Incoterms 2020 for merchandise buyers

Course outline

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1. 1What Incoterms rules do, and what they do not10 min Read

   General information, not legal advice. Rules change; check the sources below before you act.

   Incoterms rules are published by the International Chamber of Commerce (ICC). The current edition is Incoterms 2020, in use since 1 January 2020. ICC revises the rules roughly every ten years, so always name the edition.

   What a rule decides

   Each rule allocates three things between seller and buyer:

   • Tasks: who arranges transport, export clearance, import clearance, loading and unloading
   • Costs: who pays for each of those
   • Risk: the point at which the risk of loss or damage passes from seller to buyer

   What a rule does not decide

   • When ownership (title) passes
   • When or how payment is made
   • What happens if a party breaches the contract, or which law applies
   • The product specification, quality or delivery date

   Those belong in your purchase order and terms of sale.

   The 11 rules

   Rules for any mode 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 only:

   • FAS (Free Alongside Ship)
   • FOB (Free On Board)
   • CFR (Cost and Freight)
   • CIF (Cost, Insurance and Freight)

   Old terms you may still see

   Suppliers and forwarders sometimes use terms that are no longer in the current edition. DDU (Delivered Duty Unpaid) was removed in 2010; DAP is the nearest current rule. DAT (Delivered at Terminal) was replaced by DPU in 2020. "C&F" is an old way of writing CFR. If you see one of these, ask what the other side means and write the current rule into the order.

   How to write one

   Write the rule, the named place or port as precisely as you can, and the edition. For example:

   • FOB Ningbo, Incoterms 2020
   • FCA [factory address], Yiwu, China, Incoterms 2020
   • DAP [warehouse address], Northampton, UK, Incoterms 2020

   "FOB China" is not good enough: which port, and which terminal?

   Where this sits in the 13 steps

   The rule is first agreed at step 5 (Quote), written into the purchase order at step 8 (Order), and used at step 11 (Ship) and step 12 (Deliver).

   Checklist

   • Rule, precise named place and edition written in the quote and order
   • Payment, title and delivery date agreed separately in the contract
2. 2EXW and FCA: goods collected from the seller10 min Read

   EXW and FCA both put most of the journey on the buyer. The difference is export clearance and loading.

   EXW (Ex Works)

   The seller delivers by placing the goods at the buyer's disposal at the named place, usually its own premises, not loaded on any vehicle and not cleared for export.

   • Seller pays: the goods, packing for transport
   • Buyer pays: loading, export clearance, all transport, insurance, import clearance, duty and VAT
   • Risk passes: when the goods are placed at the buyer's disposal at the named place

   EXW is the minimum obligation for the seller. For exports from China it causes a practical problem: the buyer is responsible for export clearance but is not usually able to make a Chinese export declaration. The factory usually does it anyway, which means the contract says one thing and the paperwork another. It also leaves unclear who is liable if goods are damaged during loading at the factory.

   FCA (Free Carrier)

   The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place.

   • If the named place is the seller's premises, delivery happens when the goods are loaded on the buyer's collecting vehicle.
   • If the named place is somewhere else (for example the forwarder's warehouse), delivery happens when the goods arrive there on the seller's vehicle, ready for unloading.

   • Seller pays: the goods, export clearance, delivery to the named place (and loading, if at its premises)
   • Buyer pays: main carriage, insurance, import clearance, duty and VAT
   • Risk passes: at delivery to the carrier at the named place

   Bills of lading under FCA

   Incoterms 2020 added an option under FCA: the parties can agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller. This helps when payment is by letter of credit, which often requires an on-board bill.

   When to use which

   • Use FCA instead of EXW for almost all exports from China. The factory clears export, which it can do; you control the main freight.
   • FCA works for sea, air, rail and courier, and for full containers and consolidated (LCL) cargo.
   • Use EXW only if you really have a way to handle export clearance, for example through your own entity in China.

   Checklist

   • EXW replaced by FCA unless export clearance is genuinely yours
   • FCA named place stated precisely (premises or forwarder's warehouse)
   • On-board bill of lading option agreed if paying by letter of credit
3. 3FOB, CIF and CIP: loaded at origin, paid to destination12 min Read

   FOB, CIF and CIP are where most merchandise quotes from China start. Two of them are for sea transport only.

   FOB (Free On Board): sea only

   The seller clears the goods for export and delivers them on board the vessel nominated by the buyer at the named port of shipment.

   • Seller pays: the goods, export clearance, transport to the port, loading on board
   • Buyer pays: ocean freight, insurance, destination charges, import clearance, duty and VAT
   • Risk passes: when the goods are on board the vessel

   FOB is the most common term in Chinese quotes. For containers and LCL cargo the goods are handed over at a terminal or warehouse before loading, so ICC suggests FCA as the better fit. In practice many parties still use FOB; if you do, agree clearly who bears loss before loading.

   CFR and CIF: sea only

   Under CFR (Cost and Freight) the seller also pays ocean freight to the named port of destination. CIF (Cost, Insurance and Freight) adds cargo insurance.

   • Risk passes: when the goods are on board at the port of shipment, as under FOB, even though the seller pays freight to destination.

   This split is the thing to remember about all C rules: the seller pays for transport to destination, but the risk passes at origin. If the goods are lost at sea, the buyer claims on the insurance.

   Under CIF, the seller must buy insurance meeting at least the minimum cover of the Institute Cargo Clauses (C), for at least 110% of the contract price, unless agreed otherwise. That is limited cover.

   CPT and CIP: any mode

   CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To) work like CFR and CIF but for any mode, including air and courier. Risk passes when the goods are handed to the first carrier.

   Under CIP in Incoterms 2020, the seller must buy the broader cover of the Institute Cargo Clauses (A), again for at least 110% of the contract price, unless agreed otherwise.

