INCOTERMS 2010: Implications and Nuances www.morganlewis.com Presented by: Morgan, Lewis & Bockius LLP Margaret M. Gatti, Louis K. Rothberg Timothy M. Rolland
Outline of Presentation I. Introduction to INCOTERMS II. Definitions III. INCOTERMS Functions IV. Explanation & Implications of INCOTERMS V. Tips for Using INCOTERMS 2
Introduction to Incoterms 2010 International Commercial Terms 11 International Sales Terms (not sales law) Standardized trade definitions 3 Letters Each EXW, FOB, CFR Devised and maintained by ICC More than 120 member countries Updated as required by commerce trends 3
Introduction to Incoterms Current Applicability of Incoterms Widely accepted / used worldwide U.S.: Automatically apply (default) in international trade transactions unless: Alternative sales terms selected, or State law selected, or FMS (Delivery Trade Codes / DTC) U.S.: can be applied to domestic sales on elective basis (recommended that companies master and use one set of terms for all sales) 4
Key Definitions for Understanding INCOTERMS 5
Key Definitions Pre-carriage: Inland transportation on seller s side from shipment origin point to port of departure Main-carriage: Transportation from the seller's side to the buyer's side On-carriage: Transportation from the arrival point on the buyer's side to any other place (such as to the buyer's premises). 6
Key Definitions Omni-modal: Those terms that can be used for all transport modes. Marine-restricted: Those terms that can be used only for vessel shipments. Shipment contract: A UCC-based sales contract holding the seller responsible for the condition of the goods until they are handed over / delivered to a carrier. (Legal delivery physical delivery) 7
Key Definitions Destination contract: Revenue recognition: A UCC-based sales contract holding the seller responsible for the condition of the goods until they arrive at an agreed place. (Legal delivery = physical delivery) Establishes when a sale becomes an account receivable. The Securities and Exchange Commission (SEC) has established revenue recognition guidelines for publicly traded companies. The SEC guidelines are based on the concept of shipment and destination contracts. 8
Key Definitions Minimum cover: Cargo insurance that covers only minimum perils (i.e. total loss, general average). Minimum cover is often called "free of particular average (FPA) in the US, and Institute of London Underwriters "Institute Cargo Clause C" internationally. All risk: War Risk: 9 Cargo insurance coverage that is adequate for most shipments when written on a warehouse-to-warehouse basis and enhanced with "war" and "strike and civil commotion" coverage. Additional cargo insurance coverage for war-related perils.
INCOTERMS Functions 10
Incoterms Functions 1. Delegate shipping responsibilities and shipping costs between sellers & buyers a. Export Packaging Safe carriage for transport mode Excludes: Labeling / Marking and SWPM b. Export Clearance Obtain export license Apply Destination Control Statement Complete Electronic Export Information (EEI) Record in AES 11
Incoterms Functions (Responsibilities and Costs) cont d c. Pre-carriage for Export Inland transportation on seller s side From shipment origin point To port of departure Deals separately with: Loading Unloading 12
Incoterms Functions (Responsibilities and Costs) cont d d. Main Carriage for Export International transportation From seller s country To buyer s country Deals separately with: Loading Unloading 13
Incoterms Functions (Responsibilities and Costs) cont d e. On Carriage for Export Inland transportation on buyer s side From import entry port To location designated by buyer Deals separately with: Loading Unloading 14
Incoterms Functions (Responsibilities and Costs) cont d f. Import Clearance Import licenses, when applicable Customs import formalities Possible payment of: Import duties Import taxes, such as VAT Other fees / charges 15
Incoterms Functions (Insurance) 2. Compel seller and buyer to deal separately with Insurance Only two Incoterms deal with insurance Hint: look for i in the Incoterm Insurance required = minimum cover London Clause C Coverage / Free Particular Average No All Risk No War Risk or SRCC Risk 16
