Incoterms 2020 and the Changes It Has Brought

Common rules were needed to eliminate the uncertainties and disagreements caused by the laws of different countries, especially in the last half-century, where international trade was intense. The efforts to have common legal rules regarding the sale of foreign trade goods brought many international agreements.

The rules on foreign trade had been generally shaped by commercial usages and customs until leaflets were published by the International Chamber of Commerce (ICC). Due to the fact that the aforementioned usages and customs could not be applied in the same way anywhere in the world, the need to establish common rules emerged over time and in this context, the International Chamber of Commerce (ICC) was established in Paris in 1919. Today, ICC is an organization in which thousands of companies operating in the trade, manufacturing and service sectors are members in 139 countries; it serves the purpose of developing and conducting trade on a global scale and publishes the rules applicable in foreign trade in small leaflets called “brochures”. Although ICC member countries do not necessarily have to use these brochures, they become binding if the parties include them in their sales contracts.

ICC introduced some rules in international trade relations in order to eliminate disagreements, conflicts and legal disputes and to prevent buyers and sellers from wasting money and time, and these regulations came into force for the first time in 1936 under the name of Incoterms®. Incoterms® is a short version of the name International Commercial Terms and they are the rules that determine the details of where and how the products will be delivered between the buyer and the seller and whose details are specified by the ICC. Incoterms® is also a trademark of the International Chamber of Commerce. After 1936, it has undergone eight revisions in 1953, 1967, 1976, 1980, 1990, 2000,2010 and most recently in 2020 in line with the feedbacks and suggestions of the members.

In international trade, some difficulties about which country rules will be valid in the contract between the buyer and the seller and about the changes in the trade terms according to the countries can be reduced by using Incoterms®.
Incoterms® does not make sense when written alone, but it makes sense when information is about the place of delivery added. Today, delivery methods and Incoterms® concepts are used in the same sense. These rules regulate costs and responsibilities in international trade between the importer and the exporter. Within the scope of Incoterms®;

• Delivery place and time of the goods,
• Who is responsible for the damage and how,
• Sharing of transportation, insurance and customs expenses,
• Conditions in which insurance is mandatory and
• Documents are included in this.

The parties to the delivery method are the seller and the buyer, who are also the parties to the sales contract in which they are located. Other parties, such as customs officials, banks and carriers, who have various roles upon the orders of the seller and/or the buyer, are not included in the delivery method.

Major Changes Made in Incoterms® 2020

Incoterms® 2020 rules have brought many changes that can be considered more economical and practical, and delivery methods have been arranged in a more clear and simple way. A brief summary of the changes brought by Incoterms® 2020 rules is as follows:

Assessment of EXW (Ex Works-Delivery at Place) and DDP (Delivered Duty Paid):

EXW delivery method is the oldest delivery method used in international trade, and the buyer has no responsibility other than to pack and keep the goods ready at his workplace. Approximately 32 percent of our country’s export declarations are realized through EXW delivery method. The opposite version of EXW delivery method is DDP delivery method, which gives the buyer the least responsibility.

However, according to the customs legislation of our country, it is not possible for the company, which is located abroad, to carry out customs procedures. This situation is also contrary to the renewed European Union Customs Code (Customs Code of the European Union). Companies that prefer EXW and DDP rules face difficulties in carrying out customs procedures such as:

The buyer is responsible for both import and export procedures in accordance with EXW rules. However, the buyer may experience difficulties in export processes, especially if it is not a company located in the exporting country. Therefore, it is emphasized in the “Explanatory Notes” section of Incoterms® 2020 for EXW that FCA (Free Carrier) is more appropriate if the buyer wishes to perform the export.

In accordance with DDP rules, the seller is obliged to perform both export and import transactions. It may face various difficulties, especially if the seller is not a company located in the importing country. It is stated with Incoterms® 2020 rules that it will be in the benefit of the contracting parties to choose DAP (Delivered at Place) delivery method to prevent the seller from carrying out the import procedures and ensure that the place of delivery is the same place of destination.

Assessment of the Bill of Lading as FCA Delivery Method:

In the method of delivery with FCA rule, through which approximately 40 percent of international commercial transactions take place, the seller transfers the goods to the supervision of the first carrier at the designated date and place as soon as he completes the customs procedures, and all costs and risks related to the goods pass to the buyer. The responsibility of the seller ends before the goods are loaded, especially in the transports made by sea in FCA delivery, which can be used in all transport modes. However, especially in payment with the letter of credit, banks demand a bill of lading containing the loading notification from the seller, and since the seller’s delivery liability ends before the goods are loaded into the ship, this causes a problem.

