INTERNATIONAL PAYMENT National Economics University INTERNATIONAL PAYMENT TOPIC Five common errors when using certain Incoterms GROUP 3 Nguyễn Quế Phương (Leader) – 11164177 Phan Hà Phương – 11164218[.]
National Economics University INTERNATIONAL PAYMENT GROUP ASSIGNMENT TOPIC : Five common errors when using certain Incoterms GROUP Nguyễn Quế Phương (Leader) – 11164177 Nguyễn Thị Nhung – 11163951 Vũ Thị Hà Phương – 11164249 Phan Hà Phương – 11164218 Lê Hà Phương - 11164130 Đào Thúy Quỳnh - 11164366 A ABSTRACT Although Incoterms are not mandatory, they can play an important role in international transactions Incoterms are a set of rules which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts They are published by the International Chamber of Commerce (ICC) and are widely used in commercial transactions When global companies enter into contracts to buy and sell goods they are free to negotiate specific terms The Incoterms (international commercial terms) determine who pays the cost of each transaction segment, who is responsible for the loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment To gain more clarity on the different types of Incoterms, our group prepared an easy-to-understand manual which provides a broad overview of the definitions and risks involved when using Incoterms Our findings show that there are common errors that people make when using certain incoterms as well as some our expectations from Incoterms 2020, in our opinion, would be the most appropriate for international business Keywords : Incoterms, errors, international business B INTRODUCTION Over the past several decades, Incoterms have created favorable conditions for conducting international trade transactions The starting point is a document issued by the International Chamber of Commerce, with members who are European countries Incoterms are now widely used all over the world, the role of Incoterms in international trade is expressed in many different aspects However, some of Incoterms rules can make people confused because of its complexity Through the discussion of all members in group 3, we find out five common mistakes that people make when using Incoterms, especially in FCA, DDP, FOB, CIF and to be expand, it is some expectations for Incoterms 2020 Moreover, we also add the real cases, real examples in each rule for the better understand of readers They are as follows : I common errors when using certain Incoterms The use of Incoterms for national sales contracts The incomplete use of the selected Incoterms DDP (Delivered Duty Paid) – Sellers lack knowledge about getting goods into the buyer’s country FOB (Free On Board) – Sellers doesn’t know where damage occurs, which puts buyers at risk CIF (Cost, Insurance and Freight) – Neither parties understand insurance II Expectations from Incoterms 2020 C LITERATURE REVIEW Incoterms 1.1 Definition The term INCOTERMS means International Commercial Terms for the use of buyers and sellers of goods It were established by the ICC (International Chamber of Commerce), after discussions with various interested parties When a contract is made between a buyer and seller or between an importer and exporter the terms of sale and purchase for delivery of goods must be clarified to avoid any dispute at a later stage The value of the Incoterms is universally recognised There are 13 terms in Incoterms 2000 and divided into groups: E, F, C, D Group E includes terms (EXW) Group F includes terms (FCA, FAS, FOB) Group C includes terms (CFR, CIF, CPT, CIP) Group D includes terms (DAF, DES, DEQ, DDU, DDP) Incoterms 2010 includes 11 terms and are divided into two groups; term groups are classified basing on kinds of transportation means : Group (Goods/products are delivered by many kinds of transportation means : EX, FCA, CPT, CIP, DAP, DAT and DDP) Group (Goods/products are delivered by sea) : FAS, FOB, CFR and CIF 1.2 Purpose The purpose is to provide a set of international rules for the interpretation of the most commonly used trade terms in local, national and international trade to: Avoid misunderstanding the meaning of certain terms, disputes and litigation To adapt the terms to the increasing use of electronic data interchange (EDI) Accommodate the changes in the use of technology and transportation systems - unitisation of cargo - use of containers - multimodal transport - roll on-roll off (ro-ro) traffic with road vehicles - railway wagons in “short-sea” marine transport Some terms of Incoterms that relevant to our research 2.1 FCA (Free Carrier): “Free Carrier” means that the seller fulfills his obligation – risks expenses – to deliver when he has handed over the goods, cleared for export, into the change of the carrier named by the buyer at the named place or point If no such precise point is indicated by the buyer, the seller may choose within the place or range stipulated where the carrier shall take the goods into his charge When according to commercial practice, the seller’s assistance