Incoterms and customs: who declares, who pays and which value to declare

What is an Incoterm?

Incoterms are rules published by the International Chamber of Commerce (ICC). The current version, Incoterms 2020, has 11 rules identified by three letters. Each one states where the goods are delivered, when risk passes from seller to buyer, and who pays for transport, insurance and customs formalities.

An Incoterm is always followed by a place (for example "FCA Lyon" or "CIF Le Havre") and the version ("Incoterms 2020"). It does not govern transfer of ownership or payment: those are matters for the sales contract.

The 11 Incoterms 2020 rules

• EXW (Ex Works): the buyer handles everything from the seller's premises, including export clearance
• FCA (Free Carrier): the seller hands the goods, cleared for export, to the carrier nominated by the buyer
• CPT (Carriage Paid To): the seller pays the main carriage to the agreed place
• CIP (Carriage and Insurance Paid To): like CPT, with insurance paid by the seller
• DAP (Delivered at Place): the seller delivers at destination, goods not unloaded and not cleared for import
• DPU (Delivered at Place Unloaded): like DAP, but the seller unloads the goods
• DDP (Delivered Duty Paid): the seller handles everything, including import clearance, duties and VAT
• FAS (Free Alongside Ship): sea freight, delivery alongside the vessel at the port of shipment
• FOB (Free on Board): sea freight, delivery on board the vessel at the port of shipment
• CFR (Cost and Freight): sea freight, the seller pays freight to the port of destination
• CIF (Cost, Insurance and Freight): sea freight, like CFR with insurance paid by the seller

Who handles customs formalities?

Under every Incoterm except EXW, the seller handles export formalities. Under every Incoterm except DDP, the buyer handles import formalities and pays duties and VAT.

Both extremes cause problems in practice. Under EXW, a foreign buyer has to clear the goods for export in a country where it is not established, and the exporter may struggle to prove that the goods left and to support the VAT exemption. FCA is usually a better choice. Under DDP, the seller has to clear the goods for import in the buyer's country: it needs an EU EORI number, often a representative, and may be unable to recover the import VAT it paid.

How the Incoterm changes the customs value

In the European Union, the customs value includes transport and insurance up to the place where the goods enter the EU. The invoice price must therefore be adjusted according to the Incoterm:

• EXW, FCA, FAS, FOB: transport and insurance up to the EU border are not in the price and must be added
• CFR, CPT: freight is included, any insurance must be added
• CIF, CIP: freight and insurance to the agreed place are included; if that place lies beyond the EU border, the transport cost after entry can be deducted if shown separately
• DAP, DPU, DDP: the price includes transport after entry into the EU (deductible if shown separately) and, under DDP, import duties and VAT, which are not part of the customs value

Common mistakes

• Invoice with no Incoterm or place: customs and the forwarder cannot tell which costs are included
• Using FOB or CIF for air or road transport, although these rules are reserved for sea and inland waterway
• Declaring the EXW or FOB price without adding freight and insurance to the border
• Selling DDP without an EORI number or representative in the country of import
• Different Incoterms on the invoice, the contract and the instructions given to the forwarder

Frequently asked questions