Incoterms (International Commercial Terms) are a set of eleven standardized trade rules published by the International Chamber of Commerce that define, for a sale of goods, where delivery takes place, when risk passes from seller to buyer and which party pays for transport, insurance, export and import formalities. In cross-border commerce, they appear as a three-letter code followed by a named place and the edition, for example DAP Berlin Incoterms 2020.
For e-commerce sellers, Incoterms decide whether the customer receives a parcel with all duties already paid or faces an unexpected import bill at the door. They are therefore a commercial and customer-experience decision, not only a logistics detail.
How Incoterms allocate costs and risk
Each Incoterm fixes two separate points: the delivery point, where risk of loss or damage transfers, and the cost point, up to which the seller pays freight. In most rules these points coincide, but in the C-group rules they split: the seller pays carriage to the destination while risk passes at shipment.
The rules are grouped by the letter that starts each code. E means the goods are made available at the seller’s premises, F means main carriage is unpaid by the seller, C means main carriage is paid but risk passes early and D means the seller bears risk until arrival at destination.
| Group | Rules | Seller obligation | Risk transfer |
|---|---|---|---|
| E | EXW | Make goods available at own premises | At seller’s premises |
| F | FCA, FAS, FOB | Deliver to the buyer’s carrier, export cleared | At handover to carrier or ship |
| C | CPT, CIP, CFR, CIF | Pay main carriage, sometimes insurance | At handover in the origin country |
| D | DAP, DPU, DDP | Deliver to the named destination | At destination |
The eleven rules of Incoterms 2020
The current edition, Incoterms 2020, divides the rules into seven rules for any mode of transport and four rules only for sea and inland waterway transport. Using a maritime rule for a container or parcel shipment is a classic error, because risk is tied to loading on board a vessel that the seller does not control.
| Rule | Full name | Mode | Import duties paid by |
|---|---|---|---|
| EXW | Ex Works | Any | Buyer |
| FCA | Free Carrier | Any | Buyer |
| CPT | Carriage Paid To | Any | Buyer |
| CIP | Carriage and Insurance Paid To | Any | Buyer |
| DAP | Delivered at Place | Any | Buyer |
| DPU | Delivered at Place Unloaded | Any | Buyer |
| DDP | Delivered Duty Paid | Any | Seller |
| FAS | Free Alongside Ship | Sea and inland waterway | Buyer |
| FOB | Free on Board | Sea and inland waterway | Buyer |
| CFR | Cost and Freight | Sea and inland waterway | Buyer |
| CIF | Cost, Insurance and Freight | Sea and inland waterway | Buyer |
Insurance obligations differ between the two insured rules. Under CIP, the seller must buy all-risks cover in line with Institute Cargo Clauses (A), while under CIF the minimum is the more limited Institute Cargo Clauses (C). Coverage must be at least 110 percent of the contract value.
Incoterms in e-commerce: DAP versus DDP
Online stores shipping parcels abroad mostly choose between DAP, often described as delivered duties unpaid (DDU) in carrier jargon, and DDP. The choice determines who settles VAT and import duty and how the buyer experiences delivery.
| Aspect | DAP (duties unpaid) | DDP (duties paid) |
|---|---|---|
| Who pays import charges | Customer on delivery | Merchant, usually priced into checkout |
| Customer experience | Surprise fees, refused parcels | Price at checkout is final |
| Merchant setup | Minimal | Duty calculation, importer of record, tax registrations |
| Return rate risk | Higher, due to refused deliveries | Lower |
| Typical use | Low volumes, B2B buyers who import routinely | Consumer brands selling cross-border at scale |
DDP requires accurate HS codes, a correct customs declaration and often registration for schemes such as IOSS for low-value consignments into the European Union. Many merchants rely on a customs broker or a carrier’s duties-paid service to act on their behalf.
What Incoterms do not cover
Incoterms are frequently overestimated. They regulate delivery, risk, costs and formalities, but they do not transfer ownership, set the price, define payment terms or determine the remedies for breach of contract. Those matters belong to the sales contract and the governing law.
- Title to the goods passes according to the contract, not the Incoterm.
- Payment method, such as letter of credit or prepayment, is agreed separately.
- Carrier liability limits come from transport conventions, not from Incoterms.
- Tax liability follows customs and VAT law; an Incoterm only allocates who pays between the parties.
Incoterms also apply only when the parties expressly incorporate them into the contract. A bare code on an invoice without a named place and edition invites disputes about which version was meant.
Choosing the right Incoterm and avoiding mistakes
The best rule is the one that matches each party’s real control over transport and customs. A seller who books a courier door to door should not use FOB, and a buyer who cannot handle export formalities should not accept EXW.
| Mistake | Consequence | Better choice |
|---|---|---|
| FOB used for courier or air freight | Unclear risk point