Resource Center.
- When the goods you export arrive at their destination, the importing country requires that all applicable tariffs (import taxes levied by the destination country) and local taxes, including value-added tax (VAT), be paid. Many companies require the buyer to pay these tariffs and taxes.
- Buyers typically want to know the final price, with shipping and taxes included (known as the “landed cost”), before they agree to buy, but you might not be able to provide it—tariffs and taxes vary widely throughout the world, so determining those rates before you ship can be difficult. Be clear about your policy on tariffs—specifically, who pays and when payment will be due.
- The shipping companies you select often act as freight forwarders, helping you complete shipping documents, helping you estimate duties and taxes, pre-paying them for you, and then invoicing you. If you use the U.S. Postal Service for lighter weight shipments, its local partner in the buyer’s country will collect duties and taxes.
Where can I learn more about the new Incoterms?
- View the Make the Export Sale: Shipping Basics video.
- See the Incoterms reference chart and web page.
- Watch an Incoterms webinar.
- Visit ICC for more training on Incoterms, and get a current copy of Incoterms.
- See the logistics page at export.gov, or get help from your local U.S. Commercial Service office.
- For sample language, you can use on your website, check out the Standard Terms for Shipping section on export.gov.
Background on Incoterm 2010 Update
Why were the Incoterms 2000 revised?
Incoterms 2010 are the updated version of Incoterms. Incoterms 2010 have been developed because of an extensive review of current shipping practices and trends to keep up with the rapid expansion of world trade. The key drivers for this update include: a need for improved cargo security, changes to the Uniform Commercial Code in 2004 that resulted in a deletion of U.S. shipment and delivery terms, and new trends in global transportation.
Can I still use the Incoterms 2000?
According to the International Chamber of Commerce, all contracts made under Incoterms 2000 remain valid even after 2011. In addition, although the ICC recommends using Incoterms 2010 from January 2011 onward, parties to a sales contract can agree to use any version of Incoterms after 2011. It is important, however, to clearly specify the chosen version of Incoterms being used (i.e. Incoterms 2010, Incoterms 2000, or any earlier version).
Prepared by the International Trade Administration. With its network of 108 offices across the United States and in more than 75 countries, the International Trade Administration of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.
Landed Costs Incoterms