INCOTERMS 2020 in Practice
Date of publication: 31.03.2021
INCOTERMS rules are established by the International Chamber of Commerce in Paris (ICC) and they reflect principles that stem from the United Nations Convention on Contracts for the International Sale of Goods (Vienna, 1980). INCOTERMS rules constitute a line of dividing costs and risks in international commercial relationships and are of voluntary nature, as regards their application in the above-mentioned relationships. Depending on selected transport conditions, INCOTERMS set forth a moment of transferring the responsibility for goods and accepting a risk due to the loss of or damage to carried goods. Finally, they indicate a party that is responsible for completing formalities as well as for covering costs due to export and import. It is worth noting that such rules do not resolve the question of a title to goods; nevertheless, in certain transactions they may signal a moment of the above-mentioned transfer.
INCOTERMS 2020 are aimed at consolidating the rules relating to the carriage of goods from a professional seller to a professional purchaser. It is worth remembering that due to their development, they are obligatory only for the above-mentioned two entities of commercial trading in a specific commercial relationship. The optionality of INCOTERMS 2020 is further reflected in the fact that they are replaced by regulations that govern a contract made between parties in a given legal system.
It should be also kept in mind that INCOTERMS 2020 in effect determine a price of goods and the responsibility for their transport, which on the other hand involves risks and costs. In numerous contracts, where margin levels are relatively low, this fact is of fundamental business importance.
INCOTERMS 2010 applied continually for 10 years and were modified on 1 January 2020, when INCOTERMS 2020 were introduced, which may be referred to in commercial relationships at present. However, this does not mean that counterparties have been deprived of the possibility to form their commercial relationships in the future based on the currently applicable INCOTERM 2010 rules. What is more, provisions of contracts made before 1 January 2020, which provide for the application of INCOTERMS 2010 rules, remain effective.
The outcome of ICC’s work, which has been reflected in the new INCOTERMS 2010 rules, does not bring any revolutionary solutions, because they actually constitute the development of well-established and practically proven solutions that facilitate and civilize international trading of goods.
INCOTERMS 2020 are aimed at consolidating the rules relating to the carriage of goods from a professional seller to a professional purchaser. It is worth remembering that due to their development, they are obligatory only for the above-mentioned two entities of commercial trading in a specific commercial relationship. The optionality of INCOTERMS 2020 is further reflected in the fact that they are replaced by regulations that govern a contract made between parties in a given legal system.
It should be also kept in mind that INCOTERMS 2020 in effect determine a price of goods and the responsibility for their transport, which on the other hand involves risks and costs. In numerous contracts, where margin levels are relatively low, this fact is of fundamental business importance.
INCOTERMS 2010 applied continually for 10 years and were modified on 1 January 2020, when INCOTERMS 2020 were introduced, which may be referred to in commercial relationships at present. However, this does not mean that counterparties have been deprived of the possibility to form their commercial relationships in the future based on the currently applicable INCOTERM 2010 rules. What is more, provisions of contracts made before 1 January 2020, which provide for the application of INCOTERMS 2010 rules, remain effective.
The outcome of ICC’s work, which has been reflected in the new INCOTERMS 2010 rules, does not bring any revolutionary solutions, because they actually constitute the development of well-established and practically proven solutions that facilitate and civilize international trading of goods.
Division of INCOTERMS 2020
INCOTERMS 2020 rules have been divided into four groups of delivery conditions, based on criteria of a place of incurring costs and accepting risk – groups E, F, C, and D. The division and prioritization of consecutive formulas are based on the increasing responsibility of a seller, and hence accordingly the falling responsibility of a buyer.
1) Group E – Departure – the seller makes the goods available to the buyer at the delivery point indicated before. The seller is not obliged either to customs or export clearance and does not bear the costs or risks of loading.
2) Group F – Main Carriage Unpaid – the seller is obliged to perform export customs clearance, however does not pay transport and insurance costs.
3) Group C – Main Carriage Paid – the seller covers costs of transport and is responsible for conducting export clearance. In this formula, the risk is transferred at the time of posting the goods to the buyer. Other additional costs related to transporting and arising after loading are the buyer’s responsibility.
4) Group D – Arrival – The seller is obliged to deliver the goods to a specific place or the port of destination.
Tax effects of INCOTERMS 2020
Sales terms and conditions set forth according to the INCOTERMS 2020 rules are of major fiscal importance for parties to a commercial relationship. Therefore, one needs to take into account that INCOTERMS 2020 are guidelines for determining a moment of income origin on the part of the seller, because they often determine a time of contract performance by the seller.
On the other hand, in order to apply 0% VAT rate, it is necessary for a taxpayer to make the delivery of goods and transfer to the buyer the right to dispose of goods as their owner, which is not always equivalent to the transfer of a title. In order to determine if this condition has been fulfilled in a transaction, one may refer, among others, to the INCOTERMS 2020 rules applied in this transaction, which determine when the possession of goods is transferred.