is required in making the contract with the carrier (such as in rail or air transport) the seller may act at the buyer’s risk and expense This term may be used for any mode of transportation, including multimodal transport “Carrier” means any person who, in a contract of carriage undertakes to perform or to procure the performance of carriage by rail,road,sea,air,inland waterway or by a combination of such modes If the buyer instructs the seller to deliver the cargo to a person e.g freight forwarder who is not a “carrier”, the seller is deemed to have fulfilled his obligation to deliver the goods when they are in the custody of the person “Transport terminal” means the railway terminal, a freight station, a container terminal or yard, a multipurpose cargo terminal or any similar receiving point “Container” includes any equipment used to utilize cargo, e.g all types of containers and/or flats, whether ISO accepted or not, trailers, swap bodies, ro-ro equipment, igloos, and applies to all modes of transport 2.2 DDP (Delivered Duty Paid): “Delivered duty paid”means the seller fulfills his obligation to deliver when the goods have been made available at the named palace in the country of importation The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods thereto,cleared for importation Whilst the EXW term represents the minimum obligation for the seller, DDP represents the maximum obligation This term should not be used if the seller is unable directly or indirectly to obtain the import licence If the parties wish the buyer to clear the goods for importation and to pay the duty, the term DDU should be used If the parties wish to exclude from the seller’s obligation some of the costs payable upon importation of the goods (such as value added tax (VAT)),this should be made clear by adding words to this effect:“Delivered duty paid,VAT unpaid (… named place of destination)” This term may be used irrespective of the mode of transport 2.3 FOB (Free On Board): “Free on Board” means that the seller fulfills his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that point The FOB term requires the seller to clear the goods for export This term can only be used for sea or inland waterway transport When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, use of the FCA term is more appropriate 2.4 CIF (Cost, Insurance and Freight): “Cost, Insurance and Freight” means that the seller has the same obligation as under CFR but with the addition that he has to procure marine insurance against the buyer’s risk of loss of damage to the goods during the carriage The seller contracts for insurance and pays the insurance premium The buyer should note that under the CIF term the seller is only required to obtain insurance on minimum coverage The CIF term requires the seller to clear the goods for export This term can only be used for sea and inland waterway transport When the ship’s rail serves no practical purposes such as in the case of roll-on/ roll-off or container traffic, use of the CIP term is more appropriate D RESEARCH FINDINGS I common errors when using certain INCOTERMS The use of Incoterms for national sales contracts This is another common mistake Incoterms are designed for international sales contracts This has been defined as follows by the International Chamber of Commerce: Incoterms must be used in sales contracts in which the goods have their origin and destination in different countries So much so, that Incoterms are divided into four different groups, coinciding with the initial letters of each of them, E-F-C-D This classification corresponds to the country in which the goods are delivered, in other words, the point of origin or destination Thus, in the case of Incoterms that start with E and F, delivery of the goods takes place in the country of origin In other words, the seller will not assume any costs once the goods have exited the country of origin Furthermore, depending on the Incoterms selected corresponding to these two letters, the seller may even be exempt from paying certain costs before this exit takes place In the case of Incoterms® that start with the letters C and D, goods are delivered in the country of destination Another point that determines the use of Incoterms is who will be responsible for customs clearance in the case of exports and imports Obviously, if no borders are crossed, as is the case of the delivery of goods within the same country, it makes no sense to use Incoterms For example in Spain, the fact that there is sufficient legislation means that the use of Incoterms is not necessary, and they exceed requirements in national transactions For example, if goods are sold in Málaga to be delivered in León, it is sufficient to indicate in the sales contract who will pay the transport expenses In the event that the goods are lost or damaged, the Law Governing Overland Transport (L.O.T.T.) and its Implementing regulation (R.O.T.T.), clearly determine the rights and obligations of