Incoterms are the international trade terms published by the International Chamber of Commerce[1], and widely acknowledged on a global basis. This article will provide an overview of the obligations related to the Cost Insurance Freight (CIF) Incoterm, based upon Incoterms 2020.
This article was originally published in Customs Compliance & Risk Management (CCRM) Journal, Issue 27, June / July 2024
A delivery terms code must be provided for declarations using Valuation Method 1 (Transaction value of imported goods).
In the United Kingdom, a legal oblgation to submit the Incoterm relating to all imports which use valuation method 1 to His Majesty’s Revenue and Customs (HMRC) has been in effect since the introduction of the Customs Declaration Service (CDS) on 30 September 2022. Within an Incoterm and accompanying location, a CDS import entry for goods which have been sold will be rejected.
This is contained within UK Trade Tariff Volume 3 for CDS concerning ‘delivery terms’ at Data Element (D/E) 4/1 Appendix 7, which outlines that the ‘Codes for Delivery Terms’ will be based upon ICC Incoterms 2020 [2] [3] and thereby gives effect to Schedule 1 of The Taxation (Cross-Border Trade) Act 2018[4] concerning the obligation to submit a customs declaration to HMRC, and the legislation concerning valuation contained within The Customs (Import Duty) (EU Exit) Regulations 2018[5], which is harmonised with the World Trade Organisation’s Valuation Agreement[6].
A CIF declaration completed without freight charges being included within the various built-up value charges identified within DE 4/9 will be accepted by HMRC, whereas for example, delivery terms EXW would require, as a minimum a freight charge to be declared as an addition in DE 4/9.[7] However, any inland expenses incurred by the importer should be declared in the VAT adjustment field in DE 4/9.
The use of Incoterms will be acknowledged by multiple actors throughout the supply chain, including the consignor, consignee, customs agency, government authorities apportioning freight for customs duty and import VAT, cargo broker, freight forwarder, shipping line, insurance company, commercial bank providing trade finance, and associated legal counsel.
Used in combination with a specified location, and a specified version (e.g. CIF London Gateway Incoterms 2020), Incoterms identify the obligations of the consignor (seller) and the consignee (buyer), concerning which party is responsible for the transport costs and provision of customs and transit documents at export and import, port charges, insurance of the goods, the transfer of risk of loss or damage to the goods, and where the delivery will take place. Cost, insurance, freight (CIF) and Cost and freight (CFR) are two closely related Incoterms which cover almost identical obligations and transfer of risk, other than the requirement for the seller to provide insurance which is addressed by use of CIF. The obligations of the seller under CIF Incoterms are defined as follows.
General Overview
· The seller is obliged to provide the buyer with the goods packaged ready to be transported, and the commercial invoice in conformity with the contract of sale and any other evidence of conformity required by the contract, and any information required for customs, transport security or insurance;
· The buyer must pay the price of the goods as provided in the contract of sale and commercial invoice;
· The seller must ship (or procure and tender) to the buyer the goods confirming to the goods in the commercial invoice, and contract of sale;
· The seller must procure a contract of carriage by sea to the named port of destination;
· The seller must procure insurance for the cargo to Institute Cargo Clause (C) as a minimum threshold (see explanation below);
· The seller must tender the commercial invoice, insurance policy, and bill of lading to the buyer, and any associated documents related to goods as confirmed within the underlying agreement;
· The seller must arrange the export clearance;
· The buyer is responsible for all costs related to the importation at destination, including terminal handling charges if these are not included in the contract of carriage, collection from the port to warehouse, customs clearance and associated taxation.
Transport and Carriage
The CIF rule is to be used for only sea or inland waterway transport. In multimodal circumstances, the appropriate rule to use is CIP rather than CIF. The risk of loss or damage to the goods is transferred from the seller to the buyer when the goods are placed on board the vessel at the port of delivery, or when the goods are procured within an onward-chain sale, which will involve the transfer of the documents (commercial invoice, bill of lading and endorsed insurance policy) from the first buyer to the second (and any subsequent) buyers, as frequently occurs within the commodities trading sector whilst the goods are on board at sea. It is the responsibility for the seller to arrange the contract for the carriage of the goods from the port of delivery to the port of destination specified within the agreed Incoterm. As an example, goods are placed on board a vessel in Jebel Ali (which is a port) for carriage to London Gateway (which is also a port). It is the responsibility of the seller to make a contract of carriage from Jebel Ali to London Gateway, and delivery is deemed to have occurred where the goods are placed on board the vessel in Jebel Ali, with the risk transferring the buyer at that time. While the contract will always specify a destination port, it may be advisable for the buyer to also ascertain the port of delivery, where the risk transfers to the buyer, as this will not necessarily be addressed otherwise, and may also be useful information when evaluating whether the cost of freight is reasonable.
Terminal Handling Charges (THC)
The CIF Incoterm specifies that if the seller incurs costs under its contract of carriage related to unloading at the specified point at the port of destination, the seller is not entitled to recover such costs separately from the buyer unless otherwise agreed between the parties.
