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Ömer Haluk TURANLI
Education Specialist
One of the first topics that comes to mind in foreign trade is Incoterms, namely International Delivery Terms. It is the acronym of the phrase International Commercial Terms.
According to the translation of its English name, it would be more accurate to call it International Commercial Terms.
In this respect, it does not only explain the delivery terms but also has an explanatory nature of the various stages encountered during the shipment of the goods.
Incoterms are prepared by the ICC (International Chamber of Commerce) and are revised every 10 years by experts who act as the "Draft Group", if deemed necessary, in line with the feedback received by the ICC, their observations, and studies.
As we approach 2020, the 10-year cycle in question has been completed and the delivery terms that will come into force as of January 01, 2020, have also been determined. In our article, we will try to summarize the issues on which Incoterms are decisive and guiding and what to consider when using them. First, let's look at the function of Incoterms in foreign trade, that is, which issues it covers and which it does not.
Incoterms deals with the following 3 main topics;
- Liabilities
- Risks
- Expenses
The topics that can be classified as liabilities are the determination of which job will be done by whom during the shipment process. For example; questions such as who will organize the shipment of the goods, which party will have the insurance, and who will carry out the customs procedures are within this scope.
Another topic, risks, is where and under what conditions the goods are transferred from the seller to the buyer.
Finally, the topic of expenses determines who will bear the expenses that are likely to occur during the process. (Although the Verified Gross Mass topic is a topic that directly concerns the shipment regarding the weighing of the container and its contents, it was decided by the drafting group not to include it in Incoterms 2020 since it involves too many variables and it was thought that it would be difficult to tie it to a fixed rule, and we should note that the details of this expense item must be included in the sales contract to be concluded between the parties.)
There are also topics that Incoterms does not deal with. It is useful to mention these items, especially since they are thought to be related to details such as payment methods, accounting, and inventory records;
- Whether there is a valid sales contract between the parties
- Characteristics of the goods in question
- Where, when, how, and at what exchange rate the payment of the goods will be made
- Solutions that can be applied in case of breach of the sales contract
- Method, venue, or law of dispute resolution in case of such breach
- Consequences of delay in fulfilling obligations arising from the contract and other breaches
- Effects of Possible Sanctions
- Implementation of tariffs
- Export or import bans
- Force majeure and possible difficulties
- Intellectual property rights
- Status of accounting, inventory, stock, etc. records
In particular, companies that keep their accounting records by IFRS / IFRS (International Financial Reporting Standards) may be required to keep inventory records according to the delivery method under the provisions of IFRS rules. For example; IFRS 15 includes provisions regarding the stage at which export revenues will be considered realized. Accordingly, the realization in question may differ depending on each delivery method. The important detail here is; For example, while IFRS specifies a rule that in the EXW delivery method, the goods must be included in the buyer's inventory at the time the invoice is issued by the seller, Incoterms does not make a reference regarding whose inventory the goods should be included in the EXW delivery method.
After conveying the above information in general about Incoterms, let's touch on the differences between the Incoterms 2020 version and the 2010 version;
First of all, we can start by saying that visual and descriptive improvements have been made in the book, which we can call Incoterms 2020 ICC Publication No: 723E.
More detailed explanations of the processes at the dispatch stage, user notes, listing of expense items collectively under a single item (however, information on the relevant expense continues to be provided separately under each item), addition of more explanatory and multiple graphical narrative visuals, noticeable changes in terms of form.
- We can list the changes in terms of content under the following main headings; Bills of lading marked “On Board” and FCA delivery method
- Different insurance coverage in CIF and CIP delivery methods
- Arrangement of transportation with the seller’s or buyer’s vehicles in FCA, DAP, DPU, and DDP delivery methods
- Changing the DAT delivery method to DPU
- Including security-related requirements in transportation obligations and costs
Let’s briefly clarify these main headings;
In sea transportations agreed upon through the FCA delivery method, it was not possible to obtain a bill of lading bearing the phrase “On Board” (loaded on the ship), since in this delivery method, the delivery is deemed to have been made when the goods are delivered to the carrier to be delivered to the buyer, and there is no obligation to load them on the ship. Especially exporters working with letters of credit request a bill of lading issued in this way to fulfill the relevant conditions and not to eat reserves, but since this situation means showing the goods that have not yet been loaded onto the ship as if they have been loaded, the shipping agent may not want to provide such a document.
In Incoterms 2020, as a kind of solution to such transactions, an amendment was made in Articles A6/B6 of the FCA delivery method, stating that the buyer may agree to instruct the carrier to issue a bill of lading registered “on board” in the name of the seller after the goods are loaded. As it is known, in the FCA delivery method, the seller has no obligations towards the buyer regarding transportation, and this innovation does not include a change in this direction.
Among all delivery methods, CIF and CIP delivery methods are the only delivery methods that require the seller to insure the goods on behalf of the buyer. While Incoterms 2010 required insurance at the “Institute Cargo Clauses C” level, which has the lowest coverage content, in Incoterms 2020, this coverage level for the CIP delivery method was defined as the most comprehensive clause, “Institute Cargo Clauses A”. Nevertheless, the parties can add or decrease different coverages to the policy by agreement between themselves.
Another change is that the necessary arrangements have been made for the buyer or seller to carry out the transportation with their means of transport in the FCA, DAP, DPU, and DDP delivery methods.
In our opinion, the most important change has been the revision of the DAT – Delivered At Terminal delivery method, which is one of the Group D delivery methods, to DPU – Delivered At Place Unloaded. DPU, which is no different from the DAT delivery method in terms of content; requires the seller to make the goods available to the buyer, without customs procedures, unloaded from the means of transport.
Finally, obligations related to security measures, which have become more dependent on transportation needs, have been included in the terminology by being specified in articles A4-A7 of each delivery method in Incoterms 2020.
The costs brought by these conditions are more clearly included in articles A9 / B9, which we can define as cost headings.
