First of all, it should be noted that these terms apply not only to maritime transport but to any mode of transport. The term Incoterms is an abbreviation of the English words International Commercial Terms.
It is also worth highlighting that these abbreviations define the moment at which responsibility is transferred between the two parties. This is a point of great importance, as underlined by the Secretariat of the United Nations Commission on International Trade Law (UNCITRAL).
Why were Incoterms created?
To understand the origins of Incoterms, we must first consider the complexity of a goods transaction between traders from different countries. As international trade grew in prominence and the number of transactions between buyers and sellers from different countries increased, the first problems began to emerge due to disagreements over the conditions under which those transactions were carried out. It was for this reason that in 1936 the International Chamber of Commerce coined these terms. They emerged as a means of harmonising international goods purchase and sale transactions.
What are Incoterms 2020?
The meaning depends on the three-letter term used, and each one establishes the commercial conditions for the purchase and sale of international goods. These conditions are agreed between the buyer and the seller. Incoterms are not legally binding rules; rather, they are standardisation and harmonisation norms. Above all, there are a number of fundamental points for which the Incoterms set out clarifying criteria:
Where the goods are to be delivered:
This establishes the place where the seller must deliver the goods. It is determined by the letters E and D — in both cases this is known as direct delivery. When third parties receive or deliver the goods, terms F and C apply. This is the case, for example, when they are handed over to a freight forwarder who will manage the transport.
Where the risk of the shipment is transferred:
This is a very important point that determines from which moment, once the sale of the goods has been established, the seller transfers the risk to the buyer.
How costs are distributed in a commercial shipment
In most cases it is the buyer who bears the transport costs, while the seller is responsible for the operations necessary to place the goods in a deliverable condition at the agreed location. There are, however, a total of 4 cases in which the seller assumes the transport costs. These are the C terms.
Who handles the customs formalities
In most cases it is the seller who handles customs formalities at origin. It is worth noting that there is only one Incoterm under which the buyer assumes this responsibility. The use of freight forwarders is also widespread. EXW (Ex Works, at the seller's premises). In all other cases it is the seller who handles these formalities, which may extend to destination — for example when DDP (Delivered Duty Paid) is stipulated.
Who updates the Incoterms?
The body responsible for updating the Incoterms is the ICC (International Chamber of Commerce). This organisation has been updating the Incoterms since 1936, applying and implementing changes arising from developments in international transport right up to the present day.
Classification and Types.
Incoterms are divided into four types or categories.
E Terms — EXW:
EXW : Ex Works
In this case the buyer assumes all costs related to transport from origin. The seller's sole responsibility is to make the goods available at the factory on time and in the agreed condition, so that the buyer can collect them directly or hire a freight forwarder to manage the transport.
F Terms — FCA, FAS and FOB:
In this case the seller is required to deliver the goods to a freight forwarder or carrier designated by the buyer, with the buyer bearing the costs.
FAS : Free Alongside Ship
This Incoterm is used for bulk goods. The seller delivers the goods alongside the vessel at the agreed loading port, and the buyer bears all loading, freight, unloading and import clearance costs. Customs formalities at the port of departure are at the seller's expense.
FOB : Free on Board
Under this term, delivery and the transfer of the shipment risk take place on board the vessel. Up to that point the costs are borne by the seller, and from that point onwards they are borne by the buyer. This Incoterm is used exclusively for international waterborne transport, whether river or maritime. It is used for all types of non-bulk cargo.
FCA : Free Carrier
The seller undertakes to deliver the cargo at a place agreed between the parties, located in the country of origin. This may be a third-party warehouse, such as a freight forwarder's facility, or any other previously agreed location. Costs up to that point are borne by the seller. This Incoterm may be used for maritime, river and multimodal transport.
C Terms — CFR, CIF, CPT
CFR : Cost and Freight
This widely used Incoterm stipulates an arrangement whereby the seller bears the main transport costs from origin to the port of destination, covering all expenses. It should be clarified that the risk of the shipment is transferred at the moment the goods are delivered on board the vessel. Not applicable for bulk cargo.
CIF: Cost, Insurance and Freight
Transport to the port of destination is at the seller's expense, including the taking out of an insurance policy of which the buyer is the beneficiary. The risk of the shipment is transferred upon loading the vessel at the port of origin. This Incoterm establishes the customs value used to determine the payment of duties in the country of destination. It may only be used for maritime transport.
CPT : Carriage Paid To
The seller bears all transport costs, including insurance. The risk of the shipment is transferred when delivery is made to the freight forwarder in the country of destination. This Incoterm may be used for any mode of international transport.
CIP: Carriage and Insurance Paid To
The seller bears the insurance and transport costs to the agreed place at the port of destination. The beneficiary of the insurance policy is the buyer. The 2020 revision of the Incoterms introduced ICC-A clauses.
D Terms — DPU, DAP, DDP
DPU : Delivered at Place Unloaded
Under this rule the seller delivers the goods at the destination specified by the buyer, unloaded. The buyer must manage the import clearance.
DAP: Delivered At Place
Under this Incoterm the seller assumes the cost of the main transport and insurance up to the agreed place, ready for unloading from the vehicle. Import clearance is at the buyer's expense; the buyer must clear the goods in good time, as failure to do so may give rise to terminal charges that the buyer will be required to pay.
DDP: Delivered Duty Paid
This is the broadest and most straightforward Incoterm in terms of ease of contracting and purchasing goods. In this case the seller assumes all costs of the shipment up to the previously agreed location in the country of destination. The seller also handles import clearance and pays any applicable duties.
Frequently asked questions about Incoterms and removals to the Canary Islands
What are Incoterms and why do they matter for a removal to the Canary Islands?
Incoterms (International Commercial Terms) are international rules that define who pays what (transport, customs, insurance) in an international trade transaction. Even though your removal is personal rather than commercial, shipping lines and customs agents use them in their quotes. The most common ones in removals to the Canary Islands are DDP, DAP and FOB.
What does DDP (Delivered Duty Paid) mean?
"Delivered with duties paid": the carrier handles everything, including customs, right up to delivery at your door. For a removal, this is the most convenient option: you pay a fixed price and the company manages all the customs paperwork (DUA, AIEM, IGIC). It is the model most commonly used by private individuals.
And FOB (Free on Board)? What is it used for in a removal?
"Free on Board": the carrier delivers your removal loaded onto the ship at the port of origin. From that point on, it is you who contracts the shipping lines, manages customs and handles formalities at destination. Only recommended for people with experience in maritime operations. For private removals, it is almost never cost-effective.
What customs documents do I need when sending a container to the Canary Islands?
For a removal under the change-of-residence AIEM exemption: DUA (Single Administrative Document) submitted by a customs agent, certificate of registration in the Canary Islands (or a commitment to register), detailed and valued inventory, invoice for the removal service, transport document (Bill of Lading or B/L), and proof of ownership of the belongings.
Who pays for insurance on the sea crossing?
Under DDP, the carrier includes it in their price (basic third-party liability cover + optional declared-value cover at extra cost). Under FOB, you take it out directly with a marine insurer. Make sure you know what level of cover you have: basic maritime liability covers approximately 500 €/m³, whereas full declared-value cover protects the actual value of your belongings. More on the different types: differences between types of removal.
