Understanding Incoterms Rules
International Commercial Terms, or Incoterms, are a series of defined commercial terms published by the International Chamber of Commerce and intended to clearly communicate the tasks, costs, and risks associated with the international sale and transport of goods.
The original Incoterms® rules set in 1936 were divided into four categories, whereas the most recent update, done in 2010, simplifies the list by separating the eleven terms into two categories: rules for any mode of transport, and rules for sea and inland waterway transport.
Buying and Selling International Goods.
When buying or selling international goods it is of primary importance to have a clear understanding of the responsibilities of both parties.
While there are several common mistakes which can cause issues with a shipment, one of the most common and easiest to avoid is being vague or unspecific with the shipment details.
For example, using abbreviated words or failing to specify the actual destination port can delay your shipment.
Not specifying where the place of risk will transfer, or putting vague or a wrongly named place after the three-letter Incoterm could lead to misdirected shipments and/or extra expenses for both the buyer and the seller.
Incoterms Rules for purchasing or selling goods that will be transported globally.
When purchasing or selling goods that will be transported globally, it is crucial to identify where the title passes from the seller to the buyer.
A common misconception is that Incoterms rules have to deal with ownership and title transfer when in reality it deals with the dividing of costs and risks.
Title and ownership transfer should always be outlined in the sales contract before beginning shipment. Along with the title comes liability exposure and the need for marine insurance.
While commonly used, the DDP Incoterm can cause confusion.
Often sellers will quote DDP without knowing how to get goods into the buyer’s country – or the buyer will accept the DDP terms without checking to see if their supplier is registered as an importer or if they have sorted out any potential tax issues.
The difficulties surrounding DDP can be more problematic and even costlier to the seller when something goes wrong, especially as sometimes complex taxes are involved.
In some cases, taxes can only be paid by companies who are known to the authorities in the buyer’s country, which is often the case with VAT and local customs authorities.
In addition to potential tax and importer filing status issues, it is up to the DDP assigned responsible party to clear the goods through customs, meaning it is important that the party knows about import regulations in that specific country.
Any issues, such as goods being improperly declared or unpaid taxes can put an entire transaction at risk, so if unsure about DDP and the risks involved, it’s best to speak to an Incoterms expert.
Paying attention to the details, and ensuring that the right rule is chosen for the shipment will benefit both the buyer and seller mutually and avoid any errors in the shipment of international goods.
Since shipping regulations change all the time and navigating Incoterms rules can be tricky, new shippers and even experienced shippers would be well advised to call for our guidance. After all, we handle international freight on a daily basis!
To see the other ways we can help, check out our logistics services to read about the reliable and innovative solutions we provide to get your goods to or from nearly any destination worldwide. We provide a unique personalized service that you will not find with other companies.
Our experienced specialists are ready to help clear up any confusion you might have. Please mail to us info@novalog.org for questions about Incoterms® or international freight shipping.