The export or import of goods requires determining not only the price, but also responsibility for transportation, customs clearance, insurance and any damage to the cargo. An imprecise agreement may result in one of the parties bearing costs that were not included in its calculation.

Incoterms are rules developed by the International Chamber of Commerce defining the allocation of responsibilities, costs and risks between the seller and the buyer. Currently, the Incoterms 2020 version is used primarily, comprising 11 rules intended for different types of transport.

The most important information from the article

• The rule should be stated together with the exact place or port and the version, e.g. “DAP Warsaw, ul. Przemysłowa 10, Incoterms® 2020”.
• The rules regulate costs, transport, customs clearance and the point at which risk passes, but they do not determine the transfer of ownership or the payment deadline.
• DDP imposes on the seller the obligation to organize the delivery and import clearance.
• FOB and CIF may only be used for sea and inland waterway transport.
• The parties’ arrangements do not replace the customs and tax regulations of the importing country.

What are Incoterms and what matters do they actually regulate?

These are standardized rules used in contracts for the sale of goods. They make it possible to determine where the seller’s responsibility ends and the buyer’s responsibility begins.

A person entering “what are Incoterms” into a search engine should primarily know that these rules concern the delivery of goods and not the entire content of a commercial contract. They do not specify the price, currency, method of payment, point at which ownership is transferred, or consequences of failure to perform the contract. These elements must be regulated separately.

Put simply, Incoterms answer the questions: who organizes the transport, who bears its cost, who carries out customs clearance and at what point the risk of loss or damage to the cargo passes. According to the International Chamber of Commerce, there are 11 three-letter rules reflecting B2B trading practices.

The term “Incoterms in Polish” can be understood as international rules for interpreting trade terms, but in documents their official English abbreviations should be retained.

How are Incoterms rules divided and for which types of transport can they be used?

Seven rules can be used regardless of the means of transport. The remaining four are intended exclusively for sea and inland waterway transport.

Incoterms rules for any mode of transport are EXW, FCA, CPT, CIP, DAP, DPU and DDP, while FAS, FOB, CFR and CIF apply to water transport. This is particularly important for container shipments. If a container is handed over to the carrier at a terminal before being loaded onto a vessel, FCA instead of FOB or CIP instead of CIF will often be more appropriate.

Incoterms delivery terms do not create a simple scale in which each subsequent rule automatically increases the seller’s responsibility. For example, under CPT, the seller pays for transport to the named place, but the risk passes to the buyer as soon as the goods are handed over to the first carrier. Therefore, the cost of transport and the risk do not always pass at the same point.

Incoterms rules – how should the selected rule be correctly entered into the contract?

The three-letter abbreviation alone is insufficient. The exact delivery point and the version of the set of rules must be specified.

Incoterms rules are best applied according to the following format: selected rule, precise place or port, Incoterms 2020. A correct entry may read: “FCA seller’s warehouse, ul. Logistyczna 8, Poznań, Incoterms® 2020” or “CIF Port of Hamburg, Incoterms 2020”.

Specifying only the city may lead to a dispute over the costs of transport between the terminal, warehouse and the recipient’s registered office. At a large port, it is worth specifying the exact terminal, while for road delivery – the full address and, if necessary, the unloading point. The parties may also use an older version of the rules, but they must clearly indicate its year.

What does DDP mean and what does the delivery look like step by step?

DDP, meaning Delivered Duty Paid, is a rule under which the seller organizes and pays for transportation to the agreed place, carries out export and import clearance, and also covers customs duties and other charges related to the import. DDP delivery terms provide that the risk passes to the buyer only when the goods are placed at the buyer’s disposal on the arriving means of transport, ready for unloading.

DDP transport may take place using any means of transport, including in a multimodal arrangement. The buyer is essentially responsible only for taking delivery and unloading the goods, while before concluding the contract the seller should check whether it can legally carry out the import clearance and settle taxes in the country of destination.

DDP terms – who bears the costs and risks under the DDP rule?

The seller is responsible for almost the entire logistics process. The buyer should primarily take delivery of the goods and ensure that unloading is possible.

