In a world where international trade is becoming increasingly important, understanding and correctly applying Incoterms® is critical for companies involved in cross-border transactions. Whether you are a seasoned player in the global market or just beginning to explore international opportunities, knowing the ins and outs of Incoterms® can make a significant difference in the success of your transactions.
What are Incoterms®?
Incoterms®, an abbreviation for International Commercial Terms, are a set of standardized commercial terms developed and published by the International Chamber of Commerce (ICC). They provide a set of rules for interpreting the most common commercial contractual clauses in international trade. Among other things, these terms define who is responsible for the costs and risks of transporting, insuring and customs clearance of goods.
Why are Incoterms® important?
The correct application of Incoterms® in an international sales contract is vital to avoid misunderstandings and disputes. They clearly define the responsibilities of both buyer and seller during various stages of the transportation process, setting expectations and managing risk. These can range from who is responsible for loading the goods at the point of departure to who must pay import duties upon arrival at the destination.
How do you choose the right Incoterms®?
When choosing the right Incoterms® for your transaction, it is essential to consider several factors, including the nature of the goods, the mode of transport, the experience of both parties in international trade and the desired degree of control and risk. A thorough understanding of the various Incoterms® is therefore critical.
Incoterms® in the 2020 version
The Incoterms® 2020 version includes 11 trade terms, each with specific implications for buyer and seller responsibilities. Some of the best-known terms include:
- EXW (Ex Works): The seller delivers the goods to its own location, with the buyer responsible for all further costs and risks.
- FCA (Free Carrier): The seller delivers the goods to the buyer’s designated carrier at a specified location, after which the buyer is responsible for further transportation.
- CIF (Cost, Insurance and Freight): The seller delivers the goods aboard the vessel at the port of departure, including freight and insurance costs to the destination. The transportation risk passes to the buyer further the seller delivers the goods aboard the vessel at the agreed port of departure.
- DDP (Delivered Duty Paid): The seller delivers the goods to the destination, including all costs and risks to the agreed place of delivery.
However, sometimes it makes sense to choose lesser-known Incoterms®. This will often depend on the relevant factors of the transaction.
Can a European seller sell goods EXW if the goods are going outside the EU?
The Incoterms® EXW stands for Ex Works. EXW are commonly used terms for the sale of goods to outside the EU. Under these terms, all costs are for the recipient, while the seller is only responsible for preparing the goods for pickup at his location. It is therefore understandable that EXW is popular with sellers. Nevertheless, we strongly advise against using EXW when exporting goods. When exporting goods to outside the EU, VAT is not due, but a seller must be able to prove that the goods were actually exported. If EXW is used, the seller must charge VAT to the recipient outside the EU because it is difficult to prove that the goods were exported. The recipient can later reclaim the VAT after the goods have been exported. If the seller does not charge VAT, it is necessary to prove that the goods actually left the EU, for example with an export document.
Using the Incoterms® EXW is not recommended because it is difficult to prove that the goods have left the EU. If the tax authorities come to check and the goods have been delivered under EXW conditions, a VAT claim may follow if there is not proof that the goods have been exported. To avoid this, it is recommended to deliver goods at least under FCA terms. This is almost the same Incoterms® as EXW, but with FCA the seller also arranges the export documents. This provides conclusive proof in your administration.
It is important to always indicate the place of delivery when using Incoterms®, for example EXW, Amsterdam, NL, to avoid discussions with the customer afterwards.
Is the use of Incoterms® mandatory? Are there countries that do not use Incoterms® and how do sales work there?
Incoterms® are essentially agreed delivery terms between the seller and buyer in international trade transactions. Although the use of these terms is not mandatory, it is strongly recommended. The Uniform Commercial Code (UCC) is also used in the United States, which partially uses similar abbreviations, albeit with different meanings. We recommend that companies utilize the Incoterms® as they provide 11 different terms for various situations, establishing obligations, responsibilities and costs between the buyer and seller. If the Incoterms® are not used, it must be compensated with a written agreement defining the terms of delivery, such as a contract, order confirmation or applicable general terms and conditions.
There are many links between Incoterms® and other aspects such as customs, payment and transport documents.
The importance of legal advice
Incoterms® play a crucial role in facilitating smooth and efficient international trade transactions. By having a good understanding of these terms and their proper application in your trade agreements, you can minimize risks and maximize opportunities in the global marketplace.
Given the complexity of international trade and its potential legal implications, seeking legal advice from an experienced law firm is advisable. An attorney with expertise in international trade and contracts can help you understand the implications of various Incoterms® and guide you in drafting watertight trade agreements that protect your interests.
More information
Do you have any questions or are you looking for a lawyer specialized in Incoterms®? Please contact one of our colleagues of Trade, Industry and Logistics.
