When you agree on an international sale, a big part of the risk and cost shifts to two words: the Incoterms. Incoterms is the set of international rules of the ICC that tells up to where the seller is responsible, and from where the buyer. In this article we focus on the most common rules — EXW, FOB, CIF, FCA — and on how each one affects your customs duty and final cost.
What are Incoterms?
Incoterms (International Commercial Terms) is a set of standard rules prepared by the International Chamber of Commerce (ICC) that determines the division of responsibility, risk and cost between the buyer and the seller. The latest version, Incoterms 2020, is valid and is used for the transfer of the goods at the agreed delivery point.
Note: Incoterms only determines the delivery and the division of cost/risk; it does not determine the “ownership” of the goods or the single method of payment.
The most common delivery conditions
EXW (Ex Works)
The seller only hands over the goods at its own factory or warehouse. From that point on, the buyer bears all costs and risks, including the customs export and the loading of the truck.
FCA (Free Carrier)
The seller delivers the goods to the carrier or the place named by the buyer, loaded when needed. It is a preferred rule for containers and multimodal transport.
FOB (Free On Board)
The seller is responsible up to the point the goods are loaded onto the vessel. From the point of loading, risk and cost pass to the buyer. This rule is used mainly for maritime transport.
CIF (Cost, Insurance and Freight)
In addition to the freight up to the port of destination, the seller also pays the insurance of the goods. Contrary to the popular idea, the risk passes at the loading of the goods, not at the destination.
Incoterms 2020 in one table
| Rule | Role | Risk transfer point |
|---|---|---|
| EXW | Goods are bought at the seller’s warehouse | at the seller’s warehouse |
| FCA | Delivery to the carrier named by the buyer | at the carrier’s place |
| FOB | Maritime, delivery at the loading port | upon loading onto the vessel |
| CIF | Maritime, seller pays freight and insurance | upon loading onto the vessel |
The effect of Incoterms on customs duty
Many traders think Incoterms does not change the customs value. But remember:
- The tax base in most cases is based on the CIF value at the border. To compare, read the CIF value and the invoice value.
- Choosing a rule (such as EXW) does not remove the duty; the buyer must still declare the correct value.
- In an agreement, the chosen rule affects who arranges the transport documents and the clearance.
Important: in Iran-Turkey border trade, the actual CIF value of the goods is considered for the duties. The correct selection of Incoterms matters, but it does not replace the correct declaration of the real value.
Which Incoterms to choose?
- For the transporter and the single clearance: FCA is a balanced choice.
- For maritime shipments: FOB and CIF are common and understood.
- For a buyer who has full control of the internal route: EXW is an option, but it burdens the buyer with the whole cost.
FAQ
Is Incoterms the same as the contract of sale?
No. Incoterms is a small part of the contract that only sets the delivery point; the rest of the contract is separate.
Is the 2010 version of Incoterms still valid?
The ICC uses the 2020 version as the reference; older versions have a slightly different wording and are used only if the two parties explicitly agree and refer to them.
Who is responsible for import clearance?
The import clearance is usually the buyer’s responsibility; the exact division depends on the Incoterms rule chosen.
Can Incoterms change the amount of the customs duty?
No, Incoterms does not change the amount of the duty by itself, but because it affects the CIF value, it can change the base of the duty.
Summary
A correct choice of Incoterms makes the deal (including the customs base) clear from the start, and a wrong choice leaves the division of the risk unclear. Before moving any shipment, check your deal with the cargo and customs experts of Vira Farabar Logistics so that the chosen rule really corresponds to the transport route and the customs.
