INCOTERMS® 2020: WHAT IS IT ALL ABOUT?
By: Mark Anthony P. Tamayo on January 16,2020
Second of a series
In last week’s article, we discussed the relevance of Incoterms 2020 as well as the salient features of Incoterms EXW (Ex Works), FOB (Free On Board), CPT (Carriage Paid To) and CFR (Cost and Freight), as they relate to cross-border commercial transactions.
In this article, we shall discuss the remaining Incoterms, namely CIP (Carriage and Insurance Paid To), CIF (Cost Insurance and Freight), FCA (Free Carrier), FAS (Free Alongside Ship), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid).
CIF (named port of destination) and CIP (named place of destination). The CIF has the same incoterm meaning as CFR, while the CIP is basically a CPT. The only difference is that in both CIF and CIP, the exporter (seller) not only arranges and pays for the transportation cost, but also the insurance (against the loss or damage during the carriage) of the goods.
The CIF term is used for non-containerized sea freight, while CIP applies for all other modes of transport.
In a CIF, the goods are considered delivered by the seller when the goods are on board the vessel. The risk at this point is transferred from the seller to the buyer.
On the other hand, in a CIP, delivery (and transfer of risk) is made when the seller hands the goods over to the carrier contracted.
Therefore, it is critical to identify as precisely as possible the ports of delivery and
destination (for CIF) and the place (or points) of delivery and destination (for CIP). This is in order to determine when the risk is transferred and the exact coverage of the insurance.
Under both terms, the seller does not guarantee that the goods will actually arrive at their destination in sound condition, in the stated quality, or indeed at all. Consequently, the seller is required to turn over to the buyer all necessary documents for the latter to assert possible claim against the insurer. These documents include, among others, the commercial invoice, insurance policy, and bill of lading.
The seller’s obligation ends when the documents are handed over to the buyer.
FCA (named place of delivery) and FAS (named port of shipment). Under an FCA setup, the seller delivers the goods for export at a named place (e.g. seller’s premises). The goods can likewise be delivered to a carrier or to another party nominated by the buyer.
If delivery occurs at the seller’s premises, or at any other location (that is under the seller’s control), the seller is responsible for loading the goods to the buyer’s carrier.
However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once its transport has arrived at the named place. The buyer is then responsible for both unloading and loading of goods to its own carrier.
If the mode of payment is under a letter of credit (L/C), the buyer may be required to instruct the carrier to issue (to the seller) an on-board bill of lading (B/L). This document is normally required to be presented to the bank in order to effect the payment to the seller.
In a FAS arrangement, the seller delivers the goods to the buyer when they are placed alongside the vessel (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment. The buyer bears all costs and risks of loss or damage to the goods from that moment.
In both FCA and FAS, the seller is required to clear the goods for export. On the other hand, the buyer is directly responsible for the transportation cost and insurance of the goods.
DAP, DPU and DDP (named place of destination). These Incoterms require the seller to complete all legal formalities and clearance of goods in the exporting country at its own cost. All carriage expenses, inclusive of any terminal expenses, are borne by seller.
Under DAP, the seller is deemed to have delivered the goods when the same are placed at the disposal of the buyer (on the arriving means of transport) ready for unloading at the named place of destination or at the agreed point within that place. From there, the risk is transferred to the buyer.
The necessary unloading cost at final destination is borne by buyer. Customs clearance in the importing country, such as, import permit, documents required by customs and payment of customs duties and taxes, is likewise the responsibility of the buyer.
DPU replaced the old term Delivered at Terminal (DAT). The reference to terminal has been removed to make it more general. With DPU, there are no more restrictions on the named place as delivery can happen anywhere, such as among others, a transport hub, a warehouse or the buyer’s depot.
As with the old DAT, this is the only rule that requires the seller to unload the goods at their destination. Thus, DPU is basically a DAP (Delivered at Place) term, with unloading.
Risk does not transfer from the seller to the buyer until the goods have been unloaded at the place of destination agreed upon.
Under DDP, the seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination. The responsibility of the seller includes obtaining the necessary authorizations and registrations from the authorities in importing country, as well as the payment of import duties and taxes. The DDP should not be used if the seller is unable to obtain an import license.
The DDP term, in effect, places the maximum obligations on the seller and minimum obligations on the buyer. No risk or responsibility is transferred to the buyer until delivery of the goods at the named place of destination.
Next week, we shall further discuss the role of Incoterms 2020 in cross-border transactions as it relates to the customs value of imported goods.