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Customs and Incoterms – A Simple Guide

Customs and Incoterms – A Simple Guide

1. What Exactly are Incoterms?

Incoterms, simply meaning International Commercial Terms, is a phrase first coined by the International Chamber of Commerce in 1936. A growing increase in the number of shippers (people who want goods moved) and carriers (people who move goods) globally, each using their own shipping phrases, had resulted in a great deal of confusion in the shipping process. Both shippers and carriers were unsure of their responsibilities and risks at the different steps of the process. An international standardisation was required, and Incoterms were born.

In general, incoterms are just the umbrella term used to refer to the standardised set of phrases used by shippers and carriers. By using incoterms in shipping activities, all stakeholders have transparency on exactly when the goods change hands or ownership (i.e., when does the risk pass to you) and who is responsible for insuring the goods at each stage.

2. EXW, FOB, CIF, DDP… : Which Incoterm is for You?

listImageThe simplest way to identify which incoterm is for you is to understand the differences between each one and decide on how much of the shipping risk you want to bear yourself. Remember, if you are a buyer of goods, the less risk you decide to take on means that you take procession of the goods closer to its destination at the loss of some negotiating power, and if you are a seller the opposite will be true.

When it comes to the incoterms themselves, they can be divided into 4 broad categories, each currently containing between 1 and 4 incoterms, that will broadly specify at which point in the process the goods change hands. In order of increasing cost (and reducing risk) to the buyer, the four groups are:

  • Group E – Departure
  • Group F – Main Carriage Unpaid or Pre-Carriage
  • Group C – Main Carriage Paid
  • Group D – Delivery

When using an incoterm, the safest way to ensure that all parties are aware of this is to follow the guidelines set by the incoterms rulebook, using the words “(chosen incoterm) (named port, place or point) Incoterms 2020”. Example, FOB Port of Singapore Incoterms 2020 or CIP Memphis International Airport Incoterms 2020.

a. Group E – Departure

In this Group the seller places almost all obligations on the buyer. The Group only has a single incoterm: EXW, meaning Ex-Works.

EXW: Ex-Works

EXW or Ex Works means that the seller hands over the goods to the buyer at the seller’s premises or another named place agreed to between both parties. The organisation of the full transportation including the cost is borne by the buyer, as are all the risks of the full transportation and the responsibility for loading the goods, purchasing insurance and clearing the goods for export where applicable.

b. Group F - Main Carriage Unpaid or Pre-Carriage

EXW or Ex Works means that the seller hands over the goods to the buyer at the seller’s premises or another named place agreed to between both parties. The organisation of the full transportation including the cost is borne by the buyer, as are all the risks of the full transportation and the responsibility for loading the goods, purchasing insurance and clearing the goods for export where applicable.

FCA: Free Carrier

FCA or Free Carrier is where the seller arranges to deliver the goods to a place nominated by the buyer and hands over the goods to the first carrier (arranged by the buyer). The parties should also specify exactly where the goods should be delivered to within the named place, as this is the point where the buyer takes over the risk from the seller. The buyer is responsible for arranging the main carriage, any subsequent carriage and insurance, while all export formalities will be the responsibility of the seller.

FAS: Free Alongside Ship

FAS or Free Alongside Ship is used when the seller takes the responsibility, as the name suggests, to deliver the goods all the way to the dock and close enough to be reached by the crane of the ship it will be transported in. At this point the risk passes from the seller to the buyer. The buyer is responsible for arranging and paying for the main carriage, any subsequent carriage and insurance, while the seller would be responsible for clearing the goods for export, and additionally paying for all port fees.

FAS does not apply to goods in shipping containers but is instead usually used for goods sold in bulk, such as grain and petroleum.

