International Commercial Contracts – Incoterms

This guide explains the basics principles of International Commercial Terms (Incoterms), and how traders can use them in buyer or seller contracts to make clear who is responsible for the goods at each point of the transport process. The guide also explains the benefits of using Incoterms and what each Incoterm means for the buyer and seller, as well as offering sources of further help and advice for traders.

A new set of Incoterms, known as Incoterms 2010, will come into force on 1 January 2011. See the page in this guide on Incoterms 2010.

What are Incoterms?

International Commerce Terms (Incoterms) are an internationally recognised standard trade terms that set out buyer and seller responsibilities. Incoterms are maintained and developed by the International Chambers of Commerce (ICC).

Each Incoterm establishes who is responsible for costs and risks such as transport costs, insurance, duties payable and customs clearance. Incoterms are accepted by governments, legal authorities and businesses worldwide for the interpretation of most commonly used terms in international trade. This reduces or removes uncertainties and often costly misunderstandings arising from different interpretation of such terms in different countries. Incoterms apply to both domestic and international sale contracts. See the level in this guide on Incoterms and contracts.

Before you use Incoterms, consider the country of the buyer. Some countries stipulate that set Incoterms are used, while others set chosen Incoterms as standard practice. Transport may also affect your choice as some Incoterms can only be used for transport by sea and inland waterways.

A new set of Incoterms, known as Incoterms 2010, will come into force on 1 January 2011. See the page in this guide on Incoterms 2010.

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Incoterms and contracts

This page explains how to use the right version of Incoterms and how to incorporate them into your trade contracts.

The International Chamber of Commerce (ICC) originally published the very first set of Incoterms in 1936. Since that first publication, they have been updated in 1953, 1967, 1980, 1990 and most recently in 2000. Incoterms 2010 will come into force on in force 1 January 2011. See the page in this guide on Incoterms 2010.

Because Incoterms are standard definitions, they are used in contracts to reduce confusion and avoid traders having difficulty understanding the import requirements and shipping practice used in other countries.

Using the correct Incoterms clarifies the contracts you have with your suppliers or customers. ‘Incoterms’ is a protected ICC trade mark and only the original texts of Incoterms are to be considered as authoritative for incorporation into contracts. You should use the current version, Incoterms 2000 (ICC Publication No. 560), and note this in the contract. These terms should also be used on any paperwork linked to the contract, such as invoices or statements. Failing to state that you are using Incoterms 2000 could result in a dispute. You can download a summary of each Incoterm from the ICC website (PDF, 139K) – Opens in a new window.

Most contracts from 1 January 2000 will refer to Incoterms 2000, unless the seller and the buyer agree to use an earlier version. Contracts dated before 1 January 2000 are still binding under Incoterms 1990 (ICC Publication No. 460). From 1 January 2011, the ICC recommends Incoterms 2010 are used. See the page in this guide on Incoterms 2010.

Incoterms 2000 has been endorsed by the United Nations Commission on International Trade Law (UNCITRAL) and is now available in 31 languages. You can find further information about the full Incoterms text on the ICC website – Opens in a new window.

The sales contract between the buyer and seller should also state which country’s legal system will be used in case of a dispute. If both parties’ countries are signed up to the UN Convention, this will provide the legal framework for settling the dispute. Incoterms will provide the legal backbone to settling the dispute.

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Incoterms and VAT

This page gives a summary of when traders may have to pay import and export VAT and how they can incorporate it into contracts as an addition.

VAT is not covered as part of the ‘costs’ under any Incoterm, but it is payable on many international trade transactions. Summaries of when you have to pay import VAT and export VAT are given below. If you wish to agree that the buyer or seller is responsible for paying VAT, it should be written as an addition into the sales contract as it will not be covered by the Incoterm.

Import VAT

Generally, you must pay VAT on imported goods at the same rate that the goods attract if they were supplied in the UK. The procedure for making payment depends mostly on whether the country from which you are importing goods is inside or outside the European Union (EU). You can reclaim VAT from goods imported from within the EU when you declare them on your VAT return.

Find out more about import VAT in our guide on excise and VAT in international trade.

Export VAT

When you export goods outside the EU you can usually zero-rate the goods for VAT. To qualify, the goods must leave the EU within a set time limit and you must keep records of the sale and transport of the goods. Separate rules apply to goods that are moved through EU countries to other EU countries. Goods exported to a customer outside the EU can also be zero-rated for VAT even if they initially travel through other EU countries.

Find out more about import VAT on our page VAT on goods from European Union (EU) countries in our guide on imports and purchases from abroad: paying and reclaiming VAT.

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Incoterms 2010

Launched by the International Chamber of Commerce (ICC) as the first revision to the system in a decade, Incoterms 2010 will come into force on 1 January 2011.

Incoterms continue to enable traders to make clear who is responsible for the goods at each point of the transport process in buyer or seller contracts.

The new Incoterms will reflect traders’ increased obligations to cargo security rules, new means of container transport, and take updates to the United States’ Uniform Commercial Code into account.

Incoterms 2010 also contain extra guidance for traders, including help with choosing electronic procedures, ways to deal with the new laws on security clearances for shipments and updated methods of dealing with insurance, as well as increased usability for domestic moving of goods.

The new Incoterms will operate as follows from 1 January 2011:

Any mode of transport:

• CIP – Carriage and Insurance Paid
• CPT – Carriage Paid To
• DAP – Delivered At Place
• DAT – Delivered At Terminal
• DDP – Delivered Duty Paid
• EXW – Ex Works
• FCA – Free Carrier

Sea and inland waterway transport (only):

• CFR – Cost and Freight
• CIF – Cost, Insurance and Freight
• FAS – Free Alongside Ship
• FOB – Free On Board.

Order Incoterms 2010 on the ICC website – Opens in a new window.

The ICC Incoterms 2010 product code is 715, with an ISBN9789284200801.

Read about Incoterms 2010 on the ICC website – Opens in a new window.

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