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Incoterms 2010

Incoterms 2010. What do the Changes Mean?. In ternational Co mmercial Terms History. Initially created in 1936 by the International Chamber of Commerce (ICC) and have been periodically revised (Incoterms® 2010 is the 8 th revision)

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Incoterms 2010

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  1. Incoterms 2010 What do the Changes Mean?

  2. International Commercial Terms History • Initially created in 1936 by the International Chamber of Commerce (ICC) and have been periodically revised (Incoterms® 2010 is the 8th revision) • Incoterms® are generally good for approximately 10 years ~ not a magic number, but historically about accurate • Incoterms® reflect world-wide trade practices, as practices change, Incoterms® are revised • Incoterms® 2010 were written by the ICC, represented by 8 individuals from various countries/areas of the world • Met 11 times in person • Received over 2000 suggestions in first request • Refined suggestions over 4 proposals • Controlling source document is written in British English and will be translated into 35+ languages over the next year.

  3. What are Incoterms ® 2010? • Eleven (11) Incoterms® 2010 (used to be 13 terms) • Four (4) terms were deleted and two (2) new terms were created • Incoterms® 2010 will begin January 1, 2011, but you don’t have to use them on that date • Available worldwide through 100 International Chamber of Commerce National Committees • The terms aren’t law; no laws that require their use and are not all inclusive • Country neutral – they don’t favor one country over another • Self-contained – all information that determines responsibility and risk are in one place

  4. Definitions….. Just what do we mean?

  5. Key Definitions • What is Delivery? • It is not always: • When the goods arrive in your customer’s hands or • When the goods leave your dock • Defined the same in all countries • You must know your contract and your Incoterm® • Note: A Purchase Order and a matching Acknowledgement will constitute a “contract” if there isn’t a separate stand-alone contract related to the transaction. As defined in Incoterms® 2010, “it is used to indicate where the risk of loss of or damage to the goods passes from the seller to the buyer.”

  6. Transportation Definitions • Pre-carriage: inland transportation on the seller’s side • Domestic: from the place where the shipment starts to any subsequent transportation carriage • International: from the place where the shipment starts to the departure point on the seller’s side • Main Carriage: • Domestic: subsequent transportation beyond pre-carriage • International: transportation from the point of departure on the seller’s side to the arrival pint on the buyer’s side • On-carriage: • Domestic: subsequent transportation beyond main carriage • International: transportation from the arrival pint on the buyer’s side

  7. Transportation Definitions • Door – to – Door • Contract of carriage that includes pre-carriage, main-carriage and on-carriage by the same carrier • Door – to – (Air) Port: • Contract of carriage including pre-carriage and main-carriage to airport or ocean port or truck terminal port or rail port • (Air) Port – to – (Air) Port: • Contract of carriage for main carriage only • (Air) Port – to – Door: • Contract of carriage including main carriage and on-carriage

  8. Type of Transportation? • Company A • Company B Door to Door – one contract for all carriage (pre-, main, and on-carriage)

  9. Type of Transportation? • Company A Door to Port – contract for pre-carriage and main-carriage Company B responsible for arranging pick up at Arrival Airport

  10. A Few More Definitions….. • Omni-modal: Used with terms that use all modes of transportation (truck, airplane, vessel, train…) • Marine-restricted: Terms that only apply to carriage by vessel • Shipment Contract: sales/purchase contract where the seller’s responsibility ends when goods are handed over to the first carrier • Arrival Contract: sales/purchase contract where seller’s responsibility ends when goods have arrived at agreed place

  11. Packaging Definitions • The packaging of the goods to comply with any requirements under the contract of sale. • The packaging of goods so that they are fit for transportation. • The stowage of the packaged goods within a container or other means of transport. Only Definition 1 & 2 are addressed in Incoterms® 2010. Definition 3 must be addressed within the contract between the parties.

