Tax & Trade Blog
Incoterms® 2020 Changes Incoming!
The International Chamber of Commerce’s (“ICC”) Incoterms® are relied on across the world by businesses to simplify and standardize the delivery of internationally shipped goods. The terms function so that the obligations on both buyers and sellers are clear, which eliminates surprises in the case of disputes. Use of the terms, in a manner consistent with the underlying international sales agreement, is critical to not only commercial obligations, but critical to the application of international taxes, including the Canadian GST/HST valued added tax.
The ICC updates Incoterms® periodically to stay up to date with modern realities in global trade and a new set of terms, to be called Incoterms® 2020, comes into effect on January 1, 2020.
Bills of Lading under FCA – Incoterms® 2020 now provides the flexibility to sellers under FCA (Free Carrier) to require the buyer’s carrier (on instruction of the buyer) to provide a bill of lading with on-board notation (which is sometimes required by the seller’s bank for the purposes of a letter of credit). Under the old rules, delivery was completed under FCA before the goods were loaded onto a vessel. Because of this, the seller might then not be able to obtain an on-board bill of lading (since the goods had not actually been boarded). The new rules allow the seller to insist on the on-board bill of lading as a condition of delivery.
Costs Where They Are Listed – In contrast to the previous version, Incoterms® 2020 consolidates the costs imposed on the buyer and seller under each A9/B9 term. This structural change was done to put all of the costs imposed on either party in a single place, facilitating better ease of use.
Insurance under CIF & CIP – The previous version of Incoterms® required that the seller maintain a minimum level of insurance coverage for the good, when using the CIF (Cost Insurance and Freight) and CIP (Carriage and Insurance Paid To) terms. Incoterms® 2020 how bifurcates the minimum insurance requirement for each term, with CIP now requiring a slightly higher level of insurance, while CIF retaining the minimum coverage requirements that was seen in Incoterms® 2010.
Arranging for Carriage with Seller/Buyer’s means of Transport – Incoterms® 2020 has broadened the scope of what it means to arrange for carriage under the FCA, DAP, DPU, and DDP terms. This reflects the reality that some buyers and sellers will often bypass third-party carriers in favour of transporting the goods using their own means of transport (pick-ups, drop-offs, etc.).
DAT becomes DPU – In a move sure to confuse users of DDU and DDP terms, Incoterms® 2020 now redefines DAT (Delivered at Terminal) as DPU (Delivered at Place Unloaded). This change was made to reflect the fact that delivery could be at any place rather than just at a terminal.
Security Requirements – Incoterms® 2020 also expands the terms related to obtaining security clearances for the shipment of goods. This was a big issue during the past decade since there was little to no guidance in Incoterms® 2010 as to who bore the burden of obtaining and paying for security clearances. Incoterms® 2020 now deals with this by directly addressing (and apportioning) the responsibilities of the buyer and seller for obtaining relevant security clearances. Just who is responsible for what depends on the actual term chosen.
Other Changes – Incoterms® 2020 also contains a number of other cosmetic changes, including a change to the layout of the terms. Also helpful are detailed explanatory notes and helpful infographics that make the application of each rule easier to understand. The order of obligations under each term has also been altered to place greater focus on the delivery terms between the parties (helping users to quickly and correctly identify the best term to govern their particular sales arrangement).
Incoterms® 2020 is a must for buyers and sellers moving goods across international borders! And when it comes to structuring the underlying commercial agreements between the buyer and the seller, those agreements (and other terms and conditions) need to be consistent and reflective of the Incoterms® chosen.
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