Incoterms Functions (Seller s Pricing) 3. Guide seller in setting export price and clarify for buyer buyer s costs Seller increases export price to include seller s costs under relevant Incoterm Base export price Plus: Export Clearance Pre-Carriage Loading, etc. Export price amount and Incoterm choice Buyer infers buyer s costs 17
Incoterms Functions (Contract Responsibilities) 4. Clarify subsidiary contract responsibilities of seller & buyer Contract with freight forwarder Export clearance Contract with carriers Pre, Main, On Contract with insurer Contract with customs broker Import clearance 18
Incoterms Functions (Delivery & Risk of Loss) 5. Clarify when delivery occurs and risk of loss transfers Risk of loss transfers with Delivery Shipment Term: Place on Seller s Side Legal Delivery Physical Delivery EXW, F terms, C terms Destination Term: Place on Buyer s Side Legal Delivery = Physical Delivery D terms 19
Incoterms Functions (Do Not Include Title Transfer) Leave title transfer for parties agreement or for default determination Incoterms silent on title transfer Look to parties agreement, or Make default determination Title passes when delivery made and risk of loss transferred! 20
Incoterms Functions (Do Not Include Revenue Recognition) Leave timing of revenue recognition to seller Under GAAP and Securities & Exchange Commission (SEC) Rules, revenue recognition requires that: 1) ownership or title must pass prior to recognizing revenue 2) delivery must occur 21
Explanation of INCOTERMS 22
Explanation of INCOTERMS ExW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP 23
Explanation of INCOTERMS Transport Mode Limitations Marine Restricted All Modes Individual INCOTERMS MUST Be used with Named Point Seller s Side vs Buyer s Side 24
Well, maybe not in all cases 25
Explanation of INCOTERMS Marine Restricted FAS named shipment port Omni-modal EXW Seller s premises FOB named shipment port FCA named place / Seller CFR named destination port CIF named destination port CPT named destination / Buyer CIP named destination / Buyer DAT named place / Buyer DAP named place / Buyer DDP named place / Buyer 26
Explanation of INCOTERMS Incoterms are grouped into four categories which reflect the breakdown of costs / responsibilities between Seller & Buyer: Group E: Group F: Group C: Group D: Departure Terms Main Carriage Unpaid Terms Main Carriage Paid Terms Arrival Terms 27
Incoterms Explanation EXW Available at seller s premises Rule for Any Mode(s) of Transport 28
EXW Ex Works (Seller s Premises) Cost / Responsibility Seller Buyer 1. Export Packaging Yes No 2. Export Clearance No Yes 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading No No No Yes Yes Yes 29
EXW Ex Works (Seller s Premises) Cost / Responsibility Seller Buyer 4. Main Carriage Loading Main Carriage Main Carriage Unloading 5. On Carriage Loading On Carriage On Carriage Unloading No No No No No No Yes Yes Yes Yes Yes Yes 30
EXW Ex Works (Seller s Premises) Cost / Responsibility Seller Buyer 6. Import Clearance No Yes 7. Insurance No No 31
EXW Ex Works (Seller s Premises) Minimum obligation for seller Shipment Term Delivery occurs when seller places goods at buyer s disposal at seller s premises for buyer to load! Risk of loss transfers from seller to buyer when seller delivers goods to buyer 32
EXW Ex Works (Seller s Premises) Appropriate for routed transactions Inappropriate for USML exports Unless Foreign Buyer is an Embassy in the U.S., Foreign buyer cannot obtain DSP5 licenses Ineligible person under ITAR 120.1(c) US forwarders for foreign buyers cannot obtain DSP-5 export licenses for foreign buyers DDTC policy: applicant must be exporter 33
EXW Ex Works (Seller s Premises) Inappropriate for Haz Mat shipments Seller has no control over carrier s performance Seller has no control over safety conditions during transport Despite lack of control, Seller: Shares responsibility for incidents that result in damages to 3 rd parties or damages to the environment. 34