  12. What Questions to Ask? • Who furnishes the goods? • Who packages the goods in a manner suitable for shipment (export)? • Who moves the goods from the seller’s factory to a port, airport, or border crossing in the seller’s country? • Who arranges for export clearance in the seller’s country (if applicable)? • Who arranges for main carriage (international transportation) from the departure port to the arrival port? • Who pays for main carriage? • Who insures the shipment? • Who arranges for import clearance? • Who pays import duties? • Who pays for on-carriage from the arrival port to the delivery destination? • Who arranges and pays for country-specific documentation (e.g., consular invoices, inspection reports, licenses)?

  13. Now that we have some basic definitions…

  14. What do Incoterms® 2010 Do? • Divides up tasks, responsibilities, costs and risks to deliver goods from seller to buyer • If used correctly, no duplication of effort between seller & buyer • Acts as signposts for who needs to have additional contracts (i.e., with vessel steamship line, inland trucking company, etc.) to complete transaction • If something goes wrong, clearly defines responsibilities based on where the goods were in the transportation chain of delivery • Address “String sales” • Shipments where ownership changes in transit • Address Cargo Security concerns • Authorized Economic Operator (AEO), Customs-Trade Partnership Against Terrorism (C-TPAT), Importer Security Filing (ISF 10+2) • Defines mode of transportation by their use • 4 Terms are for Marine-Restricted for sea & inland waterway transport only • 7 Terms are Omni-modal for use with all modes of transportation • Increasingly considered replacement for Uniform Commercial Code (UCC) shipment/delivery terms.

  15. What Incoterms® 2010 DO NOT Do… • Automatically Apply • Determine When Ownership Changes • When delivery occurs or when payment happens can impact when ownership changes • Must be addressed specifically in contract • Under US Law, it is when the product is delivered • If jurisdiction is under another sovereign nation law, you need to address per that country regulation • If contract is subject to the United Nations Convention on Contracts for the International Sale of Goods (CSIG) the law does not specify if it is not addressed specifically within the contract • Identify when Revenue is Recognized • Under GAAP and Securities & Exchange Commission (SEC) Rules 1) ownership must pass prior to recognizing revenue and 2) delivery must occur • If not specifically addressed in contract, look to applicable contract law

  16. What Incoterms® 2010 DO NOT Do… • Identify if a Breach of Contract occurs, when it happened • Does not determine remedies for breach of contract • Provide relief from obligations/exemptions from liability in unexpected or unforeseeable situations • Address Payment issues • Tells you that the buyer must pay, but not when or where • Address more than one contract • Drop Shipments are TWO Contracts 1) between the seller and their supplier and 2) between the seller and the buyer • Incoterms® 2010 could be the same or different in each contract • Specifically task a party with container stowage obligations

  17. EXW – Ex Works FCA – Free Carrier FAS – Free Alongside Ship FOB – Free On Board CFR – Cost and Freight CIF – Cost, Insurance & Freight CPT – Carriage Paid To CIP – Carriage & Insurance Paid To DEQ – Delivered Ex Quay DES – Delivered Ex Ship DAF – Delivered at Frontier DDU – Delivered Duty Unpaid DDP – Delivered Duty Paid EXW – Ex Works FCA – Free Carrier FAS – Free Alongside Ship FOB – Free On Board CFR – Cost and Freight CIF – Cost, Insurance & Freight CPT – Carriage Paid To CIP – Carriage & Insurance Paid To DAT – Delivered At Terminal DAP – Delivered At Place DDP – Delivered Duty Paid Incoterms® 2000 vs. 2010 Marine Restricted Omni-Modal

  18. Group Term Definitions F – Terms C – Terms D – Terms

  19. F-Group Terms • Seller • Handles Export Clearance • Handles Pre-carriage • Named Place on Seller’s Side • Buyer • Contracts for Main Carriage • In charge of Carrier (and usually forwarder) selection • Control over Freight Costs • Control of Documentation • Are considered to be “Shipment Contracts” • Are considered Buyer Friendly