each party with regards to transport The code of commerce will the rest if necessary Incoterms are designed with a name and two surnames, just like many of us An Incoterm that is missing any of the three components will be devoid of content and could even lead to extremely unpleasant situations in the case of legal proceedings, as we will analyse below The incomplete use of the selected Incoterm The first three letters that make up an Incoterm must be followed by a delivery destination Often, only the first three letters are included, leaving the Incoterm devoid of meaning Now that it is clear that a place of delivery must be indicated, it is also worth mentioning how this place must be specified For example, If we have stipulated the Incoterm in a sale with the place of delivery being Granada, it would be common to find Granada within the terms and conditions Taking into account that over 130 towns across the world are called Granada, it is necessary to be more specific The country, at least, must be specified However, continuing with the example, Granada is also a province measuring over 12,700 square kilometres, so it is also necessary to specify the place of delivery within Granada The most correct manner of doing this would be to indicate the full delivery address after the three letters of the Incoterm, whether the kilometre point of a motorway, a street number, or a postcode in short, the most precise information possible In this manner, the place of delivery of the goods would be unequivocally determined For example in CFA of Incoterms, a place must be named If no place has been mentioned, and a dispute occurs, then the seller can choose the delivery point that best suits their purpose In real life, if an Incoterm was identified simply as FCA Houston: the city of Houston is a wide ranging area and the lack of a specific address doesn’t narrow down where delivery takes place Tip: In order to ensure there is no ambiguity, the proper way would be to use the complete specific address such as FCA Houston 501 Crawford Street risk FOB (Free On Board) – Sellers doesn’t know where damage occurs, which puts buyers at • Errors/misunderstandings when using FOB FOB requires the seller to hold the risk for the goods up until it’s loaded on the transportation vessel Using FOB for containerized freight doesn’t fit the modern supply chain operations Goods are often loaded into containers long before they are loaded onto the ship One issue with that is, once goods are in a container, the seller doesn’t know where damage occurs This might create a risk for the buyer, because as soon as the goods are loaded unto the ship and cleared by exports, the buyer bears all costs of damage - Where is the ship railing? - Under FOB terms, the seller fulfills the delivery obligation when the goods are transported through the railing at the designated loading port This means that the buyer bears all costs and risks of loss or damage to the goods from that time However, using the railing of a ship as a way of dividing responsibilities, costs and risks between parties is not always reasonable The story will be nothing to say if businesses are using FOB delivery method to export small shipments instead of in containers like today Mr Van Thanh Huy, General Director of Inexim Dak Lak, analyzed export enterprises could not "carry" the containers delivered to importers at the railing And no one can check the container right at the pier before passing it to the ship's railing, because just unloading a container to check it will block the jetty Therefore exporters must deliver to carriers at container yards (called CY- Container Yard) or retail delivery stations (called CFS-Container Fraight Station) on the shore Checking and tallying between both parties and customs clearance takes place at CY or CFS And this is the ship railing in the right sense of containerized goods It usually takes to days from the time of delivery to the carrier at CY until receiving the carrier's bill of lading The peak export season must wait over 10 days, sometimes longer This is the damage to the enterprise because the goods have been delivered to the importer but cannot yet get the money While many export businesses have to borrow from the bank when they sign the contract, the late payment day is subject to interest on that day CIF (Cost, Insurance and Freight) – Neither parties understand insurance • Errors/misunderstandings when using CIF CIF/CIP – the only two terms that indicate the goods must be insured – but it is common that neither party understands that insurance is taken out by the seller in the buyer’s name and that the insurance must be for a minimum of 110% of the shipment value This can lead to inadequate or no insurance *** Errors when using FOB & CIF in real life In early 2011, a trading company in Ho Chi Minh City sold a shipment of 60 tons of high quality agricultural products to Taiwanese traders under CIF Incoterms rules 2010, Taichung, Taiwan Goods