Incoterms and Customs: Understanding Import & Export Responsibilities

When crossing a border, it is not just about moving goods from point A to point B. Importers, exporters, transporters, and logistics providers need to know all the parties responsible for every part of the shipment. This is where Incoterms come into play.

But what do Incoterms tell? Who is responsible for customs duties? Who will arrange for customs clearance?

Knowing the answers to these questions will help businesses avoid unplanned expenses, troubles with documentation, and losses during intra trade. Incoterms® rules produced by the International Chamber of Commerce (ICC) enable parties to define their responsibilities and costs in an internationally recognized way. The currently valid version, Incoterms® 2020 comprises 11 Incoterms.

In this article, we will explain the way Incoterms work and influence customs obligations.

What Are Incoterms and Why Do They Matter in Customs?

Definition and Purpose of Incoterms

Incoterms have become essential in the logistics industry. These terms are basic regulations that define the procedures for making a sales agreement and cover such aspects as who is responsible for the delivery, costs and risk transfer.

For instance, sales agreements that refer to DDP mean that the seller has a lot of duties to fulfill because at DDP the latter has to arrange import clearance and deal with all the taxes and costs involved. This means that it is necessary to know Incoterms for both organizations in order to arrange a shipment successfully.

How Incoterms Affect Import and Export Transactions

The terms of sale can have an effect on the flow of delivery of goods from the point of dispatch by the seller to the destination. Responsibilities may include, depending on the chosen Incoterm:

• Arranging transportation
• Handling export clearance
• Preparing shipping documents
• Paying freight
• Arranging for insurance according to the applicable Incoterm
• Managing import clearance
• Paying duties and taxes
• Accepting risks during different transportation stages

Responsibilities will depend on the chosen Incoterm and the named place or point for the delivery of goods.

Incoterms vs. Customs Responsibilities: What's the Difference?

One of the common misunderstandings regarding the Incoterms is that they eliminate the need to conform to every law related to customs. This is incorrect.

The Incoterms define the obligations of the buyer and seller in the trades. However, the customs agencies still need to follow local laws in both of the countries.

For instance, even though an Incoterm states which party is responsible for customs clearance, a number of parties still may need to comply with laws to complete customs clearance.

That is why it is unacceptable to think of the Incoterms as replacing the need to comply with law.

Understanding the Main Incoterms Used in Global Trade

EXW, FCA, and FOB: Who Handles Export Responsibilities?

Under the term EXW (Ex Works), the seller provides the goods and leaves all the transport and clearance duties of the goods up to the buyer. The ICC explains that the seller is not obligated to arrange for any export clearance of the goods.

FCA (Free Carrier) is frequently used when the delivery of goods to a carrier or a person is conceivable. FCA is useful in cases of shipment of goods in containers.

FOB (Free on Board) works for shipments over the sea or inland waterways, while the transaction is regarded as complete only when the goods are aboard the vessel.

Terminology used here shows that it is vital to know the seller and buyer obligations before shipment.

CIF, CFR, and CIP: Transport, Insurance, and Cost Responsibilities

CIF, CFR, and CIP imply situations in which the seller pays some transport costs, but risk transfer may occur earlier or later in time than the expenses incurred in connection with the transportation.

This difference is very significant.

For instance, in the case of CIP, the seller concludes an agreement for transportation until the designated destination of goods; however, risk transfer happens when the merchandise is delivered to the carrier. Therefore, companies should not consider the payment for transportation as an automatic sign that the payer is liable for all risks during the trip.

DAP, DPU, and DDP: Who Manages Import Clearance and Duties?

Under the D terms, the seller has an increased amount of delivery responsibility.

Under the DAP (Delivered at Place) rule, the seller delivers the product to the mentioned destination ready for unloading, but clearing customs is the buyer's business.

Under the DPU (Delivered at Place Unloaded) rule, the seller is obliged to unload the product at the place of delivery.

The DDP (Delivered Duty Paid) rule places the maximum responsibility on the seller as it is the seller who carries out all the customs procedures and covers the duties and taxes as well.

Choosing the Right Incoterm for Your Shipment

Not one single Incoterm is applicable for all transactions. Businesses must keep in mind the following principles when selecting an Incoterm:

• Mode of transport
• Destination of the goods
• Who is allowed to clear the goods through customs
• Who has experience with the local customs
• Arrangements for transport
• Insurance coverage
• Cost of freight
• Customs duties and taxes
• Point of transfer of risk

It is specifically mentioned in the agreement the name of the selected Incoterm.

