Incoterms 2020: shipping containers to America

Significant changes for EXW and DDP, the main Incoterms for shipping containers to America

The two main Incoterms for shipping pallets and containers to the United States are DDP (Delivered Duty Paid) and EXW (or FCA), with an increasing tendency among American importers to request DDP shipments. Beyond the change in standards, we believe that American importers will insist on contractual clauses that provide for shipping terms to the USA similar to the current DDP and EXW.

The new edition of the Incoterms, called "Incoterms 2020," will come into effect on January 1, 2020, coinciding with the centenary of the ICC - International Chamber of Commerce. Below, we illustrate some of the changes included in the Incoterms 2020 edition, relevant to shipping pallets and containers to the United States.

Confirmation of EXW (Ex Works) and DDP (Delivered Duty Paid) Incoterms

Their elimination would have been a significant change since EXW (Ex Works) is an Incoterm used by many companies for shipments to America.

EXW is widely used for shipments to the United States in cases where the American importer purchases simultaneously from various suppliers and consolidates the goods to ship containers to America with a single shipment instead of multiple shipments, each containing a few pallets. For example, large American retail chains like Macy's purchase clothing, fashion accessories, and footwear from various suppliers in quantities of a few pallets per supplier. That said, we note that American importers and customers are strongly leaning towards DDP in all their shipping operations to America.

Creation of two new Incoterms based on DDP (Delivered Duty Paid)

DDP (Delivered Duty Paid) is always used to ship samples or spare parts to America, usually with express couriers like DHL or FedEx, which handle all logistical and customs procedures until delivery in the United States. As with FCA, DDP (Delivered Duty Paid) also generates some issues because customs duties in the United States are paid by the exporter-seller, regardless of the place of delivery of the goods. For this reason, two new Incoterms based on DDP have been created:

• DPU (Delivered at Place Unloaded)
  When goods are delivered to a specific delivery address. It replaces the previous Incoterm "DAT" and provides that the unloading of the goods at the destination is performed by the receiving customer.
• DAP (Delivered at Place)
  When goods are delivered to any place other than a transport terminal (e.g., the buyer's address). With DAP shipping, the buyer is responsible for customs clearance (in America) and payment of duties.
  We believe this will be the dominant Incoterm for shipping containers and pallets to America as it closely resembles the DDP as we know it now. Regardless of any changes, we anticipate the inclusion of clauses in sales contracts with American customers aimed at recreating the original DDP terms for shipments to the USA of containers and pallets.

Why American importers prefer to ship pallets and containers to America using the DDP term

The main reason is related to legal responsibility, ease of management, and limited experience in international shipping

Companies with export experience in the USA will have certainly noticed that American importers insist on purchasing under DDP terms. In other words, they do not want to handle any aspect of container or pallet shipping:

• Negotiation of ocean or air freight rates,
• Transport contract,
• Calculation and payment of duties,
• Customs clearance for imports into America,
• Organization of transport from the port of arrival in the USA to the importer's warehouse.

The main reason is that American importers generally lack experience in international shipping. Their business model is highly compartmentalized to enhance specialization and improve overall organizational efficiency. U.S. companies focus on their core business and outsource all other activities. This is why American importers tend to delegate the entire import operation, including the logistics of shipping containers and pallets from any country to the United States.

Elimination of the FAS Incoterm

FAS (Free Alongside Ship) is rarely used and, in practice, does not add much to FCA (Free Carrier Alongside), which applies when goods are delivered at the port of departure in the exporter's country. With FCA, the exporter can also deliver goods to the dock, just like with FAS, since the quay is part of the maritime terminal.

However, if FAS is used and the vessel's arrival is delayed, the goods will remain at the dock for several days. Conversely, if the ship arrives early, the cargo may not be ready for shipment. In reality, FAS is used only for exporting specific products (such as minerals and grains). The Drafting Committee is considering the creation of a specific Incoterm for these goods.

Splitting FCA into two new Incoterms

FCA is the most widely used Incoterm (covering about 40% of international trade transactions) because of its versatility. It allows goods to be delivered at various locations, such as the seller's address, land transport terminals, ports, or airports—most of which are in the seller’s country. The Committee is evaluating the possibility of creating two separate FCA Incoterms: one for land deliveries and another for maritime deliveries.

FOB and CIF for container shipments

The change introduced in the 2010 Incoterms edition—stating that FOB and CIF should not be used for containerized shipments but rather their FCA and CIP counterparts—has not been widely adopted by exporters, importers, or other stakeholders in international trade (such as freight forwarders, logistics operators, and banks).

This is mainly because FOB and CIF are long-established Incoterms, and the International Chamber of Commerce did not effectively communicate the importance of this change, despite the fact that nearly 80% of global trade is conducted via containerized shipments. The Incoterms 2020 edition may reinstate FOB and CIF for container shipments, as was the case in Incoterms 2000 and earlier versions.

Creation of a new Incoterm: CNI

The new Incoterm, called CNI (Cost and Insurance), would fill a gap between FCA and CFR/CIF. Unlike CFR/CIF, it would not include freight costs. Like other "C" Incoterms, this new term would be an "arrival Incoterm," meaning that transport risk would transfer from the seller to the buyer at the port of departure. However, this is unlikely to be widely used for shipping pallets or containers to the United States.

Selling in America with shipments from abroad may trigger U.S. tax obligations, even without a permanent establishment

Under U.S. tax regulations, if a foreign company engages in substantial and sustained sales activities in America, it may be required to file tax returns and pay taxes on taxable profits generated in the U.S. This regulation applies only to sales concluded on American soil. Examples include:

• Orders finalized during a trade show in America,
• Orders placed by company representatives visiting American clients,
• Orders processed by a U.S.-based agent, representative, or distributor,
• Shipments under Incoterms DDU or DDP—i.e., any Incoterm where ownership of the goods transfers within the United States.

A hidden risk in exporting to America under DDU and DDP

The technicality of DDU and DDP shipments requires that customs clearance with U.S. authorities is handled by the exporter. To do this, the customs broker must request a tax identification number from the U.S. tax authorities in the name of the company. Technically, this is equivalent to establishing a branch in the U.S. at the federal level, which brings several obligations, including:

• Filing an annual tax return,
• Paying taxes on taxable income generated in the United States.