   Destination charges under C rules

   Under CFR and CIF the seller chooses the carrier. Charges at destination (terminal handling, delivery order fees, deconsolidation) are often set by the seller's forwarder's agent and paid by you. Ask for them in writing before you accept a CIF quote.

   Checklist

   • Named port of shipment (FOB) or destination (CFR, CIF) stated precisely
   • Remembered: under C rules, risk passes at origin
   • Insurance level checked: ICC (C) minimum under CIF, ICC (A) under CIP
   • Destination charges confirmed before accepting a C-rule quote
4. 4DAP, DPU and DDP: delivered to your door10 min Read

   D rules put the journey on the seller. They are attractive to buyers who want one price, but they move risks around in ways that matter for UK and EU imports.

   DAP (Delivered at Place)

   The seller delivers when the goods are placed at the buyer's disposal on the arriving vehicle, ready for unloading, at the named place of destination.

   • Seller pays: everything to the named place, except unloading
   • Buyer pays: unloading, import clearance, duty and import VAT
   • Risk passes: at the named place, before unloading

   DAP to your warehouse is a common term for suppliers who manage freight. You still act as importer, so you control the customs entry and can recover import VAT.

   DPU (Delivered at Place Unloaded)

   Like DAP, but the seller also unloads at the named place. It replaced DAT in Incoterms 2020. Rarely used for merchandise.

   DDP (Delivered Duty Paid)

   The seller delivers the goods cleared for import, with duty and taxes paid, at the named place, ready for unloading.

   • Seller pays: everything, including import clearance, customs duty and import VAT
   • Buyer pays: unloading
   • Risk passes: at the named place

   The DDP problem for UK and EU imports

   For the seller to be able to deliver DDP, it (or someone acting for it) must be the importer. That raises questions:

   • Import VAT recovery. If the seller pays the import VAT, it is the seller who may recover it, which usually requires a VAT registration in the UK or the relevant EU member state. You cannot reclaim VAT paid in someone else's name.
   • Declarant. In the EU, the declarant must generally be established in the EU, so a Chinese seller needs a representative.
   • Product compliance. The importer has legal duties under product safety law. If the seller is the importer on paper but you are the business everyone deals with, responsibilities can be unclear.
   • Under-declaration risk. Some low-price DDP offers work by declaring low values. If that is found, the goods can be held and the recipient may be asked questions.

   If a supplier offers DDP, ask who the importer will be, which EORI and VAT number will be used, and ask for a copy of the import entry.

   Checklist

   • DAP preferred when you want to stay the importer
   • DDP accepted only with the importer, EORI and VAT arrangements in writing
   • Unloading responsibility clear at the named place
5. 5Choosing a rule when sourcing from China10 min Read

   There is no single right rule. The right one depends on the mode of transport, who has the better freight arrangements, and who should be the importer.

   A practical guide

   • Full container by sea, your own forwarder: FCA at the factory or the container yard, or FOB at the port if the supplier insists. You control freight and destination charges.
   • LCL (consolidated) cargo by sea: FCA at your forwarder's consolidation warehouse in China. The factory delivers there, cleared for export; your forwarder does the rest.
   • Air freight: FCA at the factory or the forwarder's airport warehouse. FOB and CIF are sea-only terms.
   • Courier (express): often quoted DAP or DDP by the supplier's courier account. Check who is the importer and whether you can recover the VAT.
   • No forwarder of your own, small order: DAP to your address, with you as importer, is often cleaner than DDP.
   • Payment by letter of credit: FCA with the on-board bill of lading option, or FOB/CIF for sea, so the documents match what the bank expects.

   Questions to ask before you choose

   1. Who has the better freight rates and service on this lane?
   2. Who will be the importer, and can they recover import VAT?
   3. Where do you want the risk to pass, and who insures until then?
   4. What documents does your payment method need?
   5. Is the named place precise enough that no one can argue about it?

   Insurance

   Incoterms rules only require insurance under CIF and CIP, and then only at the minimum level stated. Under every other rule, each party decides whether to insure its own risk. Because merchandise is often needed for a fixed date, consider what a loss would really cost: the goods, plus the cost of re-making them by air in time. Make sure cover starts at the point where risk passes to you under the rule you chose, and ask your forwarder or broker what their standard cover excludes.

   Common mistakes

   • Using FOB or CIF for air freight
   • Writing "FOB China" without a port
   • Accepting CIF without asking about destination charges
   • Accepting DDP without knowing who is the importer of record
   • Assuming the Incoterms rule transfers ownership or sets the payment date

   Where this sits in the 13 steps

   • Step 5 (Quote): agree the rule and named place
   • Step 8 (Order): write them into the purchase order with the edition
   • Step 11 (Ship): confirm the handover point and documents
   • Step 12 (Deliver): check that destination charges match the rule

   Checklist

   • Rule suits the transport mode
   • Named place precise, edition stated
   • Importer of record decided
   • Insurance in place from the point risk passes to you
6. 6References5 min Read

   General information, not legal advice. Rules change; check the sources below before you act.

   The Incoterms rules are published by ICC; the full text is in the ICC publication. These pages describe the rules and the UK and EU import rules referred to in this course.

   • ICC: Incoterms rules
   • ICC: Incoterms 2020
   • GOV.UK: VAT on imports, acquisitions and purchases from abroad
   • GOV.UK: Check when you can account for import VAT on your VAT Return (postponed VAT accounting)
   • European Commission: Economic Operators Registration and Identification number (EORI)
   • Regulation (EU) No 952/2013 laying down the Union Customs Code

   Links were checked when this course was published. Official pages move: if a link fails, search the site named for the title shown.