Incoterms 2020: who pays freight, insurance and duty
How the Incoterms 2020 rules divide freight, insurance, licences and customs costs between seller and buyer, and how to invoice and record them.
By Achekam · · 4 min read · For Logistics businesses in South Africa, Nigeria, Kenya
An importer in Lagos asks a supplier in Johannesburg for a price. The supplier quotes per unit and adds three letters. Those three letters decide whether the price includes the truck to the port, the ocean freight, the marine insurance and the customs clearance at either end, and who carries the loss if the container falls off a crane.
Get them wrong, or read them loosely, and the consequences show up in the books: a freight bill nobody budgeted for, an insurance claim nobody can make, duty invoiced to the wrong party. This article explains what the Incoterms 2020 rules decide about cost and risk, and how a trader or forwarder should reflect that in what it invoices and what it pays.
What the rules are for
The International Chamber of Commerce (ICC), which issues the rules, describes Incoterms as a set of standards used in international and domestic contracts for the delivery of goods. They clarify the tasks, costs and risks involved in getting goods from seller to buyer.
The US International Trade Administration (ITA) puts it in practical terms: Incoterms are a set of 11 internationally recognised rules that specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance and other logistical activities. Domestic use is worth noting. A Kenyan manufacturer selling to a distributor up-country can use the same rules to settle who pays the transport.
Eleven rules in two groups
The ITA explains that seven of the 11 rules apply to any mode of transport and four apply only to sea and inland waterway transport.
| Any mode of transport | Sea and inland waterway only |
|---|---|
| EXW (Ex Works) | FAS (Free Alongside Ship) |
| FCA (Free Carrier) | FOB (Free On Board) |
| CPT (Carriage Paid To) | CFR (Cost and Freight) |
| CIP (Carriage and Insurance Paid To) | CIF (Cost, Insurance and Freight) |
| DAP (Delivered at Place) | |
| DPU (Delivered at Place Unloaded) | |
| DDP (Delivered Duty Paid) |
If an older contract mentions DAT, it has been replaced. The ITA notes that DPU replaces the old DAT and adds a requirement for the seller to unload the goods from the arriving means of transport.
Using a sea-only rule for a road or air shipment is a common error. A consignment trucked from Durban to Lusaka has no ship to be "on board", so a rule from the left-hand column fits better.
Two questions every rule answers
Where delivery happens and when risk moves
According to the ITA, each rule specifies when delivery takes place and when the risk of loss or damage passes from the seller to the buyer. That moment matters more than most traders realise. Goods damaged after risk has passed are the buyer's problem even if the seller is still paying for the freight. Damage claims, and who can make them, follow from this point; handling damaged goods claims picks up from there.
Who arranges and pays for what
The ITA also explains that each rule states which party must obtain export and import licences and carry out customs formalities, which must contract for carriage and arrange cargo insurance, and who bears those costs. In other words, for any shipment you should be able to answer, from the rule alone:
- Who books and pays the main carriage?
- Who insures the cargo, if anyone is required to?
- Who clears the goods for export?
- Who clears them for import and pays the duties and taxes?
- Where, exactly, does the seller's responsibility end?
The rule's name gives a hint. "Carriage Paid", "Insurance" and "Duty Paid" signal costs the seller takes on. But the detail sits in the ICC's text of each rule, and that is what a contract incorporates.
Invoicing and paying to the agreed rule
Once the rule is agreed, the accounts should mirror it. Two worked examples, without figures:
The seller who pays carriage. A South African exporter sells under a rule that puts the main carriage on the seller. The carrier's freight bill is the exporter's cost. The exporter builds that cost into the price on its invoice to the buyer, and does not then add a separate freight charge the rule says it should carry.
The buyer who pays carriage. A Nigerian importer buys under a rule that leaves the main carriage and import clearance to the buyer. The supplier's invoice covers the goods. The forwarder's invoice for freight and the clearing agent's charges arrive separately and are the importer's own costs.
For a forwarder, the rule decides whom to bill. Duties paid at the border on a client's behalf are a different matter from your own freight income; see invoicing duties paid for clients.
Recording it in Achekam
On the sales side, an Achekam customer invoice starts as a draft that can be changed or deleted, so the price, the freight line (if the rule allows one) and the wording can be checked against the contract first. Issuing it takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT.
On the cost side, carriers', forwarders' and clearing agents' bills are recorded line by line with VAT, which keeps freight, insurance and clearing charges on separate lines and in separate accounts. A bill without a purchase order waits for approval before it posts, which gives someone the chance to ask whether, under the agreed rule, this cost is really yours. Bills can then be paid in full or in parts from a chosen bank account.
Check the rule before you quote
The ICC's Incoterms rules page describes what the rules are and how they divide tasks, costs and risks between seller and buyer. Before your next quotation leaves the office, answer the five questions above for the rule you are about to name. If you cannot, the price is not ready.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
