What are Incoterm and what is their importance for a Business?
29

Oct 2021

One of the oldest and most profitable businesses in the world is trading. This business activity has been performed since ancient days and is a vital activity for the business. In the present day, the activity of trading has become very vital for many countries and the trading businesses established in the various countries have a huge effect on the economies of the country.

As this activity is performed all over the world, there are various terms or phrases which are used by all businesses and countries to maintain a sense of uniformity and so that every person in every part of the world can understand what is being said. These terms assist the Accounting firm in various business-related operations such as Accounting and Auditing processes. These terms associated with international trade and are used by people all over the world are known as incoterms.

Let us know more about incoterms and how these terms can be important for your business in the UAE.

Meaning of Incoterms and how they affect your Business

Incoterms can be defined as terms that have been developed by the International Chamber of Commerce (ICC) in the year 1936 for the purpose of uniformity in the trading industry. These terms are used all over the world and the International Chamber of Commerce (ICC) updates these incoterms on a periodical basis. As these terms are used on an international basis, these terms are similar the world over.

These incoterms act as guidelines that are important in the trading sector as the duties charged on the various goods or resources are based upon these terms. The incoterms are also required to calculate the taxes which have been remitted for the company. Most of all the responsibility for making the payments depend on how the incoterms have been specified in the contract made. Thus we can see that these incoterms act as a guideline for trading businesses all over the world.

Different Types of Incoterms

There are a number of incoterms which are used all over the world. These incoterms are mentioned below:

  • Cost and Freight (CFR)

CFR means that the seller has to pay the costs and freight of the goods but all the risk of damage to the goods and any additional cost during the events of the transportation of the goods have to be borne by the buyer.

  • Cost, insurance and Freight (CIF)

When the seller packages the goods suitably and clears them for export and then securely puts them on the transport vehicle, only then will be the goods regarded as delivered. The seller is obliged to procure a minimum level of coverage.

  • Carriage paid to (CPT)

The seller is responsible for the payment of the charges for the transport of goods to the pre-decided location. The moment the goods are delivered the responsibility for the goods is of the buyer.

  • Carriage and insurance paid to (CIP)

The seller has to pay for the transportation and also the insurance of the goods. The seller should obtain insurance on goods at a minimum cover charge.

  • Delivered at Place (DAP)

In DAP, the responsibility of providing the goods at a pre-determined location will fall on the seller. The risk associated with the supply also falls on the seller. 

  • Delivered at Terminal (DAT)

The seller has to deliver all the goods to the buyer but has no obligation to unload the goods himself. This obligation is of the buyer and he also needs to fulfil all the customs formalities.

  • Delivery Duty Paid (DDP)

When the goods are placed at the disposal of the buyer, the seller bears all the costs and all the risks involved in bringing the goods to the destination. He also has an obligation to pay any export or import duties.

  • Ex Works (EXW)

The goods are considered as delivered when the goods are placed at a pre-decided spot. If the goods are not cleared for export then in such case the seller has minimum responsibility for the goods

  • Free Carrier (FCA)

In this situation, the seller has fulfilled the obligation to deliver the good and are cleared for export. The responsibility of the goods passes from the seller to the buyer at a location of the choice of the buyer.

  • Free Alongside Ship (FAS)

Here the goods are considered delivered when the goods are placed beside the vessel or at the named ports of shipment. The buyer has to bear all the costs and the risks of the loss of the goods.

  • Free on Board (FOB)

This means that the obligations of the seller are considered fulfilled when the goods are all placed at the port of departure. The buyer needs to bear all the risk as well as the cost of damage to the goods.

The above incoterms are generally used for international trading businesses. If a business is looking forward to conducting a trading business then it must make itself familiar with all the incoterms. Each of the business activities needs to be identified and the relevant incoterm must be used accordingly

After the incorporation of a business, every business needs certain services which will assist the business in its future growth. These services include Accounting Services, Auditing Services, VAT and Tax related services.

If you are looking for such services for your business in the United Arab Emirates, then you can have a look at the services provided by JAXA Chartered Accountants. For more details on the services provided, feel free to Contact Us. We will be happy to help.