The use of incoterms in an international sales transaction is not imperative, but it facilitates and determines very well the role of each of the parties in it.
Incoterms are the terms in which an international trade operation is carried out. They represent a series of rules in relation to the obligations, costs and risks assumed by the seller and the buyer. The use of incoterms in an international sales transaction is not imperative, but it facilitates and determines very well the role of each of the parties in it.
Security in the logistics chain, the preference to hire the main transport and reduce risks, assume costs or even the level of trust between importer and exporter will be some of the factors that determine the choice of a specific Incoterm.
According to data from Data Comex of Spanish exports from 2010 to 2019, at least 40% of the incoterms are misused. In this article we will talk about some of the most used incoterms and about their correct uses:
Ex Works (EXW)
Also called “in the factory”. It is the most favorable incoterm for the seller and one of the most used. In this case, the exporter's responsibility ends just before the merchandise is loaded, and the seller's factory is not necessarily the designated place of delivery. The use of this incoterm is recommended for small exporters or those who does not have sufficient experience in international trade, and it is even recommended for national trade. In this way, we are faced with the minimum obligation of the exporter and with a broader control of the logistics chain by the importer, being advantageous for him as well.
In an EXW operation, the costs and obligations of the exporter are reduced to packaging, verification and quality control, but without loading the merchandise. That is why EXW is overused in operations that should be carried out under another incoterm and we find frequent situations such as:
- Under EXW conditions, the exporter is not responsible for loading the merchandise: something common is that the seller ends up loading the merchandise on the truck, even though the latter has no obligation to do so. Since the responsibility lies with the client, it is he who must load and, in case of breakage or damage during the loading process, the exporter does not assume this responsibility.
- In addition, under EXW conditions, the export clearance is done by the importer: the document issued by customs, the SAD (Single Administrative Document), can be kept by the client, without transferring it to the seller, which could incur tax problems by not being able to present the document to an inspection.
Use of Free Carrier (FCA)
To avoid errors such as the two previously explained, it is recommended to use another incoterm such as the FCA, which we will explain below. As a positive point, more and more exporters are encouraged to operate under other conditions, exporting more actively and assuming more responsibilities, such as delivering to a place closer to the port of departure.
Free Carrier (FCA): also called “free carrier”. It is a versatile incoterm whose use is becoming more and more widespread among exporters. Mainly, the only big difference with the EXW incoterm is that under FCA conditions the seller must carry out the export clearance. However, Free Carrier is practically equal in terms of documentary obligations to Ex Works, but taking fewer risks. These are some of its advantages:
- Since the seller carries out the export clearance, he will have documentary evidence that the merchandise has been sold for export, in this case, an export SAD. In short, it serves as proof of tax exemption and, in case of not having it (as could happen with EXW), it could lead to misunderstandings with Tax Authoritities.
- A lot of flexibility for the seller, being able to designate the delivery at any point in the country of origin of the merchandise. In the event that the exporter has his own transport, this is especially interesting.
- In the case of a seller who has just started working with a new client and there is no trust, documentary credit is usually the most reliable form of payment, since it is a guarantee of receipt for the exporter. In an FCA operation, however, we must take into account the following: the buyer is the one who contracts the transport and in turn the carrier has the legal obligation to provide the B/L to the buyer, not to the seller. Even though there may be good will on the part of the buyer to provide us with said document required by the bank as a condition for receipt, he has no obligation to do so. On the other hand, it is more interesting as a receipt guarantee for the exporter to accept a sale in FCA terms if the bank requires a document such as the FIATA FCR (Forwarder’s Certificate of Receipt).
When to use Free On Board (FOB)
Free On Board (FOB): Also known as “free on board”. It is one of the most used incoterms in maritime transport, since it allows the exporter greater control of the supply chain process, being unfavorable for those exporters with little experience. From this Incoterm we highlight the following:
- The cost of transportation and import procedures will be assumed by the buyer while the export procedures will be assumed by the seller.
- In the case of blank sailing, if the operation is carried out under FOB conditions, the incoterm will be the seller who will take care of possible occupancies and delays. In this case it is advisable to use an FCA Container Terminal (designating the place of delivery specifically)
There are general recommendations and details to take into account when using incoterms, such as:
- The incoterm must always be accompanied by a surname and this is the port of delivery. The exact specification of the destination is vital. Example: FOB Algeciras.
- It is recommended that the latest version of Incoterms be included in the purchase-sale document. Example: Incoterms 2020.
- The Incoterm must be expressed throughout the whole client-supplier communication/negotitation: on the B/L, on the invoice, on the packing list, etc.
