Incoterms

What it means

Incoterms are the trade terms that fix who arranges and pays for transport, insurance and customs formalities, and where the risk of loss or damage passes.

They do not decide when title passes or when payment is due. That is for the contract. The term settles cost and risk, which is exactly why a dispute reveals it is not enough on its own.

The terms form a scale from EXW, where the seller merely makes the goods available at its premises, to DDP, where it delivers them to the customer with duty and tax paid. Four of them, FOB and CIF among them, are meant only for sea and inland waterway transport. They are nevertheless often used for road freight, and when damage occurs it is unclear where the risk passed.

How it works in practice

For accounting the term matters twice: it decides what belongs in the acquisition cost of the goods, and it indicates when the goods should be in stock and when not.

On an import where the seller pays duty, the customs documents may never reach you, and with them the right to deduct import VAT. That is agreed before the order, not after.

On a sale to another EU country the term affects VAT as well. Under EXW or FCA the customer arranges transport, so the supplier holds no documents showing the goods left, and has to support the intra-EU supply exemption with a confirmation from the customer. We agree with clients in advance which confirmation they will ask for under such a term.

What to watch out for

An abbreviation in an order without the named place and the rules version invites misunderstanding. A correct entry gives the term, the exact place and the year of the rules; otherwise each side pictures something different.

DDP looks like a commercial advantage to the seller, but it means the seller handles the import in the customer’s country. It must pay the local duty and tax and often register there or hire a customs representative to do so. Anyone who leaves this out of the price calculation finds out from the forwarder’s invoice.