  20. C-Group Terms • Seller • Contracts for Main Carriage • In charge of carrier (and usually forwarder) selection • Handles pre-carriage • Has control over freight costs • In control of documentation • Passes risk of loss (delivers) to Buyer prior main carriage • Handles export clearance • Buyer • Named Place is on Buyer’s side • Has risk of loss while goods are in transit with carrier selected and paid for by seller • Must rely heavily on Seller for data elements required for ocean shipments such as Importer Security Filing (known as ISF or 10+2) • If informed, should not consider “C” terms due to downside described • Are considered to be “Shipment Contracts” • Are considered Seller Friendly

  21. D-Group Terms • Seller • Contracts for Main Carriage • In charge of carrier (and usually forwarder) selection • Handles pre-carriage • Has control over freight costs • In control of documentation • Passes risk of loss (delivers) to Buyer at freight arrival point • Handles export clearance • Seller may have revenue recognition issues since “delivery” occurs on arrival side, meaning revenue is recognized only upon arrival • Buyer • Named Place on Buyer’s side • Must rely heavily on Seller for data elements required for ocean shipments such as Importer Security Filing (known as ISF or 10+2) • Undertakes less risk than in “C” terms • If inexperienced, or does not have good relationship with carriers, is served will by “D” terms • Are considered to be “Arrival Contracts”

  22. Omni-Modal Incoterms® 2010

  23. Ex Works (EXW) + (Named Place) Named Place is generally Seller’s Location (or where product initially ships from) • Delivery – Seller delivers goods when placed at buyer’s disposal at the name place of delivery • Goods are packaged • Goods are NOT LOADED on the collecting vehicle • Seller Risks – Minimum obligation for seller; once packaged there is a loss of control over transportation movement, where package is finally received, how export or import documentation is presented to relevant governments • Buyer Risks – Buyer bears all costs and risks involved in taking the goods from the named place • Carriage: Buyer responsibility to arrange for pre-carriage, main carriage, on-carriage • Insurance: Neither party required to insure goods • Export/Import Clearance: Buyer must handle all requirements, pay all associated duties and fees Note: Should NOT be used when the buyer cannot carry out export requirements directly or indirectly

  24. Free Carrier (FCA) + (Named Place) • Named Place is generally: • Seller’s Place of Business • Seller responsible for having goods available when promised, packaged to the extent known or agree, loaded onto collecting vehicle • Buyer responsible for pre-carriage, main carriage, on-carriage • Another Location on Seller’s side (i.e., International Airport, Freight Forwarder Warehouse for consolidation, another location agreed by Seller and Buyer) • Seller responsible for having goods available when promised, packaged to the extent known or agree, loaded onto collecting vehicle, pre-carriage • Buyer responsible for unloading pre-carriage delivering vehicle, main carriage, on-carriage

  25. FCA + (Named Place) • Contract of Carriage: Buyer is responsible to make a contract of Carriage, however if requested or the buyer does not give instruction in due time, the seller may contract for carriage on usual terms at the buyer’s risk and expense. • Risks: passes to buyer at point of delivery • Insurance: Neither party required to insure goods • Export Clearance: Handled by Seller • Associated Licenses can be obtained and maintained under US Law • Automated Export System filings can be completed by Seller • Import Clearance: Handled by Buyer – responsible for the customs formalities and any duties, fees, other charges due upon importation. This is the most versatile of the “F” terms.

  26. Carriage Paid To (CPT) + Named Place (on Buyer’s Side) • Delivery: Seller delivers goods to a carrier or another person nominated by the seller, at an agreed place, for transportation to the named destination on the Buyer's side, appropriately packaged • Carriage: Seller chooses and pays cost of carriage to bring the goods to the named destination (the final location, not the destination port) • Risks: Seller bears all risks and costs incurred until the goods are delivered to the first carrier on the Seller’s side • Export Clearance: handled by Seller • Import clearance: Buyer responsibility for paperwork and all costs • Insurance: Neither party required Note: Risk of Loss passes on Seller’s side to Buyer BUT Cost is Seller’s responsibility to named location on Buyer’s side