FOB: Free On Board

FOB or Free On Board is where the seller arranges to have the goods loaded on to the ship arranged by the buyer. The risk is passed to the buyer once the goods have cleared the railing of the ship and are on board. All costs related to the main carriage, any subsequent carriage and the insurance of the goods are the buyer’s, while the seller would bear all costs related to clearing the goods for export and having them loaded onto the ship nominated by the buyer.

c. Group C - Main Carriage Paid

The C Group of incoterms is identified by the seller bearing the cost of the main carriage, but passing on the risk to the buyer at the point of handing over the goods to the carrier. The parties can additionally agree upon which party bears the cost of the insurance. Export formalities would be the responsibility of the seller.

CFR: Cost and Freight

CFR or Cost and Freight means just that. The seller is responsible for bearing all the costs associated with delivering the goods to the buyer’s named port. The Seller bears the cost of the main carriage, but does not cover the cost of insurance. The full risk passes to the buyer at the point the seller has handed over the goods to the main carrier, and the buyer is also fully responsible for completing and bearing all costs associated with import and delivery to the final destination. A further point to note is that this incoterm can only apply when the main carriage is via ocean or inland waterway transportation.

CIF: Cost, Insurance and Freight

CIF or Cost, Insurance and Freight places most of the costs associated with the delivery of the goods with the seller. The seller is responsible for all costs, including insurance, till the goods have reached the buyers named port. The buyer however assumes the risk once the goods have been loaded on to the main carrier. The buyer would need to clear the goods for import and bear any costs associated with delivery to the final destination. This incoterm can only apply when the main carriage is via ocean or inland waterway transportation.

CPT: Carriage Paid To

CPT or Carriage Paid To is used when the seller arranges and bears all the costs of transportation to a named place of the buyer’s choosing. This may or may not include transportation by ocean freight and additional transportation once the goods have reached the country specified by the seller. While the seller pays for the transportation costs, export formalities and all port related fees, the responsibility of clearing the goods for import still remain with the buyer. The buyer takes over the risk from the seller at the point the seller hands over the goods to the first carrier, and is additionally responsible for bearing the cost of insuring the goods during transit. The final leg of transportation, to the buyer’s premises, remain the responsibility of the buyer.

CIP: Carriage and Insurance Paid To

CIP or Carriage and Insurance Paid To passes most of the costs and responsibilities of delivering the goods to a named place of the buyer’s choosing over to the seller. Under this incoterm the seller would be responsible for arranging and bearing all transportation costs, export formalities, port fees associated with the delivery, including the cost of insurance. Important to note however, is that the buyer assumes the risk once the seller has handed over the goods to the first carrier, and is responsible for clearing the goods for import. The buyer is also responsible for arranging the final leg of transportation to their premises.

The D Group of Incoterms places the most amount of risk and cost with the seller. The distinctive aspect of this group is that the seller bears the risk of the goods till handover to the buyer at the buyer’s premises.

d. Group D - Delivery

DAP: Delivered at Place

DAP or Delivered at Place is used where the seller is given most of the responsibilities, and bears most of the costs associated with delivering the goods to the seller. Under DAP the risk only passes to the buyer when the goods are handed over to him at the place of delivery. The buyer is however still responsible for unloading the goods, bearing any cost associated with unloading, and clearing the goods for import.

DPU: Delivered at Place Unloaded

DPU or Delivered at Place Unloaded is the term used when the seller is given the responsibility to deliver the goods to the buyer’s chosen location and bear all costs associated with the transportation. This term also includes the responsibility of unloading the goods at the buyer’s premises with the seller. The Buyer only assumes the risk at the point the goods are unloaded at his chosen destination, but must however clear the goods for import.

DDP: Delivered Duty Paid

DDP or Delivered Duty Paid is the incoterm that places the maximum amount of responsibility and cost with the seller. The seller is responsible for any and all costs, including any costs associated with import, in delivering the goods to the buyer’s chosen location. Unloading the goods at the buyer’s premises can be negotiated or would be the responsibility of the buyer, at which point the buyer assumes the risk of the goods.

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3. Export & Import Shipping Documents You Need to Know

Now that you have familiarized yourself with the different kinds of incoterms out there, it is important that you also understand what are the common shipping documents being involved when you export and import goods.

