The International Chamber of Commerce (ICC) Incoterms® are widely used in international trade worldwide. ICC Incoterms provide an internationally recognized standard for agreements on international goods transactions.
In such transactions, the seller basically has the obligation to deliver certain goods and the seller has the obligation to pay for them. However, a delivery usually involves more such as: loading and unloading, transportation, risk of transportation, possible insurance of risks, customs clearance and payment of import duties, and export formalities. Incoterms are used to clearly agree which party takes on which of these tasks, risks, and costs and at what point these responsibilities pass to the other party. In the most recent version of Incoterms (2020), there are 11 different Incoterms. These run from Ex Works (EXW; least responsibility for seller) to Delivered Duty Paid (DDP; most responsibility for seller). In between, 9 Incoterms remain with increasing responsibilities for the seller.
Depending on the Incoterms and the country of destination, the consequences can range from having to prepare goods for collection, to mandatory registration, or even to not being able to comply with certain obligations under applicable national law (with all its consequences). In particular, the Incoterms EXW and DDP often prove problematic in this regard.
Thus, the choice of particular Incoterms can have major consequences. In addition, carriers often have limited liability in international traffic. Therefore, it is important to make proper arrangements about liability and risk allocation in relation to the transport of goods between supplier and buyer. It may be possible to deviate from a certain part of the agreed Incoterms - a number of Incoterms even specifically allow for deviation from the standard in certain ways. However, a better solution is often to adhere to the most appropriate Incoterms from the outset.
Practice shows that many business owners do not take Incoterms too closely. Often certain Incoterms are included in the contract or invoice, while in reality they act as if other Incoterms were agreed upon. For example, in an EXW delivery, the seller will often load the goods into the means of transport engaged by the buyer, when strictly speaking that is not his job. If the seller then also acts to facilitate export it is soon obvious to agree on an FCA delivery.
In a transaction without problems and with a good relationship between supplier and buyer, this will not cause any problems. However, the purpose of Incoterms is to divide responsibilities, risks and duties between the parties. The importance of this really comes into play when something goes wrong in a transaction. Given the limited liability of carriers internationally, settling the bulk of problems is a matter between buyer and seller, or their insurers. In the example above, it is possible that damage to the goods occurs during loading. Since the task of loading lies with the buyer, the insurer will not want to pay out to the seller; after all, loading was not his responsibility.
For business owners, there are often gains to be made through better information and coordination internally. It is important that the sales department is aware of the consequences of Incoterms they agree with customers. Given the possible consequences (risks, costs, customer relations, etc.) it is important that Incoterms are put on the agenda by different departments. Always keep in mind that Incoterms establish obligations for both buyer and seller. Therefore, always assess whether it is desirable, where appropriate, for the buyer to assume a certain responsibility/obligation. For example, what happens if the buyer does not fulfill its customs clearance obligations? How does this affect customer friendliness? Such questions are important considerations when agreeing Incoterms.
Even in the event of changed situations, such as recently the Brexit, it is important to re-examine the Incoterms and perhaps make different arrangements. For some transactions it is then obvious to shift certain responsibilities to the other party. In particular, agreements on customs clearance, import duties and export operations lend themselves to change in such cases. Instead of EXW, FCA can then be chosen, and instead of DDP, DAP can offer a good alternative.
Incoterms, by the way, do not define where ownership (legally speaking) passes from buyer to seller. So it is possible for risk to be borne for goods that are no longer the property of the seller. Incoterms also do not determine which documents are required where and when, only which party is responsible for them. Incoterms do not replace payment terms or similar agreements. However, the choice of Incoterms does affect the method of payment. Some international forms of payment do not relate well to all Incoterms.
Problems surrounding Incoterms often have a direct impact on VAT issues, so our VAT focus group will be happy to help. Do you have questions about Incoterms or about other (VAT) issues within your company? Please contact us via your relationship manager, by email at btw@govers.nl, or by phone at 040 - 2 504 504.