are delivered in 20-foot containers and shipped by Taiwanese carrier Since selling goods according to CIF rules, the seller has bought insurance for all risks as the buyer recommends, the insurance company based on the purchase and sale contract has granted single insurance clearly stating " Tất các vùng đệm từ cổng vào cổng " Because it is shipped by container, after signing a contract with the shipping company, the seller takes the goods to a CFS yard in Ho Chi Minh City to ship the goods and then deliver it to the shipping agent On the same day, these containers were transported by CY agents to trucks at the wharf (container terminal) in Ho Chi Minh City, but the way CFS said is about a few dozen kilometers to put them on board to Taichung a few days later When the goods arrive at the destination port, the buyer makes customs clearance to receive the goods, the local customs office announced containers still with the same lead but the weight is quite short of compared with the delivery documents Immediately the goods inspection company is invited by the parties specified in the contract to inspect with the witness of the buyer representative, forwarding agent and customs officer The inspection record clearly states that the lead seal seals are still intact, except for the left door hinge of of the containers that are stuck, very difficult to open Then, when opening all containers, there were containers that were not full On that basis, the assessor said that it is likely that the goods will be short of weight because a significant amount may have been taken out of the container while waiting to be loaded on board This seems to coincide with news circulating in Ho Chi Minh City in this period that some hooked container drivers with bad elements on their way to transport goods from the yard to the wharf have cut off container hinges (but keep the lead pair) to steal goods inside, then cleverly refine the hinges and paint the same type On the basis of the above inspection report, buyers claim to claim compensation but are rejected because they believe that the lead pairs of the containers are still intact when the goods arrive at the port of destination, loss does not have to occur during the process Shipping from the port of loading to the port of discharge as specified in the insurance contract, moreover, according to the insurance certificate of the shipment, they only cover the risk from the port to the port, not from the yard close the goods Not demanding insurance, buyers turn to asking sellers to compensate because they argue that sellers deliver on CIF rules, not CIP, so they have to bear the risk of loss and damage until the goods are actually sold Arrange on the deck, not from the delivery agent at the yard This is a traditional customer, so the seller has no more options so he reluctantly considers and resolves buyers' complaints At the same time, the seller immediately reclaimed the carrier because the goods were stolen after being delivered to shipping agents at the loading yard However, according to the Vietnam Maritime Law and international practice, the fight to claim shipping companies in such cases is not easy, because they are always shielded by the regulation of the situation outside the container when intact pair of lead and regulations on limit of responsibility … *** Solution for FOB & CIF - The problem is that enterprises need to retire from FOB, CIF rules as well as FAS, CFR when selling or buying containers It must be remembered that when buying and selling FAS and FOB container shipments, it must be replaced with FCA, CFR rules replaced by CPT and CIF replaced by CIP as recommended by ICC - On the other hand, not only enterprises need to study to apply the appropriate international trade conditions when signing sales contracts with foreign partners that state agencies managing import and export in general also need to amend soon related legal documents to create favorable conditions for enterprises to integrate in accordance with international maritime trade practices and protect their legitimate rights and interests when signing contracts co-sale with foreign partners in accordance with common international law and practice DDP (Delivered Duty Paid) – Sellers lack knowledge about getting goods into the buyer’s country • Errors/misunderstandings when using DDP SELLER : - Delivers the goods – cleared for import to the Buyer at destination - Bears all costs and risks of moving the goods to destination, including the payment of customs duties and taxes BUYER : Risk transfers from seller to buyer when the goods are available for unloading This rule places the maximum responsibility on the seller It is the only rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty General guidance as a seller is to never contract under DDP If the seller is unable to directly or indirectly obtain import clearances DAP is recommended Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sales contract Some