21 Mar 2016 Importing 101: Inco-What?
If your business relies on international suppliers, the import process is a necessary know-how. When engaging in an international transaction, one of the most common mistakes business make is deciding who pays for each part of the import process. While many businesses agree on who will cover shipping, they often fail to define the terms of the transaction properly, leading to many unintended and messy problems when the goods arrive at the U.S. port.
Shipping costs can mean several different things to the buyer and to the seller. Do shipping costs include costs to the foreign export port? To the U.S. import port? To the buyer’s door? Strictly deciding which party pays for the transportation fails to acknowledge who pays duties, import taxes, and other customs fees.
In response to the seemingly infinite list of possible cost and risk arrangements, the International Chamber of Commerce developed the International Commercial Terms (commonly knows as Incoterms). Incoterms are a series of three letter terms related to common international transactional sales terms. The rules clearly communicate which party, the buyer or seller, is responsible for which tasks, costs, and risks associated with international shipping. After each incoterm, a place is designated. For example, “CIF port Long Beach” means the shipper is responsible for the cost of shipping and insurance from the manufacturing facility until the vessel docks at the Port of Long Beach. After that point, the shipper is responsible for all costs and risks.
Below is a brief description of the five most popular incoterms:
- EXW (Ex-works): The seller makes the goods available at their premise. The buyer is responsible for all shipping and risk.
- CFR (Cost and Freight): The seller pays for the cost of freight up to the designated port of import. However, the buyer is responsible for risks once the goods have been loaded on the vessel at the port of export. The buyer is also responsible for all customs fees, duties, and shipping from the port of import to the final destination.
- CIF (Cost, Insurance, Freight): CIF is similar to CFR but the seller takes on the risk (through the form of insurance) while the goods are in transit from the port of export to the port of import.
- DAP (Delivered at Place): Typically, the term will be DAP at [the buyer’s door]. This means the seller will pay for freight costs from their premise all the way to the buyer’s premise. However, the buyer is responsible for all customs fees, duties and import taxes. Further, DAP does not involve insurance. Any insurance agreements must be made separately.
- DDP (Delivery Duties Paid): The seller will pay for all shipping costs from door to door including customs fees, duties, and import taxes. DDP is, in effect, the opposite of EXW.
There are 11 total Incoterms. While the five Incoterms above are the most commonly used, make sure you understand exactly what the terms of your transaction are before agreeing. If you need assistance understanding an international transaction agreement, an experienced attorney can help you. Contact the Royse Law Firm today for assistance in the Los Angeles, Palo Alto, and San Francisco area.