  27. Carriage and Insurance Paid To (CIP) + Named Place (on Buyer’s Side) • Delivery: Seller delivers goods to a carrier or another person nominated by the seller, at an agreed place, for transportation to the named destination on the Buyer's side, appropriately packaged • Carriage: Seller pays cost of carriage to bring the goods to the named destination (the final location, not the destination port) • Risks: Seller bears all risks and costs incurred until the goods are delivered to the first carrier on the Seller’s side • Export Clearance: handled by Seller • Import clearance: Buyer responsibility for paperwork and all costs • Insurance: Seller required to obtain minimum coverage Note: Risk of Loss passes on Seller’s side to Buyer BUT Cost is Seller’s responsibility to named location on Buyer’s side

  28. Delivered at Terminal – DAT + Named Place (Buyer’s side) • Replaces DEQ Term • Delivery: Seller delivers goods to named destination terminal on Buyer’s side, packaged appropriately and unloaded • Carriage: • Seller responsible for pre-carriage and main carriage • Buyer responsible for on-carriage • Risks: Transfer from Seller to Buyer once goods are unloaded on buyer’s side at terminal • Export Clearance: Seller Responsibility • Import Clearance: Buyer Responsibility – documentation and fees associated • Insurance: Neither party required to insure

  29. Delivered at Place (DAP) + Named Place (Buyer’s Side) • Previously contained elements of DDU, DAF, DES terms • Delivery: Seller delivers the goods to the buyer at the named place on the Buyer’s side, appropriately packaged, but not unloaded • Carriage: Seller handles all carriage to named place on buyer’s side • Risks: Transfer from Seller to Buyer once goods are delivered to the named place on buyer’s side • Export Clearance: Seller handles • Import Clearance: Buyer handles and pays associated costs • Insurance: neither party required to insure

  30. Delivered Duty Paid (DDP) +Named Place (Buyer’s Side) • Delivery: Seller delivers goods to the Buyer, cleared for import on the arrival transportation, but not unloaded at the final destination • Carriage: Seller handles all carriage to named place on Buyer’s side • Risks: Transfer from Seller to Buyer once goods are delivered to the named place on the Buyer’s side • Export Clearance: Seller Handles • Import Clearance: Seller Handles & pays for any charges associated • Insurance: Neither party required to provide

  31. DDP Caveats • Should not be used if SELLER CANNOT clear goods in importing country • NOT recommended if Buyer wants control of import documents and declarations to Customs • DDP DOES NOT MEAN Buyer is absolved of all Customs Regulations & Responsibilities

  32. Water Transport Only Incoterms® 2010

  33. Free Alongside Ship (FAS) +Named Place (alongside vessel at port on Seller’s side) • Delivery: Seller delivers goods to Buyer alongside the vessel chosen by Buyer at the named port of shipment, packed appropriately • Carriage: • Seller handles pre-carriage • Buyer handles main carriage and on-carriage • Risks: Pass from Seller to Buyer once goods place alongside the vessel on Seller’s side • Insurance: Neither party required to insure goods • Export Clearance: Seller Handles • Import Clearance: Buyer is responsible for requirement and fees associated

  34. Free On Board (FOB) + Named Place (loaded on vessel at a port on the Seller’s side) • Delivery: Seller delivers goods to Buyer on boardthe vessel chosen by the Buyer at the named port of shipment, packaged for shipment • Carriage: • Seller handles pre-carriage • Buyer handles main carriage and on-carriage • Risks: Pass from Seller to Buyer once goods are placed on board the vessel on the Seller’s side • Insurance: Neither party is required to insure goods • Export Clearance: Handled by Seller • Import Clearance: Handled by Buyer NOTE: “Ships Rail” is no longer part of Incoterms® 2010. If using Marine Terms, Contract or PO must exactly state what “on board the vessel” means for the transaction – where on the vessel is the container, item to be placed