Incoterms Explanation MAIN CARRIAGE UNPAID FCA FAS FOB Free Carrier, Named Place Free Alongside Ship, Named Shipment Port Free on Board Named Shipment Port 35
FCA / FAS / FOB Cost / Responsibility Seller Buyer 1. Export Packaging Yes No 2. Export Clearance Yes No 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Yes No No No Yes Yes 36
FCA / FAS / FOB Cost / Responsibility Seller Buyer 4. Main Carriage Loading Main Carriage Main Carriage Unloading 5. On Carriage Loading On Carriage On Carriage Unloading No No No No No No Yes Yes Yes Yes Yes Yes 37
FCA / FAS / FOB Cost / Responsibility Seller Buyer 6. Import Clearance No Yes 7. Insurance No No 38
FCA / FAS / FOB More obligations for seller than EXW FCA: FAS: FOB: Delivery occurs: When seller delivers goods to carrier or named place When seller places goods alongside vessel at shipment port When goods pass ship s rail at shipment port 39
FCA / FAS / FOB Risk of Loss passes from seller to buyer when Delivery occurs: FCA: FAS: FOB: Seller delivers goods to carrier or named place Seller places goods alongside vessel at shipment port Goods pass ship s rail at shipment port FCA / FAS / FOB = Shipment Contracts 40
FCA / FAS / FOB Appropriate for routed transactions Inappropriate for USML exports FCA / FAS / FOB: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller obtains DSP-5 export license DSP-5 export license requires end destination control Destination control requirements in ITAR 123.9 41
FCA / FAS / FOB Inappropriate for Haz Mat shipments Seller has no control over carrier s performance Seller has no control over safety conditions during transport Despite lack of control, Seller: Shares responsibility for incidents that result in damages to 3 rd parties or damages to the environment. 42
Incoterms Explanation MAIN CARRIAGE PAID CFR CIF CPT CIP Cost and freight destination port CFR + Insurance Carriage paid destination CPT + Insurance 43
CFR / CIF / CPT / CIP Cost / Responsibility Seller Buyer 1. Export Packaging Yes No 2. Export Clearance Yes No 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Yes Yes Yes No No No 44
CFR / CIF / CPT / CIP Cost / Responsibility Seller Buyer 4. Main Carriage Loading Main Carriage Main Carriage Unloading 5. On Carriage Loading On Carriage On Carriage Unloading Yes Yes No No No No No No Yes Yes Yes Yes 45
CFR / CIF / CPT / CIP Cost / Responsibility Seller Buyer 6. Import Clearance No Yes 7. Insurance CIF CIP CFR CPT 46
CFR / CIF / CPT / CIP Shipment Terms Delivery and Risk of Loss Transfer: CFR: CIF: CPT: CIP: when goods pass ship s rail at shipment port same as CFR when seller delivers goods to first carrier same as CPT 47
CFR / CIF / CPT / CIP Inappropriate for routed transactions Appropriate for USML exports CFR / CIF / CPT / CIP: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller obtains DSP5 export license DSP5 license requires end destination control Destination control requirements in ITAR 123.9 48
CFR / CIF / CPT / CIP Appropriate for Haz Mat shipments Seller has control over carrier s performance Seller has control over safety conditions during transport Seller in better position because: Shares responsibility for incidents that result in damages to 3 rd parties or damages to the environment. 49
Incoterms Explanation ARRIVAL TERMS DAT DAP DDP Delivered at terminal, named terminal or port Delivered at place, named place Delivered duty paid, named place 50
DAT / DAP / DDP Cost / Responsibility Seller Buyer 1. Export Packaging Yes No 2. Export Clearance Yes No 3. Pre-Carriage Loading Pre-Carriage Pre-Carriage Unloading Yes Yes Yes No No No 51
DAT / DAP / DDP Cost / Responsibility Seller Buyer 4. Main Carriage Loading Main Carriage Main Carriage Unloading 5. On Carriage Loading On Carriage On Carriage Unloading Yes Yes Yes Yes Yes No No No No No No Yes 52
DAT / DAP / DDP Cost / Responsibility Seller Buyer 6. Import Clearance DDP Yes 7. Insurance No No 53
DAT / DAP / DDP More obligations for seller than FAS, FOB, CFR, CIF, EXW, FCA, CPT & CIP Delivery and Risk of Loss Transfer: DAT: When Seller delivers goods to named destination terminal on Buyer s side, packaged appropriately and unloaded DAP: When Seller delivers goods to Buyer at named place on Buyer s side, appropriately packaged but not unloaded 54
