incoterms: a case study€¦ · · 2017-08-01incoterms: a case study presented by tom gould and...

Incoterms: A Case

Study

Presented by Tom Gould and

Kelly Raia

Tom Gould Licensed Customs Broker

Certified Customs Specialist

Customs and International Trade Consultant

Sandler, Travis & Rosenberg, P.A.

Phone: 213-453-0897

Email: [email protected]

About Tom Gould

• Member

– CBP Trade Support Network – Leadership Council

– American Association of Exporters and Importers

– LA Customs Broker Association

– Foreign Trade Association

– International Compliance Professionals Association

• Leading expert in the design and management of

simple, easy to use and compliant import compliance

programs, with a special emphasis on apparel and

special claim programs. 3

Disclaimer • All materials contained in this presentation are protected by United

States copyright law and may not be reproduced, distributed,

transmitted, displayed, published or broadcast without the prior

written approval of Sandler, Travis & Rosenberg, P.A. You may not

alter or remove any trademark, copyright or other notice from

copies of the content. The materials contained in this presentation

are provided for informational use only and should not be

considered legal advice. The hiring of a lawyer is an important

decision that should not be based solely on presentation materials.

Please contact us and we will send you free written information

about our qualifications and experience.

4

Incoterms® 2010

5

Incoterms®: What are they? • Incoterms® 2010

– International Commercial Terminology.

– Effective January 1, 2011.

• Developed by the International Chamber of Commerce (ICC) in 1936. Subsequent additions and revisions in 1953, 1967, 1976, 1980, 1990, and 2000.

• Purpose was to provide international “rules” for the interpretation of commonly used trade terms.

6

Incoterms® • The Incoterms® are not law!

– However, they are recognized by international judicial bodies under contract law as a “meeting of the minds.”

• They do not determine transfer of title (ownership)!! – Common misconception! The transfer of title may take place anywhere

along the chain and should be specifically identified in the contract.

• They do not determine when revenue may be recognized! – GAAP, SEC, and other regulations determine that.

• The Incoterms® do not apply to the contract of carriage, but to the delivery of goods under a sales contract.

• They are not payment terms – “net 30 days”, “upon receipt”

• They do not enumerate all of the duties and responsibilities.

7

2010 Incoterms® • Key point!!

– It is important to understand the term "delivery" - this term has not changed, but was NOT previously defined.

• Definition of Delivery – Delivery – “where the risk of loss or damage to the goods transfers

from Seller to Buyer.”

– Example: “CIF Rotterdam, Incoterms 2010 “– Delivery occurs when the Seller turns the goods over to the international carrier at the port of export! However the Seller is still responsible for paying the freight to Rotterdam and obtaining insurance in the name of the Buyer.

8

So do not confuse " delivery" with

responsibility for payment of freight

costs.

Incoterms® 2010

• Definition of “Packaging” for Incoterms® – The packaging of goods to comply with any

requirements of the contract.

– The packaging of goods so that they are fit for transportation

– NOT the stowage of the packed goods within a container or other means of transport!

9

Incoterms® 2010

• Insurance – CIF, CIP – Note – when an Incoterm® includes insurance, it

requires the Seller to purchase insurance in the Buyer’s name.

– Type of insurance is Minimum Coverage – • FPA – “Free of Particular Average”

• Institute Cargo Clause C

– All risk – is maximum coverage (Clause A) but does not include unseaworthiness, war, strike, riot & civil commotion.

10

Uniform Commercial Code • In the United States, domestic sales agreements follow the Uniform

Commercial Code Section 2A - Sales. A model UCC Code is created and states adopt it.

• In 2004, the model UCC dropped references to FOB and CIF; however, no States adopted this version (or at least those provisions), so in 2011, the UCC put them back in the 2011 Model Code.

• Under the UCC version you could have FOB Destination, which is not allowed in Incoterms®

• So which should you use? Is it a domestic or international sale? – Be clear in your agreements whether you are using Incoterms or UCC Sales term

– Domestic sale – either is okay

– International Sale - do not use UCC terminology.

– Eliminate confusion.

– The judge will be trying to determine intent of the parties.

11

Structure of an Incoterm®

• The terms alone are insufficient – a location must always be named and the version of the Incoterms® should be included.