From a practical point of view, what matters is that the determined INCOTERMS 2020 rules should be indicated also in a VAT invoice that is related to a transaction, so that from the perspective of a potential fiscal control a lack of such information is not construed as incompleteness of an accounting document in the context of a determined commercial relationship.
For numerous reasons, it is very important for parties to a commercial relationship to explicitly and precisely determine an indicated destination – a specific site / a port of loading / a specific destination, after a three-letter abbreviation of a given formula.
An accurate determination of INCOTERMS 2020 may be found not only in an invoice or in a contract, but also, for example, in general terms and conditions of deliveries or in exchange of e-mails that reflect the form of commercial relationships between the parties.
What changes have been introduced by INCOTERMS 2020?
INCOTERMS 2020 continue the existence of 11 rules applied in domestic and foreign trade, modifying slightly their sequence and marking.
In the new INCOTERMS 2020, the sequences of rules proposed by ICC has been modified, so that in the INCOTERMS 2020 the DAP rule has been placed one item earlier, before the current DAT rule, while the same DAT rule has been modified into the rule marked with the DPU acronym.
The level of insurance protection has changed in the CIF and CIP rules – ‘cargo insurance’ should correspond at least to ‘minimum coverage provided for in the Clause – Institute Cargo Clauses (LMA/IUA) or in any similar clauses’.
The publication of INCOTERMS 2020 has also dispelled doubts as to the alleged removal of certain current rules, such as DDP, FAS and EXW. In addition, the FAC rule has not been divided into rules that concern deliveries of goods by land and sea. In addition, the idea to formulate completely new solutions and replace current rules with entirely new ones has been abandoned (other than the transformation of the DAT rule into DPU, where in fact in this case there is a change of its determination/name). It is worth noting that ICC has not included in its solutions, contrary to certain predictions, the CNO rule (Cost and Insurance), that was to ‘supplement’ the area between FCA on the one hand and CFR and CIF formulas on the other hand.
FCA rule in INCOTERMS 2020
The described changes have also covered the FCA rule (Free Carrier). INCOTERMS 2010 in the part that describes duties of a seller (‘Delivery document’) provided that the seller is obliged to deliver to the buyer, and to cover related costs, of ordinary proof that goods have been delivered according to the delivery terms and conditions for the FCA rule. Moreover, the seller was obliged to provide the buyer with assistance in obtaining a relevant shipping document. On the other hand, INCOTERMS 2020 FCA supplement such elements by indicating that in the situation where the buyer has given instructions to a carrier to issue a transport document to the seller that confirms that goods have been loaded (a bill of lading with an ‘on board’ note), the seller is obliged to provide such a document to the buyer.
Similarly, on the buyer’s side in the INCOTERMS 2020 FCA 2020 there is a new obligation to give the above-mentioned instructions to the carrier, if required according to agreements between the parties.
In INCOTERMS 2020 FCA such elements gain special importance if parties to the sales contract or a third party (most often, a bank) require the issue of a maritime bill of lading/a load line certificate that includes the above-mentioned ‘on board’ note.
INCOTERMS 2020 – DPU rule
The DPU rule (Delivered at Place Unloaded) does not create a completely new or previously unknown rule. Therefore, this rule should not create problems in practice for persons who are familiar with the DAT rule from INCOTERMS 2010. A change of name and the use of a shorter acronym are aimed at emphasizing that a terminal is not the only proper site of delivering goods/shipment, although there is no doubt that a destination should have the characteristics that enable the delivery of goods and their unloading. Therefore, the DPU rule may be continued to be used successfully in all types of transport (road, railway, air, sea).
A moment of transferring risk from the seller to the buyer in this rule remains the time when after unloading goods they are made available to the buyer. The clearance of goods in export is still carried out by the seller. There is no doubt that the removal from the discussed rule of the term ‘delivered to a terminal’ does not undermine the necessity to detail a site where goods are to be delivered.
Case study
An A entity has been obliged to deliver aluminium sections for a B entity to a shipyard in the Bahamas. The general terms and conditions of delivery include the INCOTERMS 2000 DDU rule – Delivered Duty Unpaid – named place of destination. It is noteworthy that entities A and B did not determine any other INCOTERMS rules in another document or e-mails that shape the above-mentioned commercial relationship.
However, the B entity, while signing the contract, approved the general terms and conditions of deliveries sent by the A entity. The above-mentioned sections were delivered to the Bahama shipyard according to the contract by the A entity.
