Definition
Incoterms are standard three-letter trade terms published by the International Chamber of Commerce that define who pays for shipping, insurance, and customs, and where risk passes from seller to buyer in an international sale. Examples include EXW, FOB, CIF, and DDP. The applicable Incoterm is stated on quotes, contracts, and commercial invoices.
Also called: Incoterms 2020, International Commercial Terms, Trade terms
Incoterms in practice
The current edition is Incoterms 2020, which has 11 rules. Seven work for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP), and four are for sea and inland waterway only (FAS, FOB, CFR, CIF). A revised edition, Incoterms 2030, is in development.
Write the Incoterm with a named place and the edition, for example "FCA Rotterdam Incoterms 2020". The named place matters as much as the term, because it fixes exactly where the seller's responsibility ends.
Incoterms affect your invoice. Under DDP the seller pays freight and import duties and prices accordingly; under EXW the buyer arranges almost everything and the invoice covers only the goods. Customs also use the Incoterm to work out the value for duty.
Example
A Canadian furniture maker quotes a US retailer "CPT Chicago Incoterms 2020". The invoice includes freight to Chicago, but risk passes to the buyer when the goods are handed to the first carrier in Canada.
Frequently Asked Questions
Do Incoterms cover payment terms?
No. Incoterms cover delivery, costs, and risk only. Payment terms, ownership transfer, and dispute resolution must be set separately in the sales contract and on the invoice.
Which Incoterm is best for a small exporter?
FCA and DAP are popular. FCA keeps the seller's responsibility short; DAP is simple for buyers but leaves import duties to them. Avoid DDP unless you understand the buyer's import rules.
Is FOB the right term for container shipments?
Often not. FOB is designed for goods loaded directly onto a vessel. For containerized cargo handed over at a terminal, the ICC recommends FCA instead.
Related terms
- Commercial invoice A commercial invoice is the official invoice used for international shipments that customs authorities rely on to assess duties and taxes.
- Customs duty Customs duty is a tax charged by a country on goods imported into it, usually calculated as a percentage of the goods' customs value according to their HS code and country of origin.
- Bill of lading A bill of lading is a document issued by a carrier to the shipper that acts as a receipt for goods loaded, evidence of the contract of carriage, and, when negotiable, a document of title.
- Shipping and handling Shipping and handling is a charge on an invoice that covers the cost of delivering goods and preparing them for shipment, including packing materials and labor.
- HS code An HS code is a standardized number from the Harmonized System, maintained by the World Customs Organization, that classifies a traded product for customs.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.