sellers quote DDP without the adequate knowledge to get goods, cleared through customs, to the buyer’s address Under DDP it is the seller’s responsibility to handle the customs clearance, pay the import duties and arrange local delivery at the named place Without the necessary skills or care, DDP can lead to extra costs, risks, delays due to customs hold-ups or problems with local transport companies Also, some buyers not confirm whether a seller is registered as an importer in the buyer’s country By default this can lead to the buyer being named on the import paperwork and receiving bills for taxes, when they have no control over the shipment There is a slim chance that sellers know all the import formalities in the buyer’s country Therefore, mistakes happen when they pick DDP Sometimes the system is too complicated for them to understand what they need to pay, or which documentation they need to have It is common practice that some people use DDP, when the seller is unable to meet the registration requirements of overseas customs authorities Example: A logging company in Ha Noi sold a shipment of 10 tons of plywood products to American traders under DDP Incoterms rules 2010 Before the delivery happens, this logging company assumes all of the responsibility They have to produce the product, make the contract, and acquire all the documents need for export That includes the packaging and export clearance as well Moreover, this logging company is the one who pays for import customs declarations as well His job further intensifies with transportation costs, which also include the final delivery in USA DDP leads to confusion the same way EXW does However, in this case, the seller is the one who is accountable for everything that involves the delivery Therefore, errors can happen, especially if he does not know how the import formalities work in the buyer’s country The logging company failed to clear the goods for customs on time because they don’t know how the import formalities work in the USA, so the shipment got to delayed Because of that, they would have to pay more and think of other shipment methods, which is not a position a supplier would like to be in Thus, it is better if the buyer arranges everything for import in Viet Nam Solution: If you are selling on DDP shipping terms, your obligation ends with the delivery of the goods at the named place, cleared But in some cases, you may need the assistance of the buyer in securing some documents required for the local customs clearance Remember though, you as the seller are still liable for all costs and risks till the agreed place of delivery If you are a seller trading under DDP Incoterms, you may need to take cognizance of CISG (Contracts for the International Sale of Goods) or other corresponding provisions in the relevant national Sale of Goods Acts These provisions may provide you with some relief from any unforeseen or reasonably unforeseen circumstances that may prevent you from delivering on DDP shipping terms II Expectation for Incoterms 2020 Since 1980, the Incoterms have been revised every 10 years by the International Chamber of Commerce (ICC) at its headquarters in Paris This organization is made up of companies and chambers of commerce in many countries engaged in international trade All chambers of commerce and companies that wish to participate in the deliberations of the ICC can so through local or national committees of the ICC Changes to FOB and CIF Free on Board and Cost Insurance and Freight have been used for a vast period of time now, and are globally understood well This being said, most of the amendments that were agreed upon in the earlier version of the Incoterm have not been adequately implemented – meaning there are still flaws in the tools Many stakeholders involved In international trade expect a particularly significant change in the FOB and CIF rule set for goods being transported by container Moreover, trading merchants have demonstrated a want for the International Chamber of Commerce to approach the drafting of 2020’s Incoterms in a more stringent manner due to the current inconsistencies within them Thus, the following changes are believed to take place for the FOB, CIP and CIF terms: The ownership of the liability of Insurance between the Buyer and the Seller Recommended penalties for the manipulation of the Supplier under CIF terms A critical investigation of hidden supplier profit The addition of Destination Handling Charges (DTHC) in the CIF shipment quotations a Removal of EXW and DDP Incoterms It would be a very important change since EXW is an Incoterm used in many companies with little export experience, and DDP is also commonly used especially for goods (e.g., samples or spare parts) that are sent by couriers and via express shipping companies that deal with all the logistics and customs procedures until delivery at the buyer’s address The justification to eliminate these two terms is that they are really domestic