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What Are The Incoterms?


WHAT ARE INCOTERMS?

Incoterms are international rules for the interpretation of trade terms. Incoterms make international trade easier and help traders in different countries to understand one another. These standard trade definitions that are most commonly used in international contracts are protected by ICC copyright.


There are 11 Incoterms being used and are updated annually by The International Chamber of Commerce.

  • EXW – Ex Works: This states that the selling party agrees to hand over ownership of the goods at an agreed location. From the moment of handover, the buyer holds all responsibility and risk for the entirety of the shipping process.

  • FCA – Free Carrier: This term designates that the selling party makes the goods being sold available at either his own premises or at another location. The seller is responsible for clearing the goods for export and pays any associated fees. The buyer must instruct the carrier to provide a Bill of Lading when they load the goods.

  • CPT – Carriage Paid To: The same responsibilities and terms apply with this term as with the FCA, but in this case the seller also pays all delivery costs to a certain location.

  • CIP – Carriage Insurance Paid To: The seller has the same responsibilities as with CPT but must pay insurance costs and the insurance must have a high coverage ratio. However, the parties can come to an agreement to apply more limited coverage.

  • DAP – Delivered At Place: The seller delivers the goods to an address or location agreed between both parties. The seller covers all costs and risk of loss during the delivery process, but those responsibilities pass to the buyer once delivery has been made to that agreed location.

  • DPU – Delivered at Place Unloaded: The seller covers all costs and risks to bring the goods to an agreed location. There they can be unloaded and moved to other – or similar – modes of transportation. The seller organizes customs and unloading, but the buyer is responsible for customs clearance and any associated rights.

  • DDP – Delivered Duty Paid: The seller covers all costs and risks of transportation, carries out all export and import processes, and pays any required import duties. Those responsibilities only end when the goods arrive at the destination address and are ready to be unloaded.

  • FAS – Free Alongside Ship: The seller has sole responsibility for everything until the goods are delivered next to the ship’s loading point. At that point, all costs and risks transfer to the buyer who also must arrange export and import clearances.

  • FOB – Free On Board: All costs and risks lie with the seller until the goods are on board the ship. The seller is also responsible for all export clearance processes. Once on board the ship, responsibility for the goods shifts to the buyer.

  • CFR – Cost And Freight: The same conditions apply as with FOB but the seller must also pay for transportation of the goods to the port of shipment.

  • CIF – Cost, Insurance, and Freight: In this scenario, the seller has the same obligations as with CFR, but in this case, they must also pay for minimum insurance. If the buyer wants more comprehensive insurance on the goods, then they must pay for it themselves.

Main Areas of Responsibility There are four main areas of responsibility that Incoterms cover:

  • Delivery stage: This is where the seller and buyer make an agreement for the details of the cargo’s final delivery, and when the goods exchange hands and the seller’s responsibility end.

  • Transportation stage: Incoterms set out which party is responsible for transportation costs, how these costs are shared, or whether each party takes responsibility for different stages of transportation.

  • Documentation and formalities: Incoterms set out which parties take responsibility for dealing with all customs, export, and import documentation, formalities, and duty payments.

  • Insurance: Incoterms set out which party is responsible for providing insurance coverage during transportation.

What Is The International Shipping Customs Clearance Process?

To import goods to a country legally, the goods must first clear customs at the point of entry.

The specific demands tend to vary from country to country. However, most places share some general requirements. Here is a look at some of the crucial aspects and how you should approach them.


Paperwork And Documentation

By law, all international shipments must have certain paperwork and documentation. A commercial invoice and bill of lading of two crucial examples.

A commercial invoice is a legal document provided by the seller to the importer in an international trade deal as proof of sale between both parties. The commercial invoice contains information on pricing, freight value, and the quantity of goods being sold. It is used to calculate duties and taxes.

A bill of lading (BoL) is a document of title and contains information relating to the type, quantity, and destination of the goods being carried. It must accompany a shipment and be signed at each step of the shipping process by the carrier, shipper, and receiver. From the country of origin to the end destination, the BoL must be present.

Licenses and certificates also need to be provided to clear customs. Whether you need a certificate of origin, a packing list, or a license to import hazardous materials, ensure that you have the necessary paperwork and documentation.




Duties And Taxes

To pass import customs clearance, you must pay all necessary customs duties and taxes. These charges are dependent on the type of goods, their value, and the laws surrounding them in the importing country. The customs officer will check whether charges apply to your shipment and if they’ve been paid.

Duties can be paid in two ways:

  • DDU (Delivered Duty Unpaid)

  • DDP (Delivered Duty Paid).

Goods marked as DDP have had taxes and duties prepaid. Shipments marked as DDU will require taxes and duties to be collected upon delivery. Note: DDU can get very expensive as it can involve a range of different charges. Where possible, you should ensure that you prepay duties. This will make for a much cheaper and smoother delivery process.

Consider Hiring a Customs Broker

Customs clearance is a complicated and time-consuming process. No matter what type of product you’re importing, there is a lot of work involved. A customs broker is licensed by the government and has vast knowledge in customs regulations, the harmonized tariff, and import duties. They can guide you through the process, ensuring that you are covered from an administrative and legal standpoint. This allows you to concentrate on the core aspects of your business, such as optimising the supply chain and securing the best possible ocean freight rates.


If you require export customs clearance assistance, enquire today about customs brokerage with Image International Freight, call us on +61 2 9773 1378 OR email us info@imageinternational.com.au



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