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Presented by: Morgan, Lewis & Bockius LLP Margaret M. Gatti, Louis K. Rothberg Timothy M. Rolland
www.morganlewis.com
Outline of Presentation
I. II. III. IV. V. Introduction to INCOTERMS Definitions INCOTERMS Functions Explanation & Implications of INCOTERMS Tips for Using INCOTERMS
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Devised and maintained by ICC More than 120 member countries Updated as required by commerce trends
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Introduction to Incoterms
Current Applicability of Incoterms Widely accepted / used worldwide U.S.: Automatically apply (default) in international trade transactions unless:
Alternative sales terms selected, or State law selected, or FMS (Delivery Trade Codes / DTC)
U.S.: can be applied to domestic sales on elective basis (recommended that companies master and use one set of terms for all sales)
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Key Definitions
Pre-carriage: Inland transportation on sellers side from shipment origin point to port of departure Main-carriage: Transportation from the seller's side to the buyer's side On-carriage: Transportation from the arrival point on the buyer's side to any other place (such as to the buyer's premises).
Key Definitions
Omni-modal: Those terms that can be used for all transport modes.
Marine-restricted: Those terms that can be used only for vessel shipments. Shipment contract: A UCC-based sales contract holding the seller responsible for the condition of the goods until they are handed over / delivered to a carrier. (Legal delivery physical delivery)
Key Definitions
Destination contract: A UCC-based sales contract holding the seller responsible for the condition of the goods until they arrive at an agreed place. (Legal delivery = physical delivery) Establishes when a sale becomes an account receivable. The Securities and Exchange Commission (SEC) has established revenue recognition guidelines for publicly traded companies. The SEC guidelines are based on the concept of shipment and destination contracts.
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Revenue recognition:
Key Definitions
Minimum cover: Cargo insurance that covers only minimum perils (i.e. total loss, general average). Minimum cover is often called "free of particular average (FPA) in the US, and Institute of London Underwriters "Institute Cargo Clause C" internationally. All risk: Cargo insurance coverage that is adequate for most shipments when written on a warehouse-to-warehouse basis and enhanced with "war" and "strike and civil commotion" coverage. Additional cargo insurance coverage for war-related perils.
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War Risk:
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INCOTERMS Functions
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Incoterms Functions
1. Delegate shipping responsibilities and shipping costs between sellers & buyers
a. Export Packaging
Safe carriage for transport mode Excludes: Labeling / Marking and SWPM
b. Export Clearance
Obtain export license Apply Destination Control Statement Complete Electronic Export Information (EEI) Record in AES
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International transportation
From sellers country To buyers country
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Import licenses, when applicable Customs import formalities Possible payment of:
Import duties Import taxes, such as VAT Other fees / charges
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Export price amount and Incoterm choice Buyer infers buyers costs
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Explanation of INCOTERMS
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Explanation of INCOTERMS
ExW
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Explanation of INCOTERMS
Transport Mode Limitations Marine Restricted All Modes Individual INCOTERMS MUST Be used with Named Point
Sellers Side vs Buyers Side
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Explanation of INCOTERMS
Marine Restricted FAS named shipment port FOB named shipment port CFR named destination port CIF named destination port
Omni-modal EXW Sellers premises FCA named place / Seller CPT named destination / Buyer CIP named destination / Buyer DAT named place / Buyer DAP named place / Buyer DDP named place / Buyer
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Explanation of INCOTERMS
Incoterms are grouped into four categories which reflect the breakdown of costs / responsibilities between Seller & Buyer: Group E: Group F: Group C: Group D:
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Departure Terms Main Carriage Unpaid Terms Main Carriage Paid Terms Arrival Terms
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Incoterms Explanation
EXW Available at sellers premises Rule for Any Mode(s) of Transport
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Seller No No No No No No
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Seller No
No
Buyer Yes
No
7. Insurance
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Incoterms Explanation
FCA FAS FOB
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MAIN CARRIAGE UNPAID Free Carrier, Named Place Free Alongside Ship, Named Shipment Port Free on Board Named Shipment Port
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Seller
Yes Yes Yes No No
Buyer
No No No Yes Yes
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Seller No No No No No No
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Seller No
No
Buyer Yes
No
7. Insurance
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Incoterms Explanation
MAIN CARRIAGE PAID CFR CIF CPT CIP Cost and freight destination port CFR + Insurance Carriage paid destination CPT + Insurance
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Seller No
CIF CIP
Buyer Yes
CFR CPT
7. Insurance
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Incoterms Explanation
ARRIVAL TERMS
Delivered at terminal, named terminal or port Delivered at place, named place Delivered duty paid, named place
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Buyer No No No No No Yes
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Seller DDP
No
Buyer Yes
No
7. Insurance
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INCOTERMS 2010
Seller / Exporter Tasks EXW FAS / FOB / FCA
Export Packaging Export Packaging Pre-Carriage Export Packaging Pre-Carriage Main Carriage (Insurance = I)
Costs in Pricing
$ $$
$$$
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INCOTERMS 2010
Seller / Exporter Tasks
Export Packaging Pre-Carriage Main Carriage On Carriage Export Packaging Pre-Carriage Main Carriage On Carriage Foreign Import Duties (but NOT VAT / GST)
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Costs in Pricing
DAT / DAP
$$$$
DDP
$$$$$
INCOTERMS 2010
All INCOTERMS require named place the more specific, the better
ExW and F terms, place is on sellers side of pond C terms and D terms, place is on buyers side of pond
Only one INCOTERM makes export clearance a buyers responsibility (all others assign task to seller)
ExW
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INCOTERMS 2010
Only one INCOTERM makes import clearance a sellers responsibility (all others assign task to buyer)
DDP
Routed Transactions
Buyers control shipment & freight ExW All F Terms
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Incoterms Tips
Tip #1
Understand Incoterm of choice and make sure you use properly
Stick with official meaning to the greatest extent possible Employ additional provisions sparingly
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Incoterms Tips
Tip #2
Use individual Incoterms with named point as required
Sellers side vs. Buyers side
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Incoterms Tips
Tip #3
Observe transport mode limitations
Marine restricted All modes
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Omni-Modal
EXW sellers premises FCA named place / seller CPT named destination place CIP named destination place DAT named place / buyer DAP named place / buyer DDP named place / buyer
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Incoterms Tips
Tip #4
For shipments subject to USML export license requirements and for HAZMAT shipments, use either Main Carriage Paid terms (CFR, CIF, CPT or CIP) or Arrival Terms (DAT, DAP, DDP)
Stay away from routed transactions Refrain from use of EXW, FAS, FOB, FCA
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Incoterms Tips
Tip #5
Be very careful in using DDP Incoterm
Recognize differing opinions on HTS codes and applicable duties If use, make sure to exclude VAT
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Incoterms Tips
Tip #6
Dont forget about insurance
Not just a concern for CIF and CIP Coordinate insurance with payment method and risk of loss
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Incoterms Tips
Tip #7
Shipment terms allow for earlier revenue recognition than delivery terms Based on recognition of revenue occurring with delivery and risk of loss transfer Shipment terms: Departure, Main Carriage Unpaid & Main Carriage Paid Terms Delivery terms: Arrival Terms
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Louis K. Rothberg
Washington, DC tel. 202.739.5281
Timothy M. Rolland
Washington, DC tel. 202.739.5829
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