A few days after the delivery, as a result of a hurricane hitting the Bahamas, the above-mentioned sections were destroyed. A dispute arouse between the parties. As a result of referring by the A entity to the DDU rule from INCOTERMS 2000, finally, after quite stormy negotiations, the B entity paid a claim to the A entity amounting to EUR 370,000.00. That amount constituted a last instalment of payments for sections delivered by the A entity to the B entity to the shipyard in the Bahamas. It is worth noting that at the stage when the damage to the goods originated, the title to the above-mentioned sections was not yet transferred from the A entity to the B entity.
This scenario of finalising the dispute was possible because one of the elements of INCOTERMS 2000 DDU was that the buyer covered any and all costs and risks related to goods from the time of their delivery according to the contract (e.g. customs, taxes and other import fees), and in this case such a delivery was effected.
Summary
Solutions adopted by ICC in INCOTERMS 2020 should be assessed as positive, because the effects of work carried out by the International Commercial Chamber are mechanisms that reflect voices of practitioners and experts, which take into consideration dynamic changes on the markets. Therefore, as well as due to the improved solutions within the presentation of individual rules, it is highly recommendable and advisable that practitioners and entrepreneurs concerned should become acquainted with the official ICC publications in the presented area.
Moreover, in case of disputes or major doubts that result from executed contracts, including those that include a reference to the INCOTERMS 2020 rules, it would be recommendable to carry out a detailed legal analysis of every case.
It should be kept in mind that carriers and forwarders continue as a rule to be excluded from the application of INCOTERMS 2020 rules, because the determination of their responsibility, if any, for the rendition of a transport service should be found in regulations of the general transport law, i.e. the CMR Convention, the Act on transport law, or a foreign equivalent to such regulations, depending on a governing law.
INCOTERMS 2020 rules have been divided into four groups of delivery conditions, based on criteria of a place of incurring costs and accepting risk – groups E, F, C, and D. The division and prioritization of consecutive formulas are based on the increasing responsibility of a seller, and hence accordingly the falling responsibility of a buyer.
1) Group E – Departure – the seller makes the goods available to the buyer at the delivery point indicated before. The seller is not obliged either to customs or export clearance and does not bear the costs or risks of loading.
2) Group F – Main Carriage Unpaid – the seller is obliged to perform export customs clearance, however does not pay transport and insurance costs.
3) Group C – Main Carriage Paid – the seller covers costs of transport and is responsible for conducting export clearance. In this formula, the risk is transferred at the time of posting the goods to the buyer. Other additional costs related to transporting and arising after loading are the buyer’s responsibility.
4) Group D – Arrival – The seller is obliged to deliver the goods to a specific place or the port of destination.
Tax effects of INCOTERMS 2020
Sales terms and conditions set forth according to the INCOTERMS 2020 rules are of major fiscal importance for parties to a commercial relationship. Therefore, one needs to take into account that INCOTERMS 2020 are guidelines for determining a moment of income origin on the part of the seller, because they often determine a time of contract performance by the seller.
On the other hand, in order to apply 0% VAT rate, it is necessary for a taxpayer to make the delivery of goods and transfer to the buyer the right to dispose of goods as their owner, which is not always equivalent to the transfer of a title. In order to determine if this condition has been fulfilled in a transaction, one may refer, among others, to the INCOTERMS 2020 rules applied in this transaction, which determine when the possession of goods is transferred.
From a practical point of view, what matters is that the determined INCOTERMS 2020 rules should be indicated also in a VAT invoice that is related to a transaction, so that from the perspective of a potential fiscal control a lack of such information is not construed as incompleteness of an accounting document in the context of a determined commercial relationship.
For numerous reasons, it is very important for parties to a commercial relationship to explicitly and precisely determine an indicated destination – a specific site / a port of loading / a specific destination, after a three-letter abbreviation of a given formula.
An accurate determination of INCOTERMS 2020 may be found not only in an invoice or in a contract, but also, for example, in general terms and conditions of deliveries or in exchange of e-mails that reflect the form of commercial relationships between the parties.
What changes have been introduced by INCOTERMS 2020?
INCOTERMS 2020 continue the existence of 11 rules applied in domestic and foreign trade, modifying slightly their sequence and marking.
In the new INCOTERMS 2020, the sequences of rules proposed by ICC has been modified, so that in the INCOTERMS 2020 the DAP rule has been placed one item earlier, before the current DAT rule, while the same DAT rule has been modified into the rule marked with the DPU acronym.
The level of insurance protection has changed in the CIF and CIP rules – ‘cargo insurance’ should correspond at least to ‘minimum coverage provided for in the Clause – Institute Cargo Clauses (LMA/IUA) or in any similar clauses’.
