Key Takeaways
- Review Incoterms thoroughly before requesting logistics quotes and issuing purchase orders (PO).
- Never compare product prices under different Incoterms without calculating the full landed cost.
- Ensure your finance department is aligned with logistics on the scope of cost responsibility from the start.
- Select Incoterms that your team has the actual capability to handle at the destination port.
Incoterms: Far More Than Just Price Suffixes
Terms like EXW, FOB, CIF, or DDP dictate who pays for what, who prepares documents at each stage, and when risks transfer from seller to buyer. If a procurement team does not understand these terms, they may select a seemingly cheap product only to face massive, unexpected logistics and clearance charges later.
Published by the ICC (International Chamber of Commerce), Incoterms provide a standardized framework for international trade. They directly dictate who is responsible for customs clearance, cargo insurance, and final delivery logistics.
- Delivery Point
- Origin Costs
- Freight Charges
- Cargo Insurance
- Destination Clearance
- Customs Documentation
Comparing Common Incoterms
EXW (Ex Works): The buyer bears almost all costs and risks from the seller's premises. This is suitable only if the buyer has reliable logistics agents or freight forwarders in the seller's country.
FOB (Free on Board): The seller is responsible until the goods are loaded onto the vessel at the port of origin. The buyer handles international freight, insurance, and import clearance. This is the most popular term for ocean freight.
CIF (Cost, Insurance, and Freight): The seller pays for international freight and cargo insurance to the destination port, but risk transfers to the buyer at the origin port. The buyer must still handle import clearance, duties, and inland delivery.
DDP (Delivered Duty Paid): The seller bears all costs and risks, including customs clearance, import duties, and taxes at the destination. While highly convenient for the buyer, it can obscure the actual cost breakdown.
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Contact Our Experts NowThe Pros and Cons of DDP vs. EXW
DDP appears simple because the seller manages everything, but it prevents the buyer from controlling local tax structures and customs compliance. If the seller lacks local customs experience, the cargo can easily get detained, delaying the shipment.
EXW gives the buyer complete control over the logistics chain but increases administrative burden. It is suited for established companies with robust logistics networks, but not recommended for SMEs unfamiliar with the origin country's regulations.
Incoterms and Customs Documentation Roles
Documentary duties under different Incoterms: under EXW, the buyer handles export filings; under FOB, the seller handles export clearance, while the buyer handles import clearance; under DDP, the seller manages the entire process, including destination declarations.
When purchasing under CIF or DDP, the buyer must ensure that the supplier or their foreign forwarder formats the Certificate of Origin (CO), commercial invoice, and packing list to comply with Thai or destination customs regulations.
Official Reference Agencies and Regulations
- Thai Customs Department: Electronic paperless declaration entry guidelines and customs clearance procedures.
- Ministry of Commerce & DFT: Regulations on preferential Certificates of Origin (Form CO) and targeted import-export control lists.
Incoterms define the allocation of costs, risks, and delivery points between the buyer and the seller. Consequently, they directly affect customs documentation and landed cost calculations. For instance, EXW places the export and import burden on the buyer, whereas DDP shifts almost all destination clearance and tax responsibilities to the seller.
Frequently Asked Questions
Q: Do Incoterms override national customs laws?
A: No. Incoterms are private contractual terms between the buyer and the seller. Customs procedures and tax obligations remain strictly subject to national laws and regulations. Selecting an Incoterm cannot exempt you from regulatory compliance or permit requirements.
Q: Does buying under CIF mean there are no destination charges?
A: No. CIF covers international freight and insurance to the destination port, but the buyer is still responsible for import customs clearance, duties, local port handling charges, demurrage, and final inland delivery.
Q: What is the difference between FOB and CIF regarding risk transfer?
A: Under FOB, risk transfers to the buyer once goods pass the ship's rail at the origin port, and the buyer purchases insurance. Under CIF, the seller purchases the insurance, but risk still transfers at the origin port. Thus, CIF does not offer more protection against transport damage to the buyer than FOB.
Q: Should we accept a DDP offer from a supplier?
A: It depends on the supplier's customs capability in your country. If they have a reliable local agent and proven customs experience, DDP is highly convenient. If not, FOB or CIF is recommended to maintain control over your compliance.
