In this article
Talk to our experts- Incoterms
- Incoterms are a set of 11 trade rules issued by the International Chamber of Commerce (ICC) that define the responsibilities of sellers and buyers in contracts for the sale of goods. Each three-letter rule, such as EXW, FOB or DDP, sets out who arranges and pays for carriage, insurance and customs clearance, and when risk passes to the buyer.
Also called: Incoterms rules
How it works
The ICC describes the Incoterms® rules as eleven three-letter trade terms reflecting business-to-business practice, used in trade contracts since 1936 and updated in 2020. The US International Trade Administration (ITA) explains what each rule settles:
- Who provides the goods and commercial invoice, and who pays the price
- Who obtains export and import licenses and carries out customs formalities, and who bears that cost
- Who must contract for carriage and provide cargo insurance, if anyone
- Where delivery takes place, and when the risk of loss or damage passes from seller to buyer
Incoterms are generally written into the contract of sale. The ICC recommends Incoterms 2020, and the ITA says the parties need to clearly specify the version they use. This page is a summary, not legal advice.
The 11 rules
Seven rules work for any mode of transport:
- EXW Ex Works (named place of delivery)
- FCA Free Carrier (named place of delivery)
- CPT Carriage Paid To (named place of destination)
- CIP Carriage and Insurance Paid To (named place of destination)
- DAP Delivered at Place (named place of destination)
- DPU Delivered at Place Unloaded (named place of destination)
- DDP Delivered Duty Paid (named place of destination)
Four are for sea and inland waterway transport:
- FAS Free Alongside Ship (named port of loading)
- FOB Free on Board (named port of loading)
- CFR Cost and Freight (named port of destination)
- CIF Cost Insurance and Freight (named port of destination)
Under DAP the seller does not unload the goods; under DPU it does. For insurance, CIF keeps Institute Cargo Clauses (C) as the default level of cover, while CIP now requires the higher Institute Cargo Clauses (A) or similar.
What Incoterms don't cover
Per the ITA, Incoterms do not:
- Address all the conditions of a sale
- Identify the goods or list the contract price
- Set the method or timing of payment
- Say when title, or ownership, passes from seller to buyer
- Specify which documents the seller provides for customs clearance in the buyer's country
- Address liability for nonconforming goods, delayed delivery or dispute resolution
Example
A US manufacturer sells 40 cases at $50 each to a distributor abroad, so the goods total 40 x $50 = $2,000. Freight to the distributor's warehouse is $300, and import duties and taxes are estimated at $150.
- DAP, distributor's warehouse. The seller must arrange and pay for carriage to the agreed destination, so the price covers $2,000 + $300 = $2,300. The distributor handles and pays for import clearance, including the $150.
- DDP, distributor's warehouse. The seller also carries out and pays for import clearance, so the price covers $2,000 + $300 + $150 = $2,450.
Either way, net 30 payment terms are agreed separately: Incoterms don't set payment.
On Shopify
In Shopify, incoterms determine how your customer is charged for duties and import taxes, and how your carrier collects them. Under DDP, the seller assumes responsibility for import costs and can collect them at checkout, giving customers a total price. Under DAP, the customer pays import costs to the carrier on delivery, and some carriers charge extra for collecting them. For each country or region you choose DDP or DAP, not both.
If a customer pays duties at checkout, ship with a DDP label, and mark the commercial invoice's terms of delivery as DDP, or as DAP when duties weren't paid. Duties are calculated from each product's Harmonized System (HS) code and country of origin. When Shopify collects duties at checkout, customer tax exemptions, including company-level B2B ones, aren't applied to them.
How Uncap helps
Uncap's guide to the anatomy of a private order portal says that for manufacturers operating across multiple countries or legal entities, the portal architecture needs to account for regional differences in pricing, catalogs, compliance and currency. Its recommended approach for most international B2B operations is Shopify Markets.
Sources
Frequently asked questions
What is DAP vs FOB?
DAP (Delivered at Place) works for any mode of transport and names a place of destination. FOB (Free on Board) is a sea and inland waterway rule that names a port of loading.
What is FOB, CIF, and DDP?
FOB (Free on Board) and CIF (Cost Insurance and Freight) are sea and inland waterway rules. DDP is Delivered Duty Paid, an any-mode rule under which the seller takes on import costs such as duties and import taxes.
What does the CPT Incoterm mean?
CPT means Carriage Paid To, followed by a named place of destination. It is one of the seven Incoterms 2020 rules for any mode of transport.
Which is better, DDP or CIF?
It depends on the shipment. CIF is a sea and inland waterway rule with Institute Cargo Clauses (C) as its default insurance cover. DDP works for any mode and has the seller take on import costs, which Shopify notes gives customers a total price.
