July 2008 | Commentary | 3PL Line

Incoterms Let Importers Control Their Destiny

Tags: 3PL

Simon Kaye is CEO, Jaguar Freight, 516-239-1900

Global import and export merchandise trade is currently valued at nearly $12 trillion, according to the World Trade Organization, some 75 times more than in the mid-1960s.

Despite this growth, many companies still use the same trading contract terms and structure that were prevalent decades ago.

As a result, importers are missing a major opportunity to improve financial results by taking advantage of a little-known aspect of Incoterms 2000, the internationally accepted standard definitions of trade terms.

Incoterms (International Commercial Terms) were developed by the Paris-based International Chamber of Commerce in the 1930s, and have been regularly revised to reflect changes in transportation and documentation.

They specify the exporting seller's and importing buyer's obligations regarding carriage, risks and costs, and establish basic terms of transport and delivery.

Incoterms do not define contractual rights other than for delivery, however, and both parties must specify the delivery terms, as well as issues such as loss insurance and title transfer - a fact often misunderstood when contracts are negotiated.

Even major global trading companies do not realize how much flexibility they have in determining how and when the title to goods they import will transfer.

Importers can structure contracts of sale to use Incoterms, particularly terms under Group F such as "Free on Board" (FOB), that enable them to pay for import shipping. These terms allow them to control, manage, and track their shipments, while delaying the point at which they record the goods in their inventory.

Group C Pitfalls

Newer and smaller importers generally specify Group C Incoterms, in which the seller arranges and pays for the main carriage without assuming its risk - another fact often overlooked by importers.

Importers believe it's more convenient for the seller to handle these details, but they may, in fact, pay more because the seller builds inflated shipping costs into its landed prices.

Incoterms also do not address the transfer of ownership, when transfer of title in goods occurs, or other considerations necessary for a complete contract of sale. The issue of the title transfer remains subject to the terms separately agreed on by the parties in the relevant contract of sale and applicable law.

Importers who take the initiative - and have the market clout - can specify in their contracts that title to the goods does not transfer from the seller until the importer takes possession at the port of entry or at a later point that they specify, even though the importer is paying the cost of freight.

By deferring actual ownership until a future date, importers can delay accounting for costly shipments as inventory on their financial statements, lowering expenses and boosting reported income.

The sales contract can provide for supplier invoicing upon confirmed arrival at destination port, and tracking will be made available to the supplier online and via email notification. Online tracking systems give both the seller and buyer visibility, and allow for real-time cross-checking and timing of shipments.

It is important to note that any contract terms regarding transfer of title must conform to applicable tax and accounting standards. Each shipping contract that uses Incoterms is unique, and the parties must always specify that their contract is subject to Incoterms 2000.

Structuring contracts this way provides the most advantageous transfer of title, giving a huge financial advantage to importers that pursue them.