INCOTERMS – The international trading terms and their complexities  

 

What are INCOTERMS? How did they come about? What terms can we use in Brazilian imports? These are the main questions that agents constantly receive when assisting both the importers and exporters during international negotiations. The INCOTERMS, also known as International Commercial Terms, can be very confusing; this is why the help of a professional can clarify and even end up avoiding any possible error. 

 

INCOTERMS – What are they?

 

INCOTERMS are nothing more than acronyms that serve as a basis for international negotiations. Once they are used, the responsibilities assigned to the importer are defined, as well as what the exporter’s responsibilities are within the international process. Thus, the calculation of the product cost varies according to the INCOTERM negotiated, also the form of transport must be respected in the choice of an INCOTERM. Therefore, for each mode of transport there is an INCOTERM to be negotiated, causing the alteration of the costs involved in the process.

 

INCOTERMS – How did they come about?

 

Such terms seem new, but their use is not at all recent. In 1936, the International Chamber of Commerce (founded after World War I) instituted INCOTERMS due to conflicts of interpretation during international contracts negotiated between importers and exporters. The conflicts were about the expenses in the process, the responsibilities involving the goods, in addition to the losses and damages, if any, in the course of transport. 

At this first moment, the defined terms were solely about road and sea transportation. In 1953, the rail mode was added, and it was not until 1976 that there were terms concerning air transactions. In 1980 intermodal transport emerged, thus adding new INCOTERMS to the agenda. 

As the years went by, to accompany the implementation of new technologies, updates were made through additions and deletions of some of the terms and, in 1990, there was a complete review of INCOTERMS. Then, observing the free trade zones, in January 2000, the INCOTERMS 2000 came into force, offering a simplification in the view of the 13 existing INCOTERMS. The following update – which happened only in 2010 – caused major changes in the terms, with the withdrawal of a family of rules of some INCOTERMS and the enhancement of the obligations for importers and exporters. 

Finally, the last update took place in 2020, aligning different insurance coverage through minor changes in the terms, keeping in mind the future of international trade. 

 

INCOTERM – What are they?

 

Based on the 2020 update, the 11 INCOTERMS are shown below; they’re simplified for a clear and objective understanding of each one of them. We’ll focus on sellers and buyers, since they are the terms for international negotiation, added that origin and destination are not relevant – when specifying importer and exporter – then buyers and sellers are the focal point. 

 

– EXW – Ex Works 

o Multimodal transport;

o The seller provides the merchandise ready at the factory.

 

– FCA – Free Carrier 

o Multimodal transport;

o The seller delivers the goods to the place indicated by the buyer, or, if not indicated, to the place of the carrier.

 

– FAS – Free Alongside Ship 

o Waterborne transport;

o The seller delivers the goods alongside the transport designated in the negotiation (by a ship, for example).

 

– FOB – Free on Board 

o Waterborne transport; 

o The goods are delivered on board the ship.

 

– CPT – Carriage Paid To  

o Multimodal transport; 

o The seller delivers the goods at the place of destination.

 

– CIP – Carriage and Insurance Paid To  

o Multimodal transport; 

o The seller delivers the goods at the place of destination.

 

– CFR – Cost and Freight  

o Waterborne transport; 

o The seller delivers the goods with international freight paid at the place of negotiation.

 

– CIF – Cost Insurance and Freight  

o Waterborne transport; 

o The seller delivers the goods with international freight and insurance paid at the place of negotiation.

 

– DAP – Delivered at Place  

o Multimodal transport; 

o The seller delivers the goods at the place of destination.

 

– DPU – Delivered at Place Unloaded  

o Multimodal transport; 

o The seller delivers the goods at the place of destination.

 

– DDP – Delivered Duty Paid  

o Multimodal transport;

o The seller delivers the goods at the final destination.

 

 

It is already clear that INCOTERMS can be quite complex, mainly because, in order to decide which one to choose, the terms should be carefully and thoroughly analyzed, since they give the impression that they are similar, despite of the fact that they aren’t. In short, the assistance of an international agent is essential to avoid unnecessary errors and a possible wear and tear within the process as well as financial losses.

 

INCOTERMS – Which ones are prohibited in Brazil?

Finally, a last question would be: Are there any forbidden INCOTERMS in Brazil? Yes, there are! And they depend on the kind of shipment chosen.

The DDP – Delivered Duty Paid – is the INCOTERM that cannot be used in the formal process for Brazilian importation. According to the legislation, it is not possible for a foreign company to pay taxes and duties in the Brazilian territory, so there is no possibility that the exporter performs a formal shipment by air, land or sea with the cargo already cleared at the place of destination.

The only way to opt for this INCOTERM is importing via courier, performing an informal clearance. In other words, the exporter hires an air transport company that, then, issues the billing with all costs paid up to the arrival of the cargo at the importer’s premises, so the exporter pays the air billing, and the airline pays the taxes in Brazil once the goods arrive at customs. 

When opting for the DDP INCOTERM, a simplified modality of taxes payment will be applied, then the NCM (Mercosur Common Nomenclature) will not be considered, but the value of transport will be considered, with the insurance payment added to the value of the goods, which can significantly increase the cost of the product for the Brazilian importer. 

 

So, be careful with the INCOTERM choice. Surely no importer would like to have problems with their cargo due to negotiations that did not respect the international terms. 

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