Why Incoterms® Matter More Than Most Traders Realise
Incoterms® — International Commercial Terms, published by the International Chamber of Commerce (ICC) — are the three-letter codes that define exactly where responsibility, cost and risk shift from the seller to the buyer in an international sale. They appear on almost every commercial invoice, yet they are among the most misunderstood elements of a cross-border transaction.
The current edition, Incoterms® 2020, came into effect on 1 January 2020 and contains 11 rules split into two groups: seven that work with any mode of transport and four reserved exclusively for sea and inland waterway shipments.
Getting the Incoterm wrong — or simply not understanding what it obliges you to do — can lead to overpaid duties, under-declared customs values, uninsured cargo and penalties from customs authorities on both sides of the border.
The 11 Incoterms® 2020 Rules at a Glance
Rules for Any Mode of Transport
These seven rules can be used for air, rail, road, multimodal or containerised sea freight:
- EXW (Ex Works) — The seller's only obligation is to make the goods available at their premises. The buyer bears every cost and risk from that point onward, including export clearance. In practice, EXW is problematic because the buyer often cannot clear the goods for export in a foreign country.
- FCA (Free Carrier) — The seller delivers the goods, cleared for export, to a carrier nominated by the buyer. This is widely regarded as the modern replacement for both EXW and FOB when goods move in containers.
- CPT (Carriage Paid To) — The seller pays for carriage to the named destination, but risk transfers to the buyer the moment goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To) — Identical to CPT, but the seller must also procure a high level of insurance cover (Institute Cargo Clause A or equivalent).
- DAP (Delivered at Place) — The seller delivers to a named destination, ready for unloading. The seller bears all transport risk and cost; the buyer handles import clearance and duties.
- DPU (Delivered at Place Unloaded) — The only Incoterm that requires the seller to unload the goods at the destination.
- DDP (Delivered Duty Paid) — Maximum obligation for the seller: they handle everything, including import clearance and all duties and taxes. Sellers must be cautious — using DDP without a VAT/GST registration in the destination country can create serious compliance exposure.
Rules for Sea and Inland Waterway Transport Only
These four rules should only be used for bulk or non-containerised cargo loaded directly onto a vessel:
- FAS (Free Alongside Ship) — The seller delivers when the goods are placed alongside the vessel at the named port of shipment.
- FOB (Free On Board) — The seller delivers the goods on board the vessel. Despite its popularity, FOB is frequently misused for containerised cargo — if goods move in a container, FCA is the correct choice.
- CFR (Cost and Freight) — The seller pays the cost and freight to the destination port, but risk transfers to the buyer once goods are on board at the origin port.
- CIF (Cost, Insurance and Freight) — Same as CFR, plus the seller must provide minimum insurance cover (Institute Cargo Clause C).
The Customs Compliance Connection
For customs professionals, the Incoterm on an invoice is not just a shipping notation — it directly affects how the customs value of the goods is calculated.
Under the WTO Transaction Value method (the primary basis for customs valuation in almost every jurisdiction), the dutiable value is the price actually paid or payable for the goods, adjusted for certain additions and deductions. The Incoterm tells you which costs are already included in the invoice price and which must be added or removed:
- EXW or FCA — The invoice price typically excludes freight and insurance. These must be added to arrive at the customs value (in jurisdictions that value on a CIF basis, such as the EU and UK).
- CIF — The invoice price includes cost, insurance and freight to the destination port, which may already equal the customs value in CIF-valuing jurisdictions.
- DDP — The invoice price includes post-importation costs such as domestic delivery, import duties and taxes. These must be deducted from the invoice price to arrive at the correct customs value. Failing to deduct them is one of the most common causes of duty overpayment.
- FOB — In the United States, where customs valuation is based on the FOB price at the port of export, the invoice price under FOB often aligns closely with the dutiable value. But in CIF-valuing countries, freight and insurance must still be added.
Common Mistakes That Cost Money
In our compliance reviews at MyCustomsInfo®, we regularly identify Incoterm-related errors that have been costing businesses money for years without anyone noticing:
- DDP without value adjustment. A seller quotes DDP and the full DDP price is declared as the customs value. The result: duties are calculated on a figure that already includes duties and inland delivery — effectively paying duty on duty.
- EXW without adding freight. A buyer uses the EXW invoice price as the customs value without adding the international freight and insurance. In CIF-valuing countries this means an under-declaration, which exposes the importer to penalties and back-duty assessments.
- FOB for containerised cargo. Under FOB, risk transfers when goods cross the ship's rail. For containerised cargo, the goods are typically delivered to a container terminal long before they are loaded on the vessel — creating an uninsured gap. FCA eliminates this risk.
- Mismatched terms. The Incoterm on the commercial invoice says CIF, but the customs entry is filed using FOB values. Or the contract says DAP, but the freight forwarder's documents say CPT. Inconsistency invites audit attention.
Download the ICC Incoterms® 2020 Resources
The ICC publishes two essential companion documents for Incoterms® 2020:
Both are available as free PDF downloads.
For our detailed breakdown of every rule — including customs notes and a quick-reference table showing who pays for export clearance, main carriage, import clearance and duties — visit our Incoterms® 2020 Practical Guide.
Note: Incoterms® is a registered trademark of the International Chamber of Commerce. The chart should be used in conjunction with the full Incoterms® 2020 rule book, available from the ICC.
Getting Your Incoterms Right
If you are unsure whether your Incoterms are correctly reflected in your customs declarations — or if you suspect your customs value calculations may be off — that is exactly the kind of issue a compliance review will uncover.
Book a compliance review and we will check your declaration data against your commercial documentation to identify mismatches, overpayments and compliance exposure before your customs authority does.
Ready to take action? Incoterms® 2020 practical guide with MyCustomsInfo®.
.svg)
.svg)
