Incoterms: what are they again?

International trade is all about clear agreements: who arranges transport, who pays for insurance, and who is responsible if something goes wrong? To create global clarity on these issues, there are Incoterms – International Commercial Terms. These internationally recognized rules define who bears which obligations, costs, and risks when transporting goods.

Incoterms are indispensable in the logistics sector. They provide clarity about who is responsible for transport, insurance, and customs formalities. This clarity reduces the risk of misunderstandings and disputes, which can prevent delays and unexpected costs. In addition, Incoterms specify exactly when the risk and costs are transferred from the seller to the buyer, ensuring a transparent and efficient trading relationship.

Commonly used Incoterms

There are several Incoterms, each with their own division of responsibilities. Some of the most commonly used are:

• EXW (Ex Works): The seller makes the goods available at their own location (factory, warehouse, etc.). From that point on, the buyer bears all costs and risks, including loading, transport, insurance, and customs formalities. This gives the seller minimal obligations but places maximum responsibility on the buyer.
• FOB (Free On Board): The seller bears all costs and risks until the goods are safely loaded on board the ship. From that moment on, the buyer takes over. Often used for sea freight.
• CIF (Cost, Insurance and Freight): The seller arranges and pays for transport and insurance to the agreed port of destination. However, the risk is transferred to the buyer as soon as the goods are loaded onto the ship. Suitable for buyers who want certainty about transport costs in advance, but manage the risk themselves.
• DDP (Delivered Duty Paid): The seller bears all costs and risks until the goods are delivered to the buyer, including import duties and taxes. This is the most carefree option for the buyer.

Why choosing the right Incoterm is important

Choosing the right Incoterm is not a formality, but a crucial step in a smooth international logistics operation. With the right agreements:

• Both parties know exactly where they stand.
• Costs and risks are shared fairly.
• Companies avoid unnecessary delays or disputes.

Please note: what Incoterms do not regulate
Incoterms do specify how responsibilities, risks, and costs are shared, but they do not regulate everything. Issues such as payment terms, transfer of ownership, product quality, or what happens in the event of a breach of contract fall outside their scope. These points must always be laid down separately in a contract.

Common mistakes and pitfalls

Incorrect application of Incoterms can lead to unexpected costs, insufficient insurance coverage, or delays at customs. Common mistakes include:

• Choosing a term that does not match the chosen means of transport.
• Not checking which costs (such as terminal handling) are or are not included.
• Assuming that the Incoterm automatically regulates transfer of ownership.

Additional costs: Terminal Handling Charges (THC)
With some Incoterms, such as CPT or CFR, Terminal Handling Charges are not included as standard. These costs are often charged separately by ports or terminals. Agree this clearly in advance to avoid surprises.

Important updates in Incoterms 2020

The International Chamber of Commerce has made a number of changes to the current version, Incoterms 2020:

• DAT replaced by DPU (Delivered at Place Unloaded): more flexible in terms of delivery location, including unloading.
• Insurance obligation CIP increased to comprehensive A coverage (C coverage continues to apply to CIF).
• Clearer safety obligations for both buyer and seller.
• More detailed explanations and a more user-friendly layout to facilitate the right choice.

Customs value and Incoterms

The chosen Incoterm can affect the calculation of the customs value. Depending on the term, transport, packaging, and royalty costs may be included or deducted. This can have a direct impact on the import duties and VAT you pay.

Staying up to date

Whether you export or import, it is essential to always use the correct Incoterm and stay informed of any changes. This prevents unexpected costs and ensures that your logistics chain continues to function efficiently.

Please note: This article outlines the main points of Incoterms. Their application may vary depending on the shipment and contract. Therefore, always check in advance whether the chosen Incoterm has been applied correctly and whether all agreements regarding costs, risks, and customs formalities are correct.