Incoterms 2010 rules:Whats new and what you need to know

Casey Ochs CDCS

Wells Fargo Trade Services Manager

November 1, 2010

1Wells Fargo is providing this information to you as a courtesy for your general reference purposes only. Our information is based upon sources that we believe to be reliable, though the information is not guaranteed. Wells Fargo & Co. and its affiliates do not assume any liability for any loss that may result from the reliance by you or any other person upon the information or opinions expressed in this publication. This information does not constitute investment, financial, tax, legal or business advice and you must make an independent decision regarding the structure of your transactions and your related needs. Please contact your investment, financial, tax, legal or business advisor regarding your specific needs and situation. 2010 Wells Fargo Bank, N.A. Member FDIC. All rights reserved.

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Incoterms 2010 rules:Whats new and what you need to know

International Commercial Terms first released by the ICC in 1936

Purpose: simplify drafting of international contracts and bring standardized definitions and understanding to international trade and terms of sale

Periodically updated to keep pace with changes in trade practice: 1990, 2000, 2010

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Events since 2000 affecting global trade

In 2004, shipment and delivery terms were deleted as from UCC Article 2

Sarbanes-Oxley: greater need for clarity in revenue and expense recognition in the post-Enron world

Increased port and compliance regulations in the USA and globally in the post-9/11 world

President Obama set goal of doubling U.S. exports in next five years

European Union expansion and Euro circulation China joined WTO, biggest global exporter

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The Incoterms committee

2.5 year process Drafting group

Primarily Europeans (Frank Reynolds only American)

Mostly lawyers

Roughly 2,000 comments from more than 30 countries

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Whats new?

New layout - divided into two distinct sections Any Mode terms: DDP, DAP, DAT, CIP, CPT, FCA, EXW

Waterway/Maritime terms: FOB, FAS, CFR, CIF

Includes explanation of terms used in the book 11 terms (down from 13)

DAF, DES, DDU and DEQ have been removed and replace by DAP and DAT respectively

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Whats new? (contd)

Graphics added to illustrate risk and obligation related to each Incoterm

Incoterms 2010 now defines itself as rules Multiple language translations Effective as of January 1, 2011

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What do Incoterms do?

Incoterms rules do say which party to the sale contract has the obligation to make carriage or insurance arrangements, when the seller delivers the goods to the buyer, and which costs each party is responsible for. (Incoterms 2010 rulespage 6)

New rules apply to both international and domestic sales For example, DDU has been eliminated and replaced by DAP

Define responsibilities of parties - reducing misunderstanding in contracts

Can be used as a guideline to determine risks, responsibilities and obligations for sellers and buyers

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What dont Incoterms do?

Dont address transfer of title or ownership of the goods! Ownership should be addressed in the contract

if it is not, then it may become subject to applicable law

If no Incoterm is specified, the transaction defaults subject to the UCC

Which may contradict foreign law

Ownership in foreign trade is usually determined by other factors such as negotiable documents

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What dont Incoterms do? (contd)

Dont directly deal with revenue recognition GAAP, IFRS (International Financial Reporting Standards)

and other rules, however, do touch on issues specifically dealt with by the Incoterms, such as control, delivery and risk transfer

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More thoughts on revenue recognition and Incoterms

When does the sale become a receivable under GAAP, IFRS rules?

Sarbanes-Oxley has made strict adherence to accounting regulations more important

Delivery as defined in the Incoterms rules, is a factor in revenue recognition Important to use the terms correctly and understand their

implications

Talk to your accountant!

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What dont Incoterms do? (contd)

Incoterms do not:

Use ships rail as a delivery point for CFR, CIF and FOB any more Big change from previous editions

This delivery point should be defined in the contract or sales agreement (What defines loaded on board?)

Define how packages are to be stowed within a container

Automatically default to use if not specified in the contract of sale Dont assume!