DDP terms place on the seller the costs of packaging, loading, transportation, export clearance, transit, import clearance, customs duties and other charges related to the import. The seller is not, however, required to take out insurance for the buyer. Since the seller bears the risk until the destination, transport insurance may serve to protect its own interest.

DDP delivery terms do not automatically mean that the seller bears the cost of removing the goods from the truck at the recipient’s warehouse. If the delivery involves a heavy machine requiring a crane, it must be separately specified who provides the equipment, personnel and unloading. Otherwise, the buyer may receive the goods in accordance with the rule but may not have the ability to safely remove them from the vehicle.

DDP – who pays VAT and who can deduct it?

In the case of DDP, import VAT, customs duties and other charges related to customs clearance are covered by the seller. However, the seller must check whether the regulations of the country of destination allow it to act as the importer and whether it will need local VAT registration, an EORI number or a tax representative.

The relationship between Incoterms DDP and VAT also depends on who is listed as the importer in the customs declaration, because that entity may have the right to deduct the tax. If the importer is the foreign seller, the Polish buyer will not automatically deduct VAT based solely on the invoice bearing the DDP designation.

How do DDP, CIF and FOB differ?

The differences concern the organization of transport, import clearance and the point at which risk passes. It is particularly important that CIF and FOB refer exclusively to water transport.

CIF delivery terms require the seller to pay the cost of the goods, freight to the named port of destination and insurance with minimum coverage. However, the risk passes to the buyer once the goods have been placed on the vessel at the port of shipment, and not only after the vessel arrives at the destination port.

FOB delivery terms mean that the seller carries out export clearance and places the goods on the vessel designated by the buyer. From that moment, the costs of the main transport and the risk are borne by the buyer.

When can choosing DDP turn out to be a costly mistake?

The rule is convenient for the buyer, but it requires the seller to be familiar with the law of the country of destination. A calculation error may consume the entire margin.

Problems most often arise when the seller does not check the customs duty rate, import restrictions, tax registration requirements or the amount of customs agency fees. For example, a product sold for EUR 20,000 may be subject to customs duty, import VAT, port fees and inspection costs. If the DDP price was calculated solely on the basis of freight, all additional charges will remain with the supplier.

Incoterms DDP should only be chosen after confirming that the seller can legally act as the importer and properly settle local taxes. It is also necessary to determine the customs duty rate, the origin of the goods, required permits, the method of recovering VAT and the remuneration of the customs representative.

How should the rule be selected for a specific transaction?

First, the actual course of the delivery should be determined. Only afterwards can a rule corresponding to the agreed allocation of responsibilities be selected.

Good delivery terms should take into account the means of transport, the experience of the parties, the ability to carry out customs clearance, control over the carrier and the scope of insurance coverage. The seller should not accept DDP simply because the customer expects a “door-to-door” price. If the seller cannot act as the importer, DAP may be safer. If the buyer wants to control the transport itself from the terminal of departure, FCA may be more appropriate.

Before signing the contract, it is worth comparing the freight forwarder’s offer with the customs tariff, taxes and handling costs in the recipient’s country. Next, the full rule should be entered into the contract, purchase order, commercial invoice and instructions for the carrier. Consistency of the documents reduces the risk of cargo delays and disputes over additional charges.

Frequently asked questions about Incoterms rules

Are Incoterms mandatory?

No. The parties use them voluntarily by incorporating a specific rule into the sales contract.

Does DDP include unloading at the buyer’s premises?

As a general rule, the seller delivers the goods ready for unloading, but the risk associated with the unloading itself is borne by the buyer. The cost may be included in the transport contract, so it should be clarified in the contract.

Under CIF, does the risk pass at the destination port?

No. The risk passes to the buyer once the goods have been placed on the vessel at the port of shipment, even though the seller pays the freight and insurance to the port of destination.

Does a trade rule determine who owns the goods?

No. The point at which ownership is transferred follows from the contract and the applicable law, and not from the delivery rule used.

Is it sufficient to enter “DDP” on the invoice?

No. The exact delivery place and the version of the rules should be provided, e.g. “DDP buyer’s warehouse, Warsaw, Incoterms 2020”.