• Examples:

– ExW Harrisburg, PA, Incoterms® 2010

– FCA Kennedy Intl Airport, Incoterms® 2010

12

The Obligations

A – Sellers Obligation B – Buyers Obligations

A1-General obligations of the seller B1-General obligations of the buyer

A2-Licenses, authorizations, security clearances and other formalities

B2-Licenses, authorizations , security clearances and other and formalities

A3-Contracts of carriage and insurance

B3-Contracts of carriage and insurance

A4-Delivery B4-Taking Delivery

A5-Transfer of risks B5-Transfer of risks

13

The Obligations

A – Sellers Obligation B – Buyers Obligations

A6-Allocation of costs B6-Allocation of costs

A7-Notice to the buyer B7-Notice to the seller

A8-Delivery document B8-Proof of delivery

A9-Checking-packaging-marking B9-Inspection of goods

A10-Assistance with information and related costs

B10-Assistance with information and related costs

14

2010 Incoterms®

• 11 terms now instead of 13

• Terms Eliminated: – DAF - Delivered at Frontier

– DES - Delivered Ex-Ship

– DEQ - Delivered Ex-Quay

– DDU - Delivered Duty Unpaid

• Addition of two new terms: – DAT - Delivered at Terminal

– DAP - Delivered at Place

15

EXW

FCA CPT

CIP DAT DAP DDP

FAS FOB CFR CIF

DAF DES DEQ DDU

Omnimodal Rules

• Rules For Any Form Of Transportation

16

E Term • Ex-works (Ex-Factory, Ex-Plant) – Seller’s obligations are the least.

– Seller’s obligation is to place the goods packed for export at the buyer’s disposal at an agreed place.

– Risk of loss is transferred when Seller makes goods available.

17

Seller Buyer

• Packing & labeling

• Make goods available to buyer

• Loading

• Transport domestically

• Receiving/terminal port charges

• Freight forwarding fees

• Export clearance (licensing, if

needed)

• International shipping

• Customs clearance with duties

and taxes

• Arrival/foreign port charges

Pros & Cons of Ex-Works to Seller

18

Pros Cons

• Seller only needs to have goods packed,

labeled & ready for export. Buyer has all

responsibilities

• No other costs to Seller

• Risk of loss is transferred to Buyer at

Seller’s warehouse door.

• No export control obligations other than

providing details regarding the goods, such

as the quantity, price, description and

export control information, such as

Schedule B/HTS # and ECCN to Buyer’s

chosen freight forwarder and getting written

confirmation.

• No control over the actual export of the goods.

Goods could be diverted to a prohibited destination

or never exported, just resold in the United States

so Seller would be competing with itself in the gray

market business.

• Seller is still the US Principal Party in Interest.

• Seller has obligation to send export information.

• Buyer could substitute different commercial

invoices.

• If an issue arises overseas as to the value, the

foreign government could begin investigating Seller

for invoicing irregularities. Seller should request for

confirmation of submission.

• There is an opportunity for Seller to make money

off the other services, such as the inland freight or

ocean freight. The price offered at an FCA or DAT

rate could be Seller’s rate, plus 5% or 10%.

F Terms • FCA – Free Carrier – Seller delivers the goods packed and cleared for export,

to the named carrier of the buyer and the named place. If the location is the seller’s premises (i.e., truck), then seller is responsible for loading.

– Risk of loss transfers when seller delivers the goods to the named place cleared for export.

19

Seller Buyer


• Loading on domestic carrier

• Domestic inland freight

(air/ocean)

• Receiving port/terminal charges

• Freight forwarding charges


needed)


(truck/rail)

• Loading on international carrier

• International transportation


• Customs clearance with duties &

taxes

• Foreign inland delivery

C Terms • CPT – Carriage Paid To – Seller pays the freight charges to the named place of

destination.

– The buyer is responsible for all charges after delivery at that destination.

– Risk of loss transfers when goods are delivered to the carrier, not when the goods reach the place of destination.

20

Seller Buyer




• Receiving port/terminal Charges



needed)


• International transportation



taxes

• Inland delivery

C Terms • CIP – Carriage & Insurance Paid To – Seller pays for the freight charges to the named destination.

– The buyer is responsible for all charges after delivery at that destination.

– Risk of loss transfers when goods are delivered to the carrier

21 * Seller obtains insurance in the name of the buyer! Only required to obtain minimum

coverage.

Seller Buyer







needed)


• Ocean transportation


• Insurance*


taxes


D Terms • DAT - Delivered at Terminal (heir to DAF, DES, DEQ)

– Omni-modal term, for all methods of transport. • Must be “a” terminal on buyer's side – air, truck, rail, etc.

– Risk of loss transfers when seller delivers unloaded at terminal

22

Seller Buyer







needed)




• Unloading


taxes


D Terms • DAP – Delivered at Place (heir to DDU, DAF,

DES, DEQ) – Risk of loss transfers when Seller delivers to

named place of destination.

23

Seller Buyer







needed)




• Delivery to named place


taxes

• Unloading from delivering carrier

D Terms • DDP – Delivered Duty Paid – Seller has the maximum obligation.

– Seller delivers goods to the buyers door cleared by Customs but not unloaded.

– Do not use if seller is unable to obtain an import license in the country of destination.

