What Are Incoterms?
Incoterms (International Commercial Terms) are a set of standardised trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international trade transactions — specifically, who is responsible for transportation, insurance, customs clearance, and associated costs at each stage of a shipment's journey.
Incoterms are used in commercial contracts and on shipping documents worldwide. The current version is Incoterms® 2020. Understanding them is essential for anyone importing goods, because they directly determine who pays customs duties and taxes — the buyer or the seller.
Why Incoterms Matter for Customs Charges
Imagine you order goods from an overseas supplier and the invoice says "DDP." You pay the price and receive the goods at your door with no further charges. Now imagine the invoice says "DAP" — and a courier calls you demanding payment of import duties before they'll deliver your package. Both scenarios arise from the Incoterm used.
The key distinction is whether the seller or the buyer is responsible for import customs clearance and duty payment.
The Most Important Incoterms for Importers
DDP – Delivered Duty Paid
The seller takes full responsibility for delivering goods to the buyer's named destination, including handling all export and import customs clearance, duties, and taxes. This is the most buyer-friendly term — you pay one price and receive the goods cleared. However, sellers may build duty costs into their price, so compare carefully.
DAP – Delivered At Place
The seller delivers goods to the named destination but is not responsible for import duties or customs clearance. The buyer is responsible for import formalities and must pay all applicable duties and taxes before taking delivery. This is very common in e-commerce — if a retailer uses DAP, you (the importer) will be billed for duties by the courier.
FOB – Free on Board
The seller delivers goods to the named port of shipment and loads them onto the vessel. From that point, the buyer assumes all risk and cost — including international freight, insurance, and import duties. FOB is widely used in sea freight for commercial imports.
CIF – Cost, Insurance and Freight
The seller pays for freight and insurance to the destination port, but the buyer takes responsibility from that point — including import customs clearance and duties. Importantly, CIF value (cost + insurance + freight) is often used as the customs value for duty calculation purposes in many countries.
EXW – Ex Works
The seller makes goods available at their premises. The buyer arranges and pays for everything else — collection, export, freight, import customs clearance, and duties. This places maximum responsibility on the buyer.
Quick Reference: Who Pays Import Duties?
| Incoterm | Import Duties Paid By | Import Customs Clearance By |
|---|---|---|
| DDP | Seller | Seller |
| DAP | Buyer | Buyer |
| DAT/DPU | Buyer | Buyer |
| CIF | Buyer | Buyer |
| FOB | Buyer | Buyer |
| EXW | Buyer | Buyer |
Incoterms and Customs Valuation
The Incoterm used also affects how customs value is calculated. Most countries use CIF value (goods + insurance + freight to port of entry) as the dutiable value. If your contract is on FOB terms, customs may still convert to CIF for duty calculation purposes. Always check which valuation method applies in your destination country.
Practical Tips
- Always check which Incoterm applies when buying from an overseas supplier — it's usually stated on the invoice or at checkout.
- If a retailer ships DAP, budget for import duties and courier handling fees on top of the purchase price.
- DDP can feel convenient but ensure the seller's duty calculations are accurate — you may end up paying indirectly through a higher product price.
- For large commercial shipments, agree on Incoterms in your contract and confirm responsibilities in writing before goods are dispatched.
Conclusion
Incoterms are not just legal jargon — they have real financial consequences. Knowing whether a shipment is DDP or DAP could be the difference between a smooth delivery and an unexpected bill from a courier. Always read the terms before you buy internationally.