Incoterms in shipping and their impact on indirect tax

• Incoterms are globally recognised trade rules that define responsibilities for transport, insurance, customs clearance, duties, and risk transfer between buyers and sellers.
• The chosen Incoterm can affect VAT, GST, customs duties, and whether a business must register for tax in another country.
• Different Incoterms allocate responsibility for shipping costs, customs procedures, and import duties differently, making it important to choose the right term for your business.
• Understanding Incoterms can help businesses reduce disputes, improve compliance, and manage cross-border trade more effectively.

Incoterms is short for International Commercial Terms. Published by the International Chamber of Commerce (ICC), Incoterms are a set of globally recognised rules that define the responsibilities of buyers and sellers conducting cross-border trade. This Incoterms definition is recognised and used worldwide.

To understand what Incoterms mean in shipping, it’s important to know that Incoterms define:

• Who is responsible for transportation.
• Who pays for shipping, insurance, and duties.
• Where the risk transfers from seller to buyer.
• Who handles customs clearance.

Incoterms do not cover the sale price of goods or payment terms.

Understanding what Incoterms mean in shipping can help businesses choose the most appropriate terms based on their transport methods and compliance obligations.

Modes of transport Incoterms are the rules that apply based on the type of transport used — whether any mode of transport (like air, road, rail, or multimodal) or sea and inland waterway transport only.

Ex Works (EXW)

Under EXW, the seller makes the goods available at their premises such as a factory, warehouse, or office. The buyer collects goods from the seller’s premises and is responsible for everything — transportation and insurance, export and import clearance, duties, loading at seller’s premises (unless agreed otherwise), and final delivery.

Free Carrier (FCA)

Under FCA, the seller delivers the goods to a named destination, such as a warehouse, shipping terminal, or a freight forwarder’s facility. Once the goods are handed over at one of these locations, risk and responsibility are transferred to the buyer. The seller is responsible for export customs clearance. The buyer is responsible for freight, import customs and duties, and unloading at the final destination.

Carrier and Insurance Paid To (CIP)

CIP is suitable for goods being delivered by multiple modes of transport, e.g., by lorry, ship, and rail. Under CIP, the seller delivers the goods to a carrier and pays for transportation and insurance to a named destination. However, risk transfers to the buyer as soon as the goods are handed over to the first carrier, not at the final destination. The seller is also responsible for export customs. The buyer is responsible for import customs and duties.

Carriage Paid To (CPT)

Like CIP, CPT is suitable for goods being delivered by multiple modes of transport, e.g., by lorry, ship, and rail. Under CPT, the seller delivers the goods to a carrier and pays for transportation to a named destination — but doesn’t cover insurance. Risk transfers to the buyer as soon as the goods are handed over to the first carrier, not at the final destination. The seller is also responsible for export customs. The buyer is responsible for import customs and duties.

Delivered at Place (DAP)

Under DAP, the seller delivers the goods to the buyer, but doesn’t cover import duties, taxes, or customs clearance. The buyer is responsible for import customs clearance, import VAT or GST, and unloading at the agreed final destination.

Delivered at Place Unloaded (DPU)

Under DPU, the seller delivers the goods to a named destination such as a warehouse or terminal and unloads them (DPU is the only Incoterm that requires the seller to unload the goods at the named destination). The seller also bears all risks and costs up to the point of delivery. The buyer is responsible for import clearance and customs duties.

Delivered Duty Paid (DDP)

Under DDP, the seller bears full responsibility for delivery to the buyer, and covers export duties, import duties, import VAT or GST, shipping and insurance, and customs clearance. The buyer’s only responsibility is to receive the goods.

These Incoterms are best for bulk or non-containerised cargo. They’re less suitable for container shipping due to risk-transfer points.

Free Alongside Ship (FAS)

Under FAS, the seller delivers the goods to the named port of shipment but is not responsible for loading the goods onto the vessel. The seller is also not responsible for shipping or insurance beyond that point. Once the goods are alongside the ship, risk and cost transfer to the buyer, who is also responsible for loading the goods onto the vessel, insurance, main carriage, and import duties and clearance.

Free on Board (FOB)

Under FOB, the seller is responsible for delivering the goods on board the vessel at the named port of shipment. Once the goods are loaded onto the ship, the buyer takes over all further costs and risks, including freight, insurance, and import clearance and duties.

Cost and Freight (CFR)

Under CFR, the seller is responsible for delivering the goods on board the ship and paying the cost of freight to the destination port. However, risk transfers to the buyer once the goods are loaded onto the vessel, not at the final destination. The buyer is responsible for insurance and risk during main transit, as well as import duties and clearance.

CFR is often used with bulk commodities and is suitable for sellers that have access to affordable freight options.

Cost, Insurance, and Freight (CIF)

Under CIF, the seller pays for the cost of transporting goods and minimum insurance to the destination port. The seller is also responsible for loading onto the ship, export customs clearance, and ocean freight to the destination port. Risk transfers to the buyer once the goods are loaded on board the vessel, and not upon arrival at the final destination. The buyer is responsible for import clearance, duties, and inland transport after arrival.

CIF is best for bulk and break-bulk — goods that are transported as individual units such as boxes, crates, or pallets — cargo. CIF is less suitable for containers.

Incoterms clearly define who is responsible for important factors of cross-border trade such as transport arrangements, customs clearance, taxes, and import duties.

By setting standard terms that are recognised globally, Incoterms help to reduce the risk of disputes between sellers and buyers and prevent misunderstandings about who is responsible for what and at what cost.

Incoterms can help businesses manage their tax compliance obligations by defining who is responsible for import and export VAT and GST and related documentation, customs declarations, and whether the seller must register for tax in the country of the buyer.

Incoterms and VAT

Incoterms affect how VAT is applied in international trade by shaping the logistics, legal ownership, and flow of goods. Incoterms can:

Determine the place of supply. VAT liability can depend on where goods are delivered. Incoterms define the delivery location, which helps determine the tax jurisdiction.

Establish who is the importer of record. Some Incoterms require the seller to act as importer, which means they may need to register for VAT in the buyer’s country. They could also be liable for import VAT and customs duties.

Trigger VAT registration requirements. Depending on the Incoterm used, the seller may be required to import goods in the customer’s country and/or store the goods locally, which may mean registering for VAT in that country is a requirement.

Impact VAT recovery. If one of the parties involved in the transaction is not the importer of record, they may not be able to reclaim import VAT.

Incoterms and customs

Incoterms affect customs by defining who is responsible for export and import clearance, duties, and documentation during cross-border transactions. The relationship between Incoterms and duties is particularly important when determining who bears import costs and compliance obligations.

Most Incoterms assign export clearance to the seller, but some — such as EXW — assign this responsibility to the buyer. The party responsible must provide invoices, certificates, and other customs paperwork. Incoterms also influence whether transport and insurance costs are included in the customs value used to calculate duties.

Speak with Avalara today about our compliance solutions and how they can help you.

You can also read about U.S. sales tax compliance when shipping into the U.S.