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What dont Incoterms do? (contd)

Incoterms do not:

Specify the type of loading or unloading used in various forms of transport

Deal with remedies for breach of contract Constitute payment terms

Incoterms are are not law

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So, what happened to DAF, DES and DDU?

These three terms have been replace by one term DAP (delivered at place) DAF (delivered at frontier): rarely used and limited to

ground transport

DES (delivered ex-ship): limited to water shipments only

DDU (delivered duty unpaid): not appropriate for domestic shipments since duty was implied and therefore irrelevant

DAP can be used with any mode of transport -domestic or international

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So, what happened to DEQ?

DEQ (delivered ex-quay) replaced by DAT (delivered at terminal) DEQ was limited to water or maritime transport

DEQ required the seller to unload at the quay

DAT Requires the seller to unload at a quay, terminal or

warehouse

Can be used with any mode of transport

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Some definitions

transportation from the point or place of arrival on the side of the buyer, to the buyers location, or another location on the side of the buyer

On-carriage:

the main transportation moving the goods from the exporter/sellers side to the importer/buyers side

ocean or air portion of an international shipment, for example

Main carriage:

transportation on the exporter/sellers side to the place, port or point of departure before main carriage

Pre-carriage:

point where the risk of loss or damage to the goods passes from the seller to the buyer (Incoterms 2010)

Delivery:

the party that contracts with the carrierShipper:

the party with whom the carriage is contracted (Incoterms 2010)

includes NVOCCsCarrier:

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F terms: general considerations

Main carriage contracted by buyer Less work for seller, but less control over documents

and documentation For documentary payment terms

For U.S. exporters, EEI (Electronic Export Information) filings are typically done by the forwarder

For U.S. importers, F terms facilitate ISF (Importer Security Filing - 10+2) reporting

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C terms: general considerations

Most advantageous for seller Main carriage contracted by seller

Most control over documents

More work for exporter than F terms

Under C rules, buyers are responsible for the goods during the main carriage even though the vendor has made the arrangements for main carriage

U.S. importers must rely on their suppliers forwarder to submit 10+2 documentation

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D terms: general considerations

Arrival term Main carriage contracted by seller Seller responsible for goods until delivered

(arrived) to specified location on the buyers side Not particularly advantageous if youre looking for early

revenue recognition

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D terms: additional considerations

For exporter: more work than the F terms and greater risk than C terms Seller agrees to deliver (make arrive) at the named

location on the buyers side

Potential for demurrage charges

For U.S. importers, again, the 10+2 filings are handled by the vendors forwarder Could pose additional risk

Not the best term to use for L/C transactions, since the BL or AWB do not show actual arrival

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Any mode terms

EXW FCA CPT and CIP DAP, DAT and DDP

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EXW (ex-works)

Any mode term Least work for exporters

Popular among new exporters

Exporter/Seller makes the goods available for pickup (including agreed packaging)

Is the packaging suitable for the shipment? How do you know?

Buyer responsible for loading goods at EXW place How often does this actually happen?

If the vendor is loading, who takes responsibility if damage occurs?

Buyer responsible for export and compliance documentation Seller must provide company info to buyers forwarder

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EXW and letters of credit

What happens if the buyer decides to instruct their forwarder not to pick up the goods? How irrevocable is your letter of credit?

What about custom-made goods?

Whos managing the documentation and presentation process? Do you want your customers forwarder preparing

documents you need to draw on your L/C?

What if the L/Cs confirmed?

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FCA (free carrier)

Can be used with any mode of transportation Seller must deliver the goods to the carrier provided by the

importer/buyer at a named point on the exporter/sellers side

If no point is named the seller can choose a point best suited for them

The named point can be the sellers facility

Seller is responsible for: Packaging

Loading

Pre-carriage (if any)

Export clearance

Compliance documentation

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FCA (free carrier) (contd)

Seller not responsible for unloading on the side of the buyer

Buyer responsible for everything else after loading Insurance not specified Freight collect

FCA should be considered as an alternative to EXW

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CPT (carriage paid to)