For the official explanations of the rules, businesses can refer to the International Chamber of Commerce's Incoterms® rules resources.

How Incoterms Allocate Customs Responsibilities

Export Customs Clearance and Documentation

Different Incoterms have different implications for whether or not the seller is responsible for export clearance.

For instance, ICC states that in case of FOB, the seller handles export clearance where relevant, while the buyer is responsible for import clearance.

Therefore, the seller must provide the necessary documentation and information required for the export process, while the buyer must take care of the import regulations in the destination country.

Import Customs Clearance and Duties

Import customs clearance is another area where Incoterms may create a significant difference in practice.

Under certain terms, such as DAP, the buyer usually acts as the one in charge of import customs clearance and the import duties and taxes. In the case of DDP, the seller performs those tasks.

Before making an agreement regarding an Incoterm, it is a good idea to check:

What is the level of knowledge related to customs regulations in the destination country?

If a seller accepts DDP without knowledge of customs rules in the destination country, it may result in practical problems.

Transportation, Insurance, and Delivery Costs

Incoterms are also used to clarify the sharing of all transportation costs.

Based on the selected Incoterms, one party may make the following arrangements and payments:

• Domestic transportation
• Export processing
• Main carriage
• Insurance
• Transport to the destination
• Discharge
• Import clearance
• Customs duties and taxes

At the same time, companies must differentiate between the cost responsibility and the risk of loss. The seller may incur expenses for delivery to the destination while the buyer has already assumed the risk of loss.

Risk Transfer vs. Responsibility for Customs Compliance

It is an essential point to note.

Risk transfer specifies the point of risk from the seller to the buyer as per the defined Incoterms.

Customs compliance is not the same.

Businesses can be responsible for customs clearance without being exposed to the risk of any part of the shipment. In the DAP terms, for example, the seller is responsible for all the risks related to the delivery, while the buyer will take care of customs clearance. Recognizing this distinction can help avoid misunderstandings of a costly nature.

Incoterms and Customs Documentation

Commercial Invoices and Required Trade Information

Accurate shipment details are the basis of measurement and clearance of imports and exports by customs authorities. Documentation may include the following depending on the transaction:

• Commercial invoice
• Packing list
• Transport documents
• Import/export permits
• Certificates of origin
• Customs declarations
• Product classification information
• Other regulatory paperwork

The commercial invoice is especially significant as the information therein can ensure proper customs valuations among other requirements for declarations.

Also, it is necessary for the chosen Incoterm to be referred to in the documents in question along with the name of the place if necessary.

HS Codes, Customs Valuation, and Country of Origin

Incoterms are not relevant in determining the HS code or automatically calculating the customs value for imported items. Those are separate customs considerations. Parties still need to properly classify products, determine their value, and provide country-of-origin information as needed. For companies that deal with a large number of shipments, obtaining this information from invoices and other trade documents can be time consuming.

This is where automation can help. Solutions such as Droblet's ENS platform can support teams working with trade documentation and customs data as part of a broader digital customs workflow.

EORI Numbers and Other Customs Identification Requirements

Entities that partake in international trading activities could, at certain instances, require customs identification as well as registration information; this, of course, depends on the customs regulations of the participating jurisdictions.

The European Union has established the EORI requirements which apply within the EU frame. It should be noted that Incoterms do not relieve traders from the legal requirements.

Companies must check the requirements applicable within the jurisdiction with the authorities responsible for the customs.

Avoiding Documentation Errors and Delays

In case the information in the commercial agreement contradicts the shipping information and the data supplied to customs, it may lead to delays.

Some of such issues are:

• Wrong incoterm
• Absence of destination
• Wrong product description
• Inconsistent invoice values
• Incorrect HS classification
• Absence of customs information
• Partial set of supporting documents

The more manual data needs processing the more opportunities for human mistakes. By streamlining the process and implementing automation teams will be able to detect any lack of data even before the documents are filed to customs.

Common Incoterms and Customs Mistakes to Avoid

Assuming the Seller Always Handles Customs

The term Incoterm does not entail that every custom procedure will be managed by the seller. Several Incoterms define import clearance as the obligation of the buyer. For instance, DAP states that the buyer is in charge of import clearance and DDP imposes the responsibility of customs issues on the seller.

It is important to verify rather than make assumptions on rules.