24

Seller Buyer

• Packing & labeling • Loading on domestic carrier • Domestic inland freight • Receiving port/terminal charges • Freight forwarding charges • Export clearance (licensing, if

needed) • Loading on international carrier • Ocean transportation • Arrival/foreign port charge • Unloading at arrival port • Foreign inland delivery • Customs clearance with duties &

taxes

• Unloading from arrival carrier

Pros & Cons of DDP to Buyer

25

Pros of DDP Transactions Cons of DDP Transactions

• For Buyer - the sales price for the

merchandise includes all costs, including

transportation and customs duty.

• There is no effect on the buyer’s inventory

until the goods are received at its

Distribution Center (if accounting rules

concur)

• DDP simplifies supply chain management.

• Buyer/consignee is not directly responsible

for customs clearance and import trade

compliance; however, most countries do not

allow the foreign party to be the importer of

record. So it can mean that the Seller

charged by the foreign broker or will

reimburse the Seller for the clearance

charges

• Lack of visibility while shipment is in transit.

• Loss of ability to control social corporate

responsibility by producer, which could

result in negative publicity for the buyer.

• C-TPAT and Importer Security Filing

concerns regarding incomplete security in

supply chain.

• Possible delays in release of merchandise if

IOR is not eligible for expedited release or

has had issues in past.

• If merchandise bears buyer’s labels, the

buyer will still be associated with any

negative import issues.

• Buyer has less control over product integrity

(i.e., compliance with Lacey Act, CPSIA,

etc.).

Marine ONLY Terms

• Rules for Sea and Inland Waterways Only

26

2010 Incoterms®

27

Now

“On Board”

Seller is responsible

for goods until they

are on board vessel.

** Under CFR & CIF, Seller pays for international transportation, but Seller

"delivers" when on board on vessel. Risk of loss passes to Buyer at that

point. (Same as Incoterms 2000)**

Eliminated

“Ship’s Rail” – FOB, CFR,

and CIF

(Marine only terms).

F Terms • FAS – Free Alongside Ship

– Seller delivers the goods packed and cleared for export alongside the vessel at the named port of export.

– Risk transfers at same point.

– Cleared for export was changed in 1990 version

28

Seller Buyer




• Receiving/terminal port charges



needed)





taxes


F Terms

• FOB – Free On Board Vessel

– Seller delivers when the goods are on board.

– Risk of loss is transferred at the same place.

29

Seller Buyer



• Domestic Inland Freight

• Receiving Port/Terminal

Charges

• Freight Forwarding Charges

• Export Clearance (Licensing, if

needed)

• Loading on international

carrier



• Customs Clearance with

Duties & Taxes


FOB Destination – does not exist in Incoterms®

C Terms • CFR – Cost & Freight

– Seller pays for freight and costs to port of destination.

– Risk of loss transfers when goods are on board in port of export.

30

Seller Buyer

• Packing






needed)





taxes


C Terms • CIF – Cost, Insurance & Freight – Seller pays for the international transportation

charges to port of destination.

– Risk of loss transfers when goods are on board at the port of export.

31

Seller Buyer




• Receiving port/terminal charges



needed)



• Insurance*



taxes


*NOTE: Seller obtains insurance in the name of the buyer!

Only required to obtain minimum coverage.

Diagram of Incoterms®

32

Modifications of Incoterms® • Can you modify an Incoterm®?

• Yes, but……….. – Both parties must agree to the term and understand what it

means.

– “FCA factory Incoterms® 2010, inland freight prepaid.”

– This means that: • the Buyer takes risk of loss at the factory,

• Seller will handle the export obligations,

• Seller is also going to arrange for and pay for the inland freight.

– Document the responsibilities in writing on the Purchase Order, Confirmation, contract, etc.

33

2010 Incoterms®

• Cargo Security – In 2009 and 2010, the ICC recognized the need

to include cargo security measures, but there are different obligations in different countries.

– Therefore, it has stated the obligation is on both parties.

– Basically, the party requesting the services for its import purposes should pay any charges required.

34

Costs By Incoterm®

• Simple cost calculation

35

Cost of goods $10,00

0

Ex-works $10,02

5

Packed for export ($25)

FCA (port of

export)

$10,57

5

Inland transport ($500) & export

clearance ($50)

DAT (port of

import)

$11,57

5

International transport ($1000)

DAP (destination) $11,72

5

Inland delivery ($150)

DDP

(destination)

$11,82

5

Import clearance ($100)

Incoterm® 2010 Books

• The official Incoterms® 2010 books are

available through the U.S. Council for

International Business at

• http://www.uscib.org/icc-guide-to-incoterms-2010-ud-4482/

36

http://www.uscib.org/icc-guide-to-incoterms-2010-ud-4482/













Questions? Contact Tom Gould:

37

Tom Gould Licensed Customs Broker

Certified Customs Specialist

Customs and International Trade Consultant

Sandler, Travis & Rosenberg, P.A.

Phone: 213-453-0897

Email: [email protected]

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