Can be used with any mode of transportation Well suited for multimodal transport Seller must clear goods for export including export

compliance documentation

Seller delivers goods, packaged for shipment, to carrier for transportation to a named destination place on the importer/buyers side

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CPT (carriage paid to) (contd)

Seller pays all transportation costs to specified delivery destination main carriage Risk, however, passes to buyer when goods are delivered to

carrier

Buyer typically responsible for unloading at place of destination

Insurance not specified Freight prepaid term

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CIP (carriage and insurance paid to)

Can be used with any mode of transportation Well suited for multimodal shipments Seller must clear the goods for export including

export compliance documentation

Seller delivers goods, packaged for shipment, to carrier for transportation to a named destination on importer/buyers side

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CIP (carriage and insurance paid to) (contd)

Seller pays for all transportation costs up to specified delivery destination main carriage Risk, however, passes to buyer when goods are delivered to

carrier

Buyer typically responsible for unloading at place of destination

Insurance is sellers obligation (minimum coverage) Make sure your insurance coverage is up to date!

Freight prepaid term

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More about insurance CIP and CIF

Seller obtains minimum cover Institute Cargo Clause C

In the currency of the contract

The contract amount plus 10%

The insurance shall be contracted with the underwriters or an insurance company of good repute and entitle the buyer or any other person having an insurable interest in the goods, to claim directly from the insurer. Incoterms 2010 pages 46 and 110

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DAT (delivered at terminal)

Any mode (arrival) term, ostensibly replaces DEQ Seller obtains export clearance and handles

appropriate export compliance documentation

Seller appropriately packages goods for transport and pays for all transportation costs to a named destination terminal

Seller pays for unloading at the named destination terminal on importer/buyers side

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DAP (delivered at place)

Any mode (arrival) term Seller obtains export clearance and handles

appropriate export compliance documentation

Seller appropriately packages goods for transport and pays for all transportation costs to a named destination place on importer/buyers side

Buyer responsible for unloading goods at the named place

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DAP (delivered at place) (contd)

Buyer responsible for import clearance and on carriage (if any)

No insurance specified Freight prepaid Seller must provide appropriate documentation for

release of goods on importer/buyer side

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DDP (delivered duty paid)

Any mode (arrival) term Not suitable for domestic shipments (duty doesnt

apply)

Seller arranges and pays for: Transportation

Foreign duties

Export and import licenses

Export compliance documentation

Seller clears goods through customs in foreign country for delivery to a named place on the importer/buyers side May be foreign exchange risk

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DDP (delivered duty paid) (contd)

Risky for exporter Dealing directly with foreign customs and government

agencies

Buyer typically responsible for unloading at the point of delivery

Insurance not specified Freight prepaid A buyer under DDP is not the importer of record,

since they are not clearing the goods through customs If youre an importer how does this affect drawback

considerations?

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Sea and inland waterway transport terms

FAS FOB CFR CIF

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FAS (free alongside ship)

Sea and Waterway term Usually used for charter party transactions (not

conference line containerized shipments)

Seller delivers the goods, commodity, or product, packaged or prepared for export alongside a vessel designated by the buyer at a named place/port on the sellers side

Seller responsible for export clearance and export compliance requirements

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FAS (free alongside ship) (contd)

Buyer responsible for: Loading the vessel

Main carriage

Clearance through customs

On-carriage

Insurance not specified Freight collect

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FOB (free on board)

Sea and Waterway term (not to be confused with UCC term FOB)

Seller delivers the goods packaged and prepared for export, loaded on-board a vessel chosen by the buyer, at a port on the exporter/sellers side

Seller is responsible for: Export compliance requirements

Export clearance

Pre-carriage

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FOB (free on board) (contd)

Over the ships rail is no longer used as a point to define transfer of risk from seller to buyer Buyer and seller should agree on what constitutes loaded on board

Different products loaded differently

Seller responsible for performance of carrier loading the ship even though carrier is chosen by the buyer