When identifying the port of destination, it is important for the seller to be specific, for example, CIF London could be read as London Gateway, London Tilbury, or London Container Terminal. Frequently, the first cost that the importer will encounter will be the THC at the port of destination, which are billed by the cargo broker of the shipping line, and are an invariable source of dispute as many sellers will arrange a contract of carriage that does not include the terminal handling charges at destination. Costs incurred by the buyer also include the port charges and customs clearance fees, which are billed by the importer’s customs agent. Freight forwarders benefit from economies of scale, and thereby a buyer confident in matters of international trade may request a freight forwarder to arrange the shipment and contract on free on board (FOB) Incoterms. Due to the freight forwarder’s relationship with the shipping line, it may be possible for the forwarder to access a preferential rate on THC in advance. The THC are non-negotiable by the buyer under CIF Incoterms, the cargo broker will not release the cargo at the destination port until a party has accepted these charges.
Insurance
String sales are particularly common in commodity trading sector, whereby the reference to “procure” addresses multiple onward sales. With regards to insurance and the passing of risk, the risk of loss or damage to the goods transfers to the buyer once the goods are delivered on board the vessel. Under the CIF Incoterm, the seller must also contract for insurance cover against the buyer’s risk of loss or damage to the goods from the port of shipment to at least the port of destination and endorse the document to enable the buyer to claim against it. In circumstances where the destination country requires insurance cover to be purchased locally the parties should consider buying and selling under CFR. The CIF Incoterms 2020 rule determines that as a minimum threshold, the seller is required to obtain insurance cover complying with Institute Cargo Clause (C). On the basis of caveat emptor – buyer beware – Institute Cargo Clause (C) insures only “named perils.” Institute Cargo Clause (C) does not extend to aspects covered by marine “all risk” policies, such as theft or pilferage, damage due to insufficient care of the cargo (e.g. water damage, lack of ventilation) or war and piracy.
Customs Clearance
It is the responsibility of the seller to arrange the export clearance, and any further documents required by the country of export such as:
However, the seller is not obliged to clear the goods for transit through third countries. It is the responsibility of the buyer to arrange the import clearance, to cover any costs related to border-administration such as examination fees, fumigation, common user charges related to the Import of Products of Animal Origin Food and Feed System (IPAFFS)[8], and port charges, and to arrange the remittance of any customs related taxation to the border authorities. The importing party is responsible for the accuracy of the information supplied to the customs agent in the importing territory.
· An export licence
· Security clearance for export
· Pre-shipment inspection
· Any other official authorisation
Final Note
Within the contemporary lex mercatoria, Incoterms may be used independently of an underlying contract of sale, and will accompany a bill of lading and commercial invoice. Yet, it is also of note that the terms may be subject to negotiation within an underlying agreement, whereby a lawyer may draft an international sale of goods contract, and such instrument, governed by for example, English law, and The Sale of Goods Act 1979 and the close interrelationship of section 32 to the CIF Incoterm[9]; or governed by another jurisdiction and under the terms of the United Nations Convention on Contracts for the International Sale of Goods 1980 (UNCITRAL CISG), may contain permeations to the traditional understanding of a CIF or FOB contract, or otherwise, which could have a bearing on areas such as the parties’ responsibilities and obligations concerning damages.
Please visit Alinea Customs’ webpage A Guide to Incoterms for more information.
[1] ‘INCOTERMS® 2020 – ICC – International Chamber of Commerce’ (ICC, 5 June 2024) <https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/> accessed 22 June 2024
[2] HM Revenue and Customs ‘Delivery Terms for Data Element 4/1 of the Customs Declaration Service’ (GOV.UK, 29 April 2024) <https://www.gov.uk/government/publications/delivery-terms-for-data-element-41-of-the-customs-declaration-service> accessed 22 June 2024
[3] HM Revenue and Customs, ‘CDS Declaration Completion Instructions for Imports’ (GOV.UK, 9 May 2024) <https://www.gov.uk/government/publications/cds-uk-trade-tariff-volume-3-import-declaration-completion-guide> accessed 22 June 2024
[4] ‘Taxation (Cross-Border Trade) Act 2018’ (Legislation.gov.uk) <https://www.legislation.gov.uk/ukpga/2018/22/schedule/1> accessed 22 June 2024
[5] ‘The Customs (Import Duty) (EU Exit) Regulations 2018’ (Legislation.gov.uk) <https://www.legislation.gov.uk/uksi/2018/1248/part/12> accessed 22 June 2024
[6] ‘WTO Legal Texts’ (WTO) <https://www.wto.org/english/docs_e/legal_e/legal_e.htm#artvii> accessed 22 June 2024
[7] HM Revenue and Customs, ‘Additions and Deductions for Data Element 4/9 of the Customs Declaration Service’ (GOV.UK, 25 June 2023) <https://www.gov.uk/government/publications/additions-and-deductions-for-data-element-49-of-the-customs-declaration-service> accessed 22 June 2024
[8] ‘Import of Products, Animals, Food and Feed System (IPAFFS)’ (GOV.UK) <https://www.gov.uk/guidance/import-of-products-animals-food-and-feed-system> accessed 22 June 2024
[9] ‘Sale of Goods Act 1979’ (Legislation.gov.uk) <https://www.legislation.gov.uk/ukpga/1979/54/section/32> accessed 22 June 2024