  35. Cost and Freight (CRF) +Named Place (port on Buyer’s side) • Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Seller’s side • Carriage: • Seller handles pre-carriage and main carriage • Buyer handles on-carriage following delivery to port on Buyer’s side • Risks: Passes from Seller to Buyer once goods are on board the vessel • Insurance: Neither party required to insure goods • Export Clearance: Handled by Seller • Import clearance: Buyer is responsible for the customs requirements and associated costs (fees, duties, etc.) NOTE: Even though risk passes from Seller to Buyer on Seller’s side (once loaded per contract), Seller contracts for and pays freight necessary to bring goods to the named port on the Buyer’s side

  36. Cost Insurance Freight (CIF) +Named Place (port on Buyer’s side) • Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Seller’s side • Carriage: • Seller handles pre-carriage and main carriage • Buyer handles on-carriage following delivery to port on Buyer’s side • Risks: Passes from Seller to Buyer once goods are on board the vessel • Insurance: Seller required to procure minimum coverage against Buyer’s risk of loss or damage to the goods during carriage • Export Clearance: Handled by Seller • Import clearance: Buyer is responsible for the customs requirements and associated costs (fees, duties, etc.) NOTE: Even though risk passes from Seller to Buyer on Seller’s side (once loaded per contract), Seller contracts for and pays freight necessary to bring goods to the named port on the Buyer’s side Same as CPT + Insurance coverage

  37. Price Considerations with Incoterms® 2010 When negotiating a contract, keep in mind the following: • Basic Rule of Thumb: The more responsibility the Seller takes on, the more they must charge the Buyer. • Example: What is the price the Seller should quote for 10 units to be shipped from Hilltown to Seattle? • $10,000 EXW, Johnsburg Factory • $10,200 FCA, Carrier in Hilltown • $10,600 CIP, Newark Airport • $10,800 DAT, O’Hare Airport • $12,000 DDP Seattle

  38. Importing and Incoterms® 2010 • Some charges if included and detailed in commercial invoice need to be deducted from the dutiable value of the shipment • Main carriage • Any foreign inland freight • Insurance • Supply chain security fees • Terminal handling fees • Etc. • See U.S. Cross Rulings HRL H092560 (April 7, 2010) and HRL H119857 (Sept 9, 2010) for additional information.

  39. Cargo Security With the US programs C-TPAT and ISF (10+2 for ocean shipments) and other countries’ similar programs in use proper use of Incoterms® 2010 is critical to both the Seller and the Buyer • Control over who is arranging/paying for transportation when is critical to maintaining control over data elements required by governmental entities. • Control over carriers (C-TPAT, AEO, PIP etc.) • Control over documentation (waybills, AES data reporting, ITAR licensing requirements) • Control over Importer Security Filing (ISF aka 10+2 in US), the EU is also implementing a similar ocean shipment filing requirement shortly

  40. What Questions to Ask? • Who furnishes the goods? • Who packages the goods in a manner suitable for shipment (export)? • Who moves the goods from the seller’s factory to a port, airport, or border crossing in the seller’s country? • Who arranges for export clearance in the seller’s country (if applicable)? • Who arranges for main carriage (international transportation) from the departure port to the arrival port? • Who pays for main carriage? • Who insures the shipment? • Who arranges for import clearance? • Who pays import duties? • Who pays for on-carriage from the arrival port to the delivery destination? • Who arranges and pays for country-specific documentation (e.g., consular invoices, inspection reports, licenses)?

  41. Final Thoughts All Incoterms® 2010 can be used for domestic transactions. • Incoterms® 2010 titles have removed all references to duty • Principles apply, just not the last items on who is responsible for export/import formalities • Determining proper Incoterms® to use • Revenue Recognition is NOT part of Incoterms® 2010 • Delivery + Title Passage = Revenue Recognition • Delivery is addressed • Title is not and must be addressed elsewhere • Where do you want risk and responsibility? • AES, Licensing concerns, C-TPAT, ISF should play a part in determining appropriate Incoterms® 2010 use • Look at the entire transaction, answer questions early in process for who does what, when • Some transportation charges are deducted upon import from dutiable value (reducing duties and fees) if specifically identified by Shipper

  42. Questions?

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