DAT / DAP / DDP Delivery and Risk of Loss Transfer: (cont d) DDP: when seller places goods at buyer s disposal on transport arrival at destination place»seller is not required to unload goods but must clear goods for import 55
Inappropriate for routed transactions (because Seller is controlling shipping) Appropriate for USML exports DAT / DAT / DDP: Export Clearance by Seller US seller = eligible person (ITAR 120.1(c)) US seller can obtain DSP-5 export license DSP-5 license requires end destination control Destination control requirements in ITAR 123.9 DAT / DAP / DDP 56
DAT / DAP / DDP Appropriate for Haz Mat shipments Seller has control over carrier s performance Seller has control over safety conditions during transport Seller in better position because: Shares responsibility for incidents that result in damages to 3 rd parties or damages to the environment. 57
INCOTERMS 2010 Seller / Exporter Tasks Costs in Pricing EXW Export Packaging $ FAS / FOB / FCA Export Packaging Pre-Carriage $$ CFR / CIF CPT / CIP Export Packaging Pre-Carriage Main Carriage (Insurance = I) $$$ 58
INCOTERMS 2010 DAT / DAP DDP Seller / Exporter Tasks Export Packaging Pre-Carriage Main Carriage On Carriage Export Packaging Pre-Carriage Main Carriage On Carriage Foreign Import Duties (but NOT VAT / GST ) 59 Costs in Pricing $$$$ $$$$$
INCOTERMS 2010 All INCOTERMS require named place the more specific, the better ExW and F terms, place is on seller s side of pond C terms and D terms, place is on buyer s side of pond Only two Incoterms deal with insurance look for I CIF CIP Only one INCOTERM makes export clearance a buyer s responsibility (all others assign task to seller) ExW 60
INCOTERMS 2010 Only one INCOTERM makes import clearance a seller s responsibility (all others assign task to buyer) DDP Routed Transactions Buyers control shipment & freight ExW All F Terms INCOTERMS = International Standard / Default terms 61
Tips for Using INCOTERMS 62
Incoterms Tips Tip #1 Understand Incoterm of choice and make sure you use properly Stick with official meaning to the greatest extent possible Employ additional provisions sparingly 63
Incoterms Tips Tip #2 Use individual Incoterms with named point as required Seller s side vs. Buyer s side 64
Incoterms Tips Tip #3 Observe transport mode limitations Marine restricted All modes 65
Incoterms and Transport Modes Marine Restricted Omni-Modal FAS named shipment port FOB named shipment port CFR named destination port CIF named destination port EXW seller s premises FCA named place / seller CPT named destination place CIP named destination place DAT named place / buyer DAP named place / buyer DDP named place / buyer 66
Incoterms Tips Tip #4 For shipments subject to USML export license requirements and for HAZMAT shipments, use either Main Carriage Paid terms (CFR, CIF, CPT or CIP) or Arrival Terms (DAT, DAP, DDP) Stay away from routed transactions Refrain from use of EXW, FAS, FOB, FCA 67
Incoterms Tips Tip #5 Be very careful in using DDP Incoterm Recognize differing opinions on HTS codes and applicable duties If use, make sure to exclude VAT 68
Incoterms Tips Tip #6 Don t forget about insurance Not just a concern for CIF and CIP Coordinate insurance with payment method and risk of loss 69
Incoterms Tips Tip #7 Shipment terms allow for earlier revenue recognition than delivery terms Based on recognition of revenue occurring with delivery and risk of loss transfer Shipment terms: Departure, Main Carriage Unpaid & Main Carriage Paid Terms Delivery terms: Arrival Terms 70
Morgan, Lewis & Bockius Margaret M. Gatti Philadelphia, PA tel. 215.963.5569 Louis K. Rothberg Washington, DC tel. 202.739.5281 Washington, DC tel. 202.739.5409 Timothy M. Rolland Washington, DC tel. 202.739.5829 71
international presence Almaty Beijing Boston Brussels Chicago Dallas Frankfurt Harrisburg Houston Irvine London Los Angeles Miami Moscow New York Palo Alto Paris Philadelphia Pittsburgh Princeton San Francisco Tokyo Washington 72Wilmington