24 Mar 2021 8:59 AM

Incoterms define who is responsible for customs declarations and any import taxes. After 1st January 2021 these could be more of a challenge as customs declarations are now required after Brexit.

What are Incoterms?

Incoterms is an acronym standing for “International Commercial Terms” and used worldwide for the international trade of goods for both import and export. Incoterms 2020 came into effect on 1st January 2020, replacing Incoterms 2010.

The Incoterms rules describe:

Obligations – Who, the seller or the buyer, organises and what e.g. carriage/insurance of goods? Who obtains shipping documents and export import licences, etc?

Risk –  Where and when risk transfers from seller to buyer

Cost -  Which party is responsible for which cost e.g. transport, packaging, loading or unloading, etc?

It is very important to be clear and specific by stating the rule, insert named port, place or point and quote the incoterms rules e.g. Incoterms 2020.

Brexit effect

If for example a busines is buying on DDP terms, the seller is the importer, not the buyer. As well as the export customs entry, the seller would also be responsible for arranging the import customs entry into the buyer’s country and paying any import taxes. They would need an EORI number and a VAT number in the buyer’s country. The supply becomes a domestic supply and the seller, if applicable, would charge VAT at the rate of the buyer’s country.

On the other side of the spectrum is EXW terms where the buyer is organising the transport, import customs entry as well as export customs entry out of the seller’s country. Important point here is that the export sale is zero rated for VAT and the export declaration has to be done correctly.

The above examples only show how important the issue now is.

Businesses could consider different terms and it is good to be reminded that Incoterms are no substitute for a contract of sale.

For more information please visit https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/

Our specialist Brexit Advisory Team are helping businesses negotiate the changes to international trade as a result of Brexit.  For more information please visit our Brexit information hub. https://www.alliotts.com/blog/brexit-quick-find-alliotts-articles/

Incoterms - overview

Here is an overview of most commonly used three-letter trade terms for the sale and purchase of goods.

RULES FOR ANY MODE OR MODES OF TRANSPORT

  • EXW | Ex Works
  • FCA | Free Carrier
  • CPT | Carriage Paid To
  • CIP | Carriage and Insurance Paid To
  • DAP | Delivered at Place
  • DPU | Delivered at Place Unloaded
  • DDP | Delivered Duty Paid

RULES FOR SEA AND INLAND WATERWAY TRANSPORT

  • FAS | Free Alongside Ship
  • FOB | Free On Board
  • CFR | Cost and Freight
  • CIF | Cost Insurance and Freight
Main Rules Point of delivery and transfer of risks Transport obligation Costs Risks Export formalities Import formalities
EXW | Ex Works Named place of delivery, agreed point of collection - Risk transfers from seller to buyer - minimum responsibility on the seller Buyer Buyer Buyer Buyer Buyer
FOB | Free On Board Named port of loading - Risk transfers from seller to buyer - Seller delivers goods, cleared for export, loaded on board the vessel at the named port Buyer Buyer Buyer Seller Buyer
FAS | Free Alongside Ship Named port of loading - Risk transfers from seller to buyer - Seller delivers goods, cleared for export, alongside the vessel at a named port, at which point risk transfers to the buyer Buyer Buyer Buyer Seller Buyer
FCA | Free Carrier Named place of delivery - risk transfers from seller to buyer, "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier. FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage. the seller is responsible for export clearance; the buyer assumes all risks and costs after the goods have been delivered at the named place. Buyer - from the named placeSeller - to named place Seller Buyer Seller Buyer
CPT | Carriage Paid To Named place of destination to which seller must organise carriage of the goods, which is however not the place or port of delivery; when delivery of the goods takes place, risk transfers from seller to buyer, at the point where the goods are taken in charge by a carrier Seller Seller Buyer Seller Buyer
CIP | Carriage and Insurance Paid To Named place of destination to which seller must organise carriage of the goods and insure the goods, which is however not the place or port of delivery; when delivery of the goods takes place, risk transfers from seller to buyer, at the point where the goods are taken in charge by a carrier Seller Seller Buyer Seller Buyer
CFR | Cost and Freight Named port of destination to which seller arranges and pays for transport to named port, seller delivers goods, cleared for export, loaded on board the vessel. Risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place Seller Seller Buyer Seller Buyer
CIF | Cost Insurance and Freight

 

Named port of destination to which seller arranges and pays for transport to, arranges and pays for insurance for the goods for carriage to the named port, seller delivers goods, cleared for export, loaded on board the vessel; risk transfers from seller to buyer once the goods have been loaded on board, i.e. before the main carriage takes place. Seller Seller Buyer Seller Buyer
DAP | Delivered at Place Named place of destination - place of delivery and destination - seller must organise carriage and deliver the goods to that point, ready for unloading from the arriving means of transport, at the named place. Risk transfers from seller to buyer when the goods are available for unloading, so unloading is at the buyer’s risk Seller Seller Seller Seller Buyer
DPU | Delivered at Place Unloaded Named place of delivery and destination - seller must organise carriage and deliver the goods to that point, ready for unloading from the arriving means of transport, at the named place. Risk transfers from seller to buyer when the goods have been unloaded. This is the only rule that requires the seller to unload the goods in order to complete delivery. Seller Seller Seller Seller Buyer
DDP | Delivered Duty Paid Named place of delivery and destination - seller is responsible for arranging carriage and delivering the goods at the named place, cleared for import and all applicable taxes and duties paid (e.g. VAT) Seller Seller Seller Seller Seller