Incoterms 2010 Training

Incoterms 2010
What do the Changes Mean?

International Commercial Terms History

Incoterms 2010 Training

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.

What are Incoterms 2010?

Incoterms 2010 Training

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 dont have to use them on that date Available worldwide through 100 International Chamber of Commerce National Committees
The terms arent law; no laws that require their use and are not all inclusive Country neutral they dont favor one country over another Self-contained all information that determines responsibility and risk are in one place

Incoterms 2010 Training

Definitions..

Just what do we mean?

Key Definitions
Incoterms 2010 Training

What is Delivery? 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. It is not always:
When the goods arrive in your customers 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 isnt a separate stand-alone contract related to the transaction.

Transportation Definitions
Incoterms 2010 Training

Pre-carriage: inland transportation on the sellers 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 sellers side

Main Carriage:
Domestic: subsequent transportation beyond pre-carriage International: transportation from the point of departure on the sellers side to the arrival pint on the buyers side

On-carriage:
Domestic: subsequent transportation beyond main carriage International: transportation from the arrival pint on the buyers side

Transportation Definitions
Incoterms 2010 Training

Door to Door
Contract of carriage that includes pre-carriage, main-carriage and oncarriage 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

Type of Transportation?
Incoterms 2010 Training

Company A

Company B

Door to Door one contract for all carriage (pre-, main, and on-carriage)

Type of Transportation?
Incoterms 2010 Training

Company A

Door to Port contract for pre-carriage and main-carriage

Company B responsible for arranging pick up at Arrival Airport

A Few More Definitions..

Incoterms 2010 Training

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 sellers responsibility ends when goods are handed over to the first carrier Arrival Contract: sales/purchase contract where sellers responsibility ends when goods have arrived at agreed place

Packaging Definitions
Incoterms 2010 Training

1. The packaging of the goods to comply with any requirements under the contract of sale. 2. The packaging of goods so that they are fit for transportation. 3. 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.

What Questions to Ask?

Incoterms 2010 Training

Who furnishes the goods? Who packages the goods in a manner suitable for shipment (export)? Who moves the goods from the sellers factory to a port, airport, or border crossing in the sellers country? Who arranges for export clearance in the sellers 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)?

Incoterms 2010 Training

Now that we have some basic definitions

What do Incoterms 2010 Do?

Incoterms 2010 Training

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.

What Incoterms 2010 DO

Incoterms 2010 Training

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

What Incoterms 2010 DO

Incoterms 2010 Training

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

Incoterms 2000 vs. 2010

Incoterms 2010 Training

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 Marine Restricted

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

Omni-Modal

Incoterms 2010 Training

Group Term Definitions

F Terms C Terms D Terms

F-Group Terms
Incoterms 2010 Training

Are considered to be Shipment Contracts Are considered Buyer Friendly

Seller Handles Export Clearance Handles Pre-carriage Named Place on Sellers Side

Buyer Contracts for Main Carriage In charge of Carrier (and usually forwarder) selection Control over Freight Costs Control of Documentation

C-Group Terms
Incoterms 2010 Training

Are considered to be Shipment Contracts Are considered Seller Friendly 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 Buyers 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

D-Group Terms
Incoterms 2010 Training

Are considered to be Arrival Contracts 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 Buyers 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

Incoterms 2010 Training

Omni-Modal Incoterms 2010

Ex Works (EXW) + (Named Place)

Incoterms 2010 Training

Named Place is generally Sellers Location (or where product initially ships from)

Delivery Seller delivers goods when placed at buyers disposal at the name place of delivery
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
Goods are packaged Goods are NOT LOADED on the collecting vehicle

Free Carrier (FCA) + (Named Place)

Incoterms 2010 Training

Named Place is generally:

Sellers 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 Sellers 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

FCA + (Named Place)

Incoterms 2010 Training

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 buyers 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.

Carriage Paid To (CPT) + Named Place (on Buyers Side)

Incoterms 2010 Training

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 Sellers 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 Sellers side to Buyer BUT Cost is Sellers responsibility to named location on Buyers side

Carriage and Insurance Paid To (CIP) + Named Place (on Buyers Side)
Incoterms 2010 Training

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 Sellers 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 Sellers side to Buyer BUT Cost is Sellers responsibility to named location on Buyers side

Delivered at Terminal DAT + Named Place (Buyers side)

Incoterms 2010 Training

Replaces DEQ Term Delivery: Seller delivers goods to named destination terminal on Buyers 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 buyers side at terminal Export Clearance: Seller Responsibility Import Clearance: Buyer Responsibility documentation and fees associated Insurance: Neither party required to insure

Delivered at Place (DAP) + Named Place (Buyers Side)

Incoterms 2010 Training

Previously contained elements of DDU, DAF, DES terms Delivery: Seller delivers the goods to the buyer at the named place on the Buyers side, appropriately packaged, but not

unloaded

Carriage: Seller handles all carriage to named place on buyers side Risks: Transfer from Seller to Buyer once goods are delivered to the named place on buyers side Export Clearance: Seller handles Import Clearance: Buyer handles and pays associated costs Insurance: neither party required to insure

Delivered Duty Paid (DDP) + Named Place (Buyers Side)

Incoterms 2010 Training

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 Buyers side Risks: Transfer from Seller to Buyer once goods are delivered to the named place on the Buyers side Export Clearance: Seller Handles Import Clearance: Seller Handles & pays for any charges associated Insurance: Neither party required to provide

DDP Caveats
Incoterms 2010 Training

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

Incoterms 2010 Training

Water Transport Only Incoterms 2010

Free Alongside Ship (FAS) + Named Place (alongside vessel at port on Sellers side)
Incoterms 2010 Training

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 Sellers side Insurance: Neither party required to insure goods Export Clearance: Seller Handles Import Clearance: Buyer is responsible for requirement and fees associated

Free On Board (FOB) + Named Place (loaded on vessel at a port on the Sellers side)
Incoterms 2010 Training

Delivery: Seller delivers goods to Buyer on board the 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 Sellers 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

Cost and Freight (CRF) + Named Place (port on Buyers side)

Incoterms 2010 Training

Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Sellers side Carriage:
Seller handles pre-carriage and main carriage Buyer handles on-carriage following delivery to port on Buyers 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 Sellers side (once loaded per contract), Seller contracts for and pays freight necessary to bring goods to the named port on the Buyers side

Cost Insurance Freight (CIF) + Named Place (port on Buyers side)

Incoterms 2010 Training

Delivery: Seller delivers goods packaged for shipment on board the Seller-designated vessel at the port on Sellers side Carriage:
Seller handles pre-carriage and main carriage Buyer handles on-carriage following delivery to port on Buyers side

Risks: Passes from Seller to Buyer once goods are on board the vessel Insurance: Seller required to procure minimum coverage against Buyers 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 Sellers side (once loaded per contract), Seller contracts for and pays freight necessary to bring goods to the named port on the Buyers side Same as CPT + Insurance coverage

Price Considerations with Incoterms 2010

Incoterms 2010 Training

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, OHare Airport $12,000 DDP Seattle

Importing and Incoterms 2010

Incoterms 2010 Training

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.

Cargo Security
Incoterms 2010 Training

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

What Questions to Ask?

Incoterms 2010 Training

Who furnishes the goods? Who packages the goods in a manner suitable for shipment (export)? Who moves the goods from the sellers factory to a port, airport, or border crossing in the sellers country? Who arranges for export clearance in the sellers 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)?

Final Thoughts
Incoterms 2010 Training

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

Questions?
Incoterms 2010 Training