Buyer responsible for: Main carriage

Import clearance

On-carriage

Freight collect Insurance not specified Common Incoterm for L/C transactions

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CFR (cost and freight)

Sea and Waterway term Seller delivers goods, packaged for shipment, to

carrier for transportation to a named destination port on the buyers side Risk passes to buyer when goods delivered to carrier

Seller: Chooses vessel

Pays costs for main carriage

Handles export clearance and compliance requirements

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CFR (cost and freight) (contd)

Over the ships rail no longer used to designate transfer of risks to buyer from seller

Buyer responsible for: Vessel unloading

Import clearance

On-carriage

Freight prepaid Insurance not specified

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CIF (cost insurance and freight)

Sea and Waterway term Seller delivers goods, packaged for shipment, to

carrier for transportation to a named destination port on the importer/buyers side Risk passes to buyer when goods delivered to carrier

Seller: Chooses vessel

Pays costs for main carriage

Handles export clearance and compliance requirements

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CIF (cost insurance and freight) (contd)

Over the ships rail no longer used to designate transfer of risks to buyer from seller

Buyer responsible for: Vessel unloading

Import clearance

On-carriage

Freight prepaid Seller arranges minimum insurance coverage

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Your pro-forma invoice (quote): the basics

Pro-forma invoice should:

Be dated and numbered Note the buyers request or inquiry Contain the correct name and address of buyer and seller Describe the goods with prices, totals and currency Have the correct Incoterm Show the payment terms Show the origin of the goods Any other pertinent information related to the transaction Tell the buyer what the seller is willing to do and at what price

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Your contract or sales agreement: the basics

Terms of payment and price Specific ports of loading and discharge places of receipt and

arrival

Address passing of title Description of goods and packaging (possibly HTS codes) Incoterm Who does what when - timeline Applicable law and address resolution of disputes Correct addresses of buyer and seller contact information

Whatever is not covered in your contract may be decided by default from the UCC These default provisions are found in Article 2 of the UCC

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Incoterms and your sales contract

Avoid misunderstandings in your commercial transactions! International transactions carry their own set of hurdles

Language, culture, time zones, different points of view

Correct Incoterms usage can alleviate these issues

Incorrect Incoterms usage can exacerbate these issues

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Incoterms and documentary payment terms

C terms allow seller to easily obtain documentation EXW shipments require that the seller depend on the

buyer/agent for shipping documents

FCA is suitable for truck shipments and received for shipment documents

D terms may not be the best choice for letters of credit since the BL does not show arrival dates at the buyers side

Sea and Waterway terms allow for the acquisition of an on-board or received for shipment BL

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Conclusion

Incoterms rules are essential to avoid misunderstanding in sales contracts

Incoterms can affect revenue recognition Incoterms can affect your bottom line

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Resource Sites and Publications

http://www.iccwbo.org/ http://www.commerce.gov/ https://www.wellsfargo.com/inatl/inatl.jhtml

Incoterms 2010 (ICC Publication 715E)

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Incoterms 2010

SellerSellerSellerDDP (delivered duty paid)

SellerSellerSellerDAP (delivered at place)

SellerSellerSellerDAT (delivered at terminal)

Arrival, freight prepaid

BuyerSellerSellerCPT (carriage paid to)

BuyerSellerSellerCIP (carriage and insurance paid to)

Main carriage freight prepaid

BuyerBuyerBuyerFCA (free carrier)

Main carriage freight collect

BuyerBuyerBuyerEXW (ex-works)

Departure, freight collect

RiskMain

Carriage ControlAny Mode Terms

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Incoterms 2010

BuyerSellerSellerCIF (cost, insurance, freight)

BuyerSellerSellerCFR (cost and freight)

Main carriage freight prepaid

BuyerBuyerBuyerFOB (free on board)

BuyerBuyerBuyerFAS (free alongside ship)

Main carriage freight collect

RiskMain

Carriage ControlSea, Inland Waterway Transport Terms

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