The international trade environment has become extremely volatile in the last years. Tariff increases and trade wars continue to capture the headlines across the globe, adding another layer of complexity to the already extensive trade and customs regulations.
Luckily, there is also good news for international traders: on 1 January 2020, the latest edition of the Incoterms (called Incoterms® 2020) entered into force. Incoterms are internationally accepted standards defined by the International Chamber of Commerce (ICC) that identify the responsibilities of sellers and buyers for the delivery of goods in international trade. These terms also determine how the costs and risks are being divided between the trade partners. The new set of Incoterms is easier to use than its predecessors, provides more clarity on traders’ responsibilities and reflects current commercial practices.
The key changes included in Incoterms® 2020 are as follows:
- DAT (Delivery at Terminal) is renamed to DPU (Delivery at Place Unloaded) to emphasize that the place of destination could be any place that is contractually agreed upon;
- CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid to) now require a different level of insurance;
- FCA (Free Carrier) allows the parties to agree that the buyer instructs the carrier to issue to the seller a transport document stating that the goods have been loaded (a Bill of Lading with an on-board notation);
- Incoterms® 2020 (FCA and D-category) allow the buyer or seller to arrange the transport by their own means, whereas the previous versions assumed that goods were transported from the seller to the buyer by a third party;
- Incoterms® 2020 rules have much more extensive explanatory notes and provide a clear allocation of costs and security requirements.
Incoterms have an impact on both customs and indirect tax treatment of international transactions although both legislations do not make specific references to them. It often happens that trade partners focus on the commercial aspects of the Incoterms and are not aware of possible customs and VAT implications. Let’s take a look at the following simple example that illustrates the importance of Incoterms in the area of VAT and customs.
A Dutch customer sells goods to a US client under the Ex Works Incoterm. This means that the customer is responsible for the transport and exporting the goods out of the European Union. However, the EU customs legislation prescribes that an exporter should be established in the EU. To avoid such problems with fulfilling customs formalities, the explanatory notes to the Incoterms® 2020 state that FCA is more appropriate then Ex Works if the buyer intends to export the goods.
Following the introduction of the Incoterms® 2020, international traders should review how Incoterms are applied in their supply chains and the impact of Incoterms on the export and import procedures.