Air Waybill

An Air Waybill (AWB) is a document issued by air carriers for goods transported by air. The consignor (the shipper) uses the AWB as a form of receipt, while the carrier issues it to acknowledge the possession of the shipment. Moreover, the document contains detailed information about the transported goods, such as the details of the supplier and recipient, terms and conditions, and other information.

There are several functions of the Air Waybill:

  • Proof of receipt
  • Contact information among all parties involved
  • Contact information among all parties involved
  • Contains the freight bill
  • Customs declaration
  • Description and guideline
  • Certificate of insurance
  • Tracking of shipment

Bank Draft

A bank draft is a note issued by the drawer bank that guarantees the payment of the good. The drawer bank is required to pay according to the actual settlement amount to the payee or bearer of the note.

Several advantages of bank drafts include:

  • Guarantee of funds to the payee: A bank draft is guaranteed by the bank, which means that the payee or bearer of the note would have access to the funds upon settlement date.
  • Convenience: Users are not subjected to any amount limit on the bank drafts, unlike e-transfer, and they do not have to make large payments to third parties using one’s account.
  • Suitable for cross border transactions: Bank drafts can be used in multiple currencies

However, there are also several disadvantages:

  • Non-cancellability: Cannot be cancelled once issued and received by the payee.
  • Risk of fraud: Funds can be cashed by other people if the bank draft is lost, stolen or altered. In this case, the bank will not replace the lost fund, and the buyer will bear the loss.

Bill of Lading

An accompaniment legal document issued by a carrier (someone providing shipping/freight services) to a shipper. This document typically contains shipping information such as details of goods shipped, quantity, destination of shipment, and more.

In general, it serves 3 functions:

  • Document of title
  • Receipt for the shipped goods
  • Representation of T&Cs for the shipment of the goods

Certificate of Origin

The Certificate of Origin (CO) is a document used to attest that a product or goods can be deemed to be originating from a particular country. This document becomes important as it determines whether certain goods or products are import-eligible or whether they are subjected to certain duties and/or taxes.

Dangerous Goods Form

The Dangerous Goods Form is an essential part of complying with the IATA Dangerous Goods Regulation when shipping dangerous goods. Consignors are required to prepare a form to declare that the goods are labelled, packed, and comply with the necessary regulations.

Things that have to be declared:

  • Shipper
  • Air Waybill Number
  • Shipper’s Reference Number
  • Name & Address of the consignees
  • Transport Details
  • Airport of departure & destination
  • Shipment type

Commercial Invoice

Commercial invoice is a more complete form of the proforma invoice. It needs to be prepared by the seller as soon as the buyer has accepted the proforma invoice and made an order. This document acts as a confirmation of sale.

A commercial invoice should typically contain more information than a proforma invoice since the terms and conditions of the transaction should be much clearer now. In addition to whatever has been included in the proforma invoice, this document may contain information such as PO number, payment information, country of manufacture, etc.

It has to be noted that a commercial invoice is usually used as the reference to calculate tariff and, incoterms and is widely used for customs purposes.

Insurance Certificate

An insurance certificate is one of the many documents required by exporters to obtain the shipping bill. The document indemnifies the exporters for liability and potential losses in the event of loss shipments. Furthermore, the authorities verify the shipment using the insurance certificate to check whether the selling price is inclusive of the insurance cost. Moreover, it helps the authorities to determine the correct import duty.

Ocean Bill of Lading

An ocean bill of lading is a legally binding contract between the shipper and the carrier. The document represents a receipt or invoice for the goods transported overseas. Moreover, it contains information about the parties involved in the entire shipping process and the routing details. Important details included in the ocean bill of lading includes:

Important details included in the ocean bill of lading includes:

  • Nature of the goods
  • Quantity of the goods
  • Condition of the goods
  • Shipping destination and location of the goods
  • Terms and conditions by the parties in the shipping process

Issuance of the ocean bill of lading occurs when the goods are fully loaded on the ship by the carrier, completed all customs procedures, and forwards the ‘Let Export order’ to the shipping line.