Incoterms® 2020 offers an additional option with the new arrangement. If the parties agree, the seller has the right to request a bill of lading with a transport document stating that the goods have been loaded by the buyer. When such a request is made, the seller may receive a bill of lading with an onboard notation. In this case, the seller is responsible for sending this bill of lading to the buyer via banks.

Insurance coverage at different levels in CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid to) delivery methods:

According to Incoterms® 2010 rules, CIF and CIP delivery rules had a standard minimum guarantee and referred to a narrow scope of transport insurance. With the revisions made in Incoterms® 2020, the insurance coverage limit provided by CIP delivery method has been increased as “all risks” and different minimum insurance guarantees have become applicable for CIF and CIP delivery methods unless otherwise agreed by the parties. Whereas limited comprehensive insurance is sufficient in CIF delivery method [for example, ICC C Clause], it is compulsory to make insurance that covers all the risks of the seller in CIP delivery method [for example, ICC A Clause]. In addition, according to Incoterms® 2020 rules, the parties can set a higher or lower collateral limit for both delivery methods by making a special arrangement in sales contracts.

Changing the abbreviation DAT (Delivered At Terminal) to DPU:

While DAT delivery method means “Delivered at Terminal”, this abbreviation has been changed by Incoterms® 2020 as DPU “Delivered at Place Unloaded”. In Incoterms® 2010 rules, the term was modified in Incoterms® 2020 and the term “terminal” was removed from the abbreviation to emphasize that delivery can be made anywhere as the abbreviation DAT means delivery can only be made at the terminal. The most important feature of this delivery method is that it requires the unloading of the goods. According to Incoterms® 2020, if the place of delivery of the goods is not a terminal, the seller must make ensure that the place he intends to deliver the goods is suitable for unloading the goods.

Safety requirements

Safety requirements are discussed in more detail in Incoterms® 2020 and in accordance with each clause, provisions regulating the customs procedures required for transportation and export/import are included within the provisions for the sharing of these obligations between the parties. Besides, “Explanatory Notes for Users”, which was designed as easier for users, was added instead of “Guidance Notes” in Incoterms 2010. Another innovation of Incoterms® 2020 is that all costs related to delivery methods are included in a single cost list as “Allocation of Costs”.

As a result, we see that important revisions have been made for the solution of the problems we encountered in Incoterms® 2010 rules regarding the place of delivery and risk transitions. In addition, explanatory notes for users and explanations on the application of EXW and DDP delivery methods, for example, are guiding for exporters and importers. However, according to Incoterms® 2020, as in Incoterms® 2010, the parties still do not have any insurance obligation in terms of “D” delivery. In DAP, DPU and DDP delivery methods, where there is no insurance obligation, the seller is responsible for all costs including customs clearance up to the delivery location and must meet these costs. However, according to the laws of our country, export goods are taxed on FOB value and import goods are taxed on CIF value. So, along with the costs of insurance and delivery to the entry port in Turkey or delivery to the designated place or the costs of loading and handling related to the delivery of the goods to the entry port or delivery to the designated place are included in the tax base. However, since the issue of insurance is left to the parties in delivery methods with “D”, the issue of insurance should be clarified between the parties if these delivery methods are selected. The correct indication of the delivery methods to be used in trading contracts and which Incoterms® brochure is based on will prevent any subsequent disputes.

However, another issue to be considered by the parties is that the delivery methods and payment methods should be compatible. For example, if the parties choose FCA delivery method and “Cash against Goods” payment method, this poses a risk to the exporter. Namely; In the “Cash against Goods” payment method, the buyer pays the price of the goods to the seller at the predetermined term after receiving the goods. On the other hand, the responsibility of the seller in FCA delivery method is to deliver the goods to the transport vehicle at the designated place without loading it. In this case, the risk and responsibility of the goods in question pass to the buyer. In case of the fact that goods are damaged, stolen, etc. on the road, the buyer might not make the payment since he will not receive the goods. In today’s world, where international trade is in a trend of speed and growth, it is important for the parties to evaluate such risks.