What Are Incoterms Used For?

What are Incoterms?

When shipping internationally, a question we get asked is, when does the transfer of ownership from the shipper to the buyer happen? Does it happen once the buyer pays for it, or once the buyer has it? This raises other questions like, who pays the customs duties and taxes needed to enter a country? And who is liable for the risk if something happens during transit, say it gets lost or damage? The shipper or the buyer?

Luckily, these are common questions that have been around for a long time. There is an industry standard to help buyers and shippers determine who is responsible for things like; proper packaging, loading the freight, fees and charges that incur along the way like duties and taxes, as well as who maintains the risk and ownership during transport. These are called Incoterms. Incoterms stand for international commercial terms and are published by the International Chamber of Commerce (ICC).

Each purchase transaction that requires international shipping, requires the buyer and seller to agree on Incoterms so both parties know their responsibility before the shipment happens. Incoterms can be thought of in three ways,

      1. Who is responsible for incurred charges and formalities (packaging, loading the freight, shipping charges..)
      2. When is the transfer of ownership
      3. When is the transfer of risk.

 

There are 11 pre-determined terms that parties can agree on for a shipment, which are often referred to as a 3-letter acronym. A few common examples are Ex-Works (EXW), Delivered at Place (DAP), Carriage Paid To (CPT), and Delivered Duty Paid (DDP). Each one of these have different terms for the shipper and the buyer.

Learn More about Incoterms

Every 10 years the ICC reviews all Incoterms and either makes changes or republishes them for the industry. Incoterms latest revisions were release in 2020. To learn about all 11 Incoterms check out the ICC website where the have a free wall chart reference guide and even a Incoterms2020 app you can download for your phone.

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