There are four types of ocean bill of lading, namely:

  • Straight
  • Shipper’s Order
  • Clean Bill of Lading
  • On Board

Packing List

The packing list is a highly useful shipping document that contains information about the contents of the exported goods. Although the packing list is not a mandatory document, the inclusion of the document is encouraged to make the import or export process more straightforward.

Important details to be included in the packing list include:

  • Details of the consignee and consignor
  • Invoice number
  • Purchase order number
  • Pre-carriage mode
  • Origin and destination address of cargo
  • Port of loading and discharge
  • Terms of delivery and terms of payment
  • Marking and Numbering of the goods
  • Total number of packages and a detailed description of each packages
  • Physical information of each packages, including the dimension, volume and weight
  • A declaration that all information provided are true and correct
  • Any other information as appropriate
  • Signature of the authorised representative

Proforma Invoice

A Proforma invoice is a preliminary bill similar to a Purchase Order that an exporter sends to an importer before the shipment of goods happens. While the level of details contained within a proforma invoice may vary, this is some information that you can typically find in a proforma invoice:

  • The parties being involved in the transaction
  • Description of the goods, including the HS (Harmonized System) Codes
  • Terms of payment, which usually include the agreed incoterm used
  • Important dates of delivery and payment

Purchase Order

A type of commercial document prepared by a buyer/importer to confirm and initiate an import transaction from an exporter. There is no fixed template for a PO, and the content may vary depending on the industries and parties involved. However, in general, a Purchase Order used in international trade will contain the following information:

  • Parties being involved
  • Price of goods
  • A detailed description of the goods
  • Quantity of goods
  • Terms and Conditions
  • Important dates such as delivery and payment dates
  • Modes of transport
  • Payment terms and method

While it may sound similar to a commercial invoice, the main difference between them is that a PO is prepared by the buyer/importer as a means to initiate a purchase, whereas a Commercial Invoice is prepared by the seller/exporter as a means to confirm sales.

Shipper’s Letter of Instruction (SLI)

Shipper’s Letter of Instruction (SLI) is a document issued by an exporter detailing instructions to the freight forwarder on how and where to handle the goods being transported. It is of the utmost importance to get this document right so as to avoid financial loss from misunderstandings between the shipper and the freight forwarder.

Some information that you can find on this document include:

  • Details of the shipper and consignee (receiver of the goods)
  • Origin and destination
  • Information on whether this container is marked as hazardous
  • Product descriptions, weight and measurements
  • Fees and charges, along with the parties being responsible for them.
  • Commercial value
  • Important dates

Verified Gross Mass (VGM) Declaration

An amendment of the SOLAS (Safety of Life at SEA) has resulted in changes in the loading requirement of the packed container. A packed container can only be loaded on board vessels after the provision of the Verified Gross Mass by the shipper to the shipboard personnel and/or to port authorities. The changes would take effect starting from 1st July 2016.

VGM calculates the overall weight of the container tare weight and weight of all cargo, including all packaging and dunnage. The shipper mentioned in the Bill of Lading will be responsible for providing the VGM.

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4. Export & Import Custom Procedures in Asia

Now that you have familiarized yourself with the different kinds of incoterms out there, it is important that you also understand what are the common shipping documents being involved when you export and import goods.

Singapore

Export Custom Procedures in Singapore

Import Custom Procedures in Singapore

Malaysia

Export Custom Procedures in Malaysia

Import Custom Procedures in Malaysia

Thailand

Export Custom Procedures in Malaysia

Import Custom Procedures in Malaysia

Vietnam

Export Custom Procedures in Malaysia

Import Custom Procedures in Malaysia

Indonesia

Export Custom Procedures in Malaysia

Import Custom Procedures in Malaysia

Philippines

Export Custom Procedures in Malaysia

Import Custom Procedures in Malaysia