The publication of INCOTERMS 2020 has also dispelled doubts as to the alleged removal of certain current rules, such as DDP, FAS and EXW. In addition, the FAC rule has not been divided into rules that concern deliveries of goods by land and sea. In addition, the idea to formulate completely new solutions and replace current rules with entirely new ones has been abandoned (other than the transformation of the DAT rule into DPU, where in fact in this case there is a change of its determination/name). It is worth noting that ICC has not included in its solutions, contrary to certain predictions, the CNO rule (Cost and Insurance), that was to ‘supplement’ the area between FCA on the one hand and CFR and CIF formulas on the other hand.
FCA rule in INCOTERMS 2020
The described changes have also covered the FCA rule (Free Carrier). INCOTERMS 2010 in the part that describes duties of a seller (‘Delivery document’) provided that the seller is obliged to deliver to the buyer, and to cover related costs, of ordinary proof that goods have been delivered according to the delivery terms and conditions for the FCA rule. Moreover, the seller was obliged to provide the buyer with assistance in obtaining a relevant shipping document. On the other hand, INCOTERMS 2020 FCA supplement such elements by indicating that in the situation where the buyer has given instructions to a carrier to issue a transport document to the seller that confirms that goods have been loaded (a bill of lading with an ‘on board’ note), the seller is obliged to provide such a document to the buyer.
Similarly, on the buyer’s side in the INCOTERMS 2020 FCA 2020 there is a new obligation to give the above-mentioned instructions to the carrier, if required according to agreements between the parties.
In INCOTERMS 2020 FCA such elements gain special importance if parties to the sales contract or a third party (most often, a bank) require the issue of a maritime bill of lading/a load line certificate that includes the above-mentioned ‘on board’ note.
INCOTERMS 2020 – DPU rule
The DPU rule (Delivered at Place Unloaded) does not create a completely new or previously unknown rule. Therefore, this rule should not create problems in practice for persons who are familiar with the DAT rule from INCOTERMS 2010. A change of name and the use of a shorter acronym are aimed at emphasizing that a terminal is not the only proper site of delivering goods/shipment, although there is no doubt that a destination should have the characteristics that enable the delivery of goods and their unloading. Therefore, the DPU rule may be continued to be used successfully in all types of transport (road, railway, air, sea).
A moment of transferring risk from the seller to the buyer in this rule remains the time when after unloading goods they are made available to the buyer. The clearance of goods in export is still carried out by the seller. There is no doubt that the removal from the discussed rule of the term ‘delivered to a terminal’ does not undermine the necessity to detail a site where goods are to be delivered.
Case study
An A entity has been obliged to deliver aluminium sections for a B entity to a shipyard in the Bahamas. The general terms and conditions of delivery include the INCOTERMS 2000 DDU rule – Delivered Duty Unpaid – named place of destination. It is noteworthy that entities A and B did not determine any other INCOTERMS rules in another document or e-mails that shape the above-mentioned commercial relationship.
However, the B entity, while signing the contract, approved the general terms and conditions of deliveries sent by the A entity. The above-mentioned sections were delivered to the Bahama shipyard according to the contract by the A entity.
A few days after the delivery, as a result of a hurricane hitting the Bahamas, the above-mentioned sections were destroyed. A dispute arouse between the parties. As a result of referring by the A entity to the DDU rule from INCOTERMS 2000, finally, after quite stormy negotiations, the B entity paid a claim to the A entity amounting to EUR 370,000.00. That amount constituted a last instalment of payments for sections delivered by the A entity to the B entity to the shipyard in the Bahamas. It is worth noting that at the stage when the damage to the goods originated, the title to the above-mentioned sections was not yet transferred from the A entity to the B entity.
This scenario of finalising the dispute was possible because one of the elements of INCOTERMS 2000 DDU was that the buyer covered any and all costs and risks related to goods from the time of their delivery according to the contract (e.g. customs, taxes and other import fees), and in this case such a delivery was effected.
Summary
Solutions adopted by ICC in INCOTERMS 2020 should be assessed as positive, because the effects of work carried out by the International Commercial Chamber are mechanisms that reflect voices of practitioners and experts, which take into consideration dynamic changes on the markets. Therefore, as well as due to the improved solutions within the presentation of individual rules, it is highly recommendable and advisable that practitioners and entrepreneurs concerned should become acquainted with the official ICC publications in the presented area.
Moreover, in case of disputes or major doubts that result from executed contracts, including those that include a reference to the INCOTERMS 2020 rules, it would be recommendable to carry out a detailed legal analysis of every case.
It should be kept in mind that carriers and forwarders continue as a rule to be excluded from the application of INCOTERMS 2020 rules, because the determination of their responsibility, if any, for the rendition of a transport service should be found in regulations of the general transport law, i.e. the CMR Convention, the Act on transport law, or a foreign equivalent to such regulations, depending on a governing law.
Source: Mateusz Romowicz
www.facebook.com/Legal.Marine.Mateusz.Romowicz
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