Confusing Cost Responsibility with Risk Transfer

Another typical mistake is to regard the person who pays the transport fees as the one responsible for the shipment until it reaches the destination. This is a wrongly held belief.

Certain Incoterms make the distinction between cost liability and the time of risk transfer.

This information makes it possible to negotiate contracts better.

How Businesses Can Simplify Incoterms and Customs Compliance

Define Responsibilities Clearly with Trading Partners

Prior to a shipment being scheduled, both parties need to verify the following:

• What Incoterm is applicable?
• What is the agreed upon point of delivery?
• Who is in charge of the transport?
• Who is responsible for export clearance?
• Who is responsible for import clearance?
• Who is responsible for the payment of the duties and taxes?
• When does the risk shift?
• What documents have to be provided by the parties involved in the shipment?

The abovementioned questions can clarify the responsibilities involved in the process.

Standardize Customs Data and Documentation

If you have to deal with many shipments, a standardized process for trade documents definitely can save your time.

Instead of checking all documents individually, the team will implement consistent operations related to document processing, including:

• Document collection
• Data extraction
• Verification
• Classification verification
• Preparing of customs declarations
• Dealing with exceptions

Use Technology to Reduce Manual Customs Work

Contemporary customs technology facilitates teams to get rid of tedious manual procedures.

AI-based tools allow pulling out specifics from bills and trade papers, approving information, detecting missing data, and aiding customs declarations.

For companies coping with ENS and ICS2 needs, Droblet provides customs professionals with the possibility of placing documents and customs processes into a single system.

Improve Visibility Across Import and Export Processes

Technology shows most efficiency when it enables teams to see what is going on during shipment life. In contrast to spreading information through emails, spreadsheets, papers, and different platforms, companies can operate more organized way.

That enables finding missing information before it becomes customs-related problem and allows getting more control over processing a lot of shipments.

How Incoterms Impact Importers, Exporters, and Customs Brokers

What Importers Need to Check Before Shipment

Before entering into a sales contract, it is crucial for importers to comprehend their responsibilities as sellers. Primarily, the following areas must be addressed:

Import clearance procedures, taxes and duties, licenses, customs documents, transport arrangements, delivery address, applicable customs registrations, and product classification needs.

If you are responsible for import clearance, you need to ensure that your team or your freight forwarder is fully prepared prior to product arrival.

What Exporters Need to Prepare Before Dispatch

Exporters must understand their role as sellers in accordance with the terms of the Incoterm chosen. This may mean export clearance, transport organization, documents, packaging, and overall obligations that must be fulfilled.

It is also crucial to submit proper documentation in advance, as it will enable the buyer or freight forwarder to carry out customs procedures in the destination country effectively.

How Customs Brokers Can Manage Responsibilities More Efficiently

Customs brokers frequently occupy a position linking the commercial, logistics, and customs procedures. They may have to rely on the data received from exporters, importers, carriers, and freight forwarders.

A standardized digital workflow can assist brokers in structuring the incoming documentation, acquiring essential information, and determining the missing data for customs processes.

In teams dealing with significant numbers of shipments, shortening repetitive and manual activities leaves time for exception management and sophisticated compliance work.

Conclusion

Incoterms represent a lot more than just three-letter shipping words. They create a unified basis for understanding the roles of buyers, sellers, prices, deliveries, and risk transfer in world trade. However, picking the right Incoterm is only one stage of effective customs operation.

Apart from it, companies need to collect the necessary papers, possess pertinent customs data, know how to classify items accurately, be properly registered, and work through the processes of minimizing the risks of import and export.

As the number of shipments increases, relying only on manual documents could make the work of customs teams even harder. Digital technologies allow customs personnel to organize data, avoid copy-pasting, and build more regular processing.

Frequently Asked Questions

Does the Incoterm determine who pays customs duties?

It depends on the Incoterm. Under DDP, the seller generally pays import duties and taxes, while under DAP, the buyer handles them.

Which Incoterms require the buyer to handle import clearance?

Under terms such as DAP, the buyer is generally responsible for import customs clearance and related duties and taxes.

Does DDP mean the seller handles import customs?

Yes. DDP places import clearance, duties, and taxes with the seller, subject to the destination country's customs laws.

Can Incoterms affect customs valuation?

They can affect how certain transportation and related costs are allocated, but customs valuation is determined according to the applicable customs regulations.

How should businesses choose an Incoterm?

Consider the transport mode, destination, customs responsibilities, costs, duties, insurance, and the point where risk transfers between buyer and seller.