Prior to the rapid ascent of freight rates and imposition of storage, demurrage, and detention charges, the importance of Incoterms was limited to basic cost items such as freight charges, destination terminal charges and duties and taxes. Today, as importers are engaged in a battle with carriers, terminals and sometimes their shippers, we felt it was a good time to ask Camelot, “What are Incoterms® and why are they so important?”
The Incoterms® are established by the International Chamber of Commerce and are updated every ten years (like the US Census). Incoterms® are described by the Chamber as: “The Incoterms® rules are the world’s essential terms of trade for the sale of goods. Whether you are filing a purchase order, packaging and labelling a shipment for freight transport, or preparing a certificate of origin at a port, the Incoterms® rules are there to guide you. The Incoterms® rules provide specific guidance to individuals participating in the import and export of global trade on a daily basis.”
The goal of the Incoterms® is to establish from origin to destination which charges are the responsibility of the buyer and which charges are the responsibility of the seller. Incoterms are separate from whatever negotiations take place between the two parties to establish the price paid or payable for an item, but certain Incoterms® will allow for deductions to the entered value declared to Customs and Border Protection.
Incoterms fall into one of four categories: E, F, C and D.
- E is “Ex-,” meaning that all charges are for the account of the buyer from the point of origin. For general cargo, this means the buyer is responsible for inland transportation, lading on board the conveyance (air or sea), international transportation, destination charges and haulage to the final destination.
- F is “Free,” not as in without cost, but the charges begin at some point overseas, usually the point at which cargo is laden on board the vessel or aircraft. Under traditional FCA terms, the buyer’s responsibility commences with the air freight or sea freight and the seller is responsible for everything up to the point at which the cargo is placed on the conveyance.
- C is “Carriage,” as in “Carriage Paid To (CPT) [named destination].” This term implies that the seller is responsible for the international transportation to a point in the seller’s country. This area gets more granular, as it could mean arriving port, nearest inland rail ramp or even the buyer’s warehouse.
- D stands for “Delivered,” and is the most comprehensive, placing the responsibility for nearly the entire transaction, including duties and taxes in the destination country, on the seller of the goods.
Each comes with benefits, but also pitfalls.
When a US importer utilizes “C” terms, they are sacrificing their ability to control the routing and carrier choice because the seller has priced the international transportation into the cost of the goods. However, with proper substantiating documentation (i.e. a rated bill of lading, air waybill or arrival notice reflecting prepaid freight charges), the U.S. importer of record at the time of entry is permitted to deduct those prepaid freight charges from the entered value, thereby lowering the overall dutiable value of the goods.
Be forewarned – CBP is within their right to ask for evidence, including proof of payment from the seller to the transportation provider. Absent this proof, CBP could re-liquidate the entry at the full value inclusive of freight charges, resulting in a higher overall bill for duties, taxes and – if present – trade remedy duties like Section 301 or AD/CVD.
The same can be said for “D” terms because Customs and Border Protection is taking increasing scrutiny – and finding ways to hold Ultimate Consignees, responsible for violations that occur as part of a DDU / DDP transaction, including for PGA violations, grey market or counterfeit items or goods that infringe on intellectual property rights.
The choice of an Incoterm is one that an importer should weigh carefully for the pros and cons. If you don’t feel comfortable doing this on your own, Ask Camelot. We have experience that can help steer your decision, including offering competitive freight rates and services that allow you to control cargo movement better than your supplier can.