What is Incoterms® and how does it work in foreign trade?

Even experienced foreign trade professionals who deal with Incoterms® on a daily basis still have doubts about their meanings, correct uses and implications. After all, these terms are not simple: they define responsibilities, risks and costs between buyer and seller — and a wrong choice can compromise the entire operation.

Therefore, understanding in depth what Incoterms® are, who defines them, when to use them and which ones are permitted in Brazil is essential for any international business.

Incoterms® (International Commercial Terms) are a set of rules created by the International Chamber of Commerce (ICC) to standardize and clarify obligations in international purchase and sale transactions.

They determine who pays for freight, insurance, taxes and at what point in the chain the cargo risk is transferred.

The most recent version is Incoterms® 2020, valid since January 1, 2020. It can be used in contracts for any mode (air, sea, road, rail or multimodal) and is recognized globally.

The 11 Incoterms® of the current version are divided into four groups, according to the seller’s level of responsibility:

Incoterms® 2020 Groups

Incoterms® are divided according to the time of delivery and the seller’s level of responsibility. Let’s take a look at them:

Group E – Delivery at origin

• EXW (Ex Works)

The seller makes the goods available at their own location (factory, warehouse, etc.). All responsibility and costs become the buyer’s from that point onwards.

Group F – No payment of main freight by the seller

• FCA (Free Carrier)

The seller delivers the goods at an agreed point, usually the terminal of origin. Recommended for containerized cargo.

• FAS (Free Alongside Ship)

Specific for maritime transport and inland waterways

Delivery occurs alongside the ship at the port of embarkation, before the cargo is on board. Rarely used.

• FOB (Free On Board)

Specific for maritime transport and inland waterways

The seller is responsible until the moment the cargo is loaded onto the ship.

Group C – Freight paid by the seller (risk transfers at origin)

• CFR (Cost and Freight)

Specific for maritime transport and inland waterways

The seller pays the freight to the destination, but the risk transfers to the buyer upon shipment.

• CIF (Cost, Insurance and Freight)

Specific for maritime transport and inland waterways

Similar to CFR, but the seller also purchases international insurance.

• CPT (Carriage Paid To)

Used in any mode. The seller pays the freight to the agreed location, but the risk is transferred to the carrier at the point of delivery.

• CIP (Carriage and Insurance Paid To)

Same as CPT, with insurance included.

Group D – Delivery at destination

• DAP (Delivered at Place)

The seller delivers to the final destination, with all costs paid, except taxes.

• DPU (Delivered at Place Unloaded)

Like DAP, but the seller also takes care of unloading.

• DDP (Delivered Duty Paid)

The seller assumes all costs, including taxes and customs clearance in the buyer’s country.

Prohibited in Brazil: only national companies authorized by the Federal Revenue Service can perform customs clearance and pay import taxes. Therefore, DDP is not permitted for imports to Brazil.

The importance of choosing the right one

The choice of Incoterm directly impacts the costs, deadlines and risks of an operation. Furthermore, not all terms are appropriate for all modes or situations. In Brazil, for example, the use of CIF for imports is prohibited, since insurance must be contracted by a local company.

Therefore, having experienced professionals to define the ideal Incoterm is essential to avoid losses and ensure compliance with the legislation.

If your company imports or exports, the BR Company team is ready to support you with technical knowledge, customized solutions and total security in operations.