operations: in the case of EXW by the seller-exporter and in DDP by the buyer-importer In addition, these two Incoterms contradict, in some way, the new Customs Code of the European Union since the responsibility of the exporters and importers takes place once the clearance of export and import have been carried out b Removal of Incoterm FAS FAS (Free Alongside Ship) is an Incoterm very little used and, in fact, does not contribute almost anything to FCA (Free Carrier Alongside) that is used when the merchandise is delivered at the port of departure in the exporter’s country With FCA, the exporter can also deliver the goods at the dock, as in FAS, since the dock is part of the maritime terminal On the other hand, if FAS is used and there is a delay in the arrival of the ship, the merchandise will be available to the buyer at the dock for several days and, on the contrary, if the ship arrives in advance, the merchandise will not be available for shipment Actually, FAS is only used for the exportation of some commodities (minerals and cereals) and, in this sense, the Drafting Committee is evaluating the convenience of creating a specific Incoterm for this type of products c Unfold FCA in two Incoterms FCA is the most used Incoterm (about 40% of the international trade operations are carried out with this Incoterm) since it is very versatile and allows the delivery of goods in different places (seller’s address, land transport terminal, port, airport, etc.) that, most of the times, are in the seller’s country The Committee is thinking about the possibility of creating two Incoterms FCA; one for terrestrial delivery and another for maritime delivery Creation of a new Incoterm: CNI The new Incoterm would be denominated as CNI (Cost and Insurance) and would cover a gap between FCA and CFR/CIF Unlike FCA, which would include the cost of international insurance on account of the seller-exporter, and as opposed to CFR/CIF that would not include freight As in the other Incoterms in “C,” this new Incoterm would be an “arrival Incoterm,” i.e., the risk of transport would be transmitted from the seller to the buyer at the port of departure Two Incoterms based in DDP As with FCA, DDP (Delivered Duty Paid) also generates some problems due to the fact that the customs duties in the importing country are paid by the exporter-seller, regardless of the place of delivery of the goods For this reason, the Drafting Committee is considering creating two Incoterms based on DDP: DTP (Delivered at Terminal Paid): when the goods are delivered to a terminal (port, airport, transport center, etc.) in the country of the buyer, and the seller assumes the payment of customs duties DPP (Delivered at Place Paid): when the goods are delivered at any place other than a transport terminal (for example, at the buyer’s address), and the seller assumes the payment of the customs duties E DISCUSSION Incoterms are standardized terms used in international trade to clearly define the seller’s and buyer’s obligations as part of a contract For instance, Incoterms have nothing to with the insurance contract and not apply to the negotiated financing or carriage or transportation of the equipment terms Instead, the main Incoterms use is for international delivery of equipment sales and does not cover breach of contract consequences or exemptions of liability In every international trade transaction there are certain questions that must be asked by the parties concerned The research questions are listed as below: (a) Who will arrange to pay for the carriage of goods from one point to another? (b) Who will bear the risk if these operations cannot be carried out? (c) Who will bear the risk of loss of or damage to the goods in transit? F LIMITATION The limitation of this research is that there are many errors when people using Incoterms but because of time limit and limited knowledge, we can not show all information in this paper We just find out and show the most common mistakes with the real examples for the reader to easy to understand G CONCLUSION Incoterms play the strongest role in ensuring all international trade is performed in a standardized, thorough manner Without Incoterms, buyers and sellers would suffer from constant changes in language and difficulties in shipping practices Fortunately, Incoterms clarify obligations and help shippers maintain standard practices throughout the process This paper just identified some common mistakes when using Incoterms with the purpose for everyone to have the clear view about Incoterms and avoid those errors F REFERENCES International Trade Finance A Pragmatic Approach - Tarsem Singh Bhogal and Arun Kumar Trivedi “Incoterms 2020: Main changes” – Olegario Llamazares “Đã đến lúc bỏ quy tắc FOB CIF” – Logistics Delivery Duty Paid – Investopedia.com “Một số lưu ý sử dụng điều kiện toán FOB FCA vận chuyển hàng hóa container” – Duy Tan University “Incoterms 2010 – How to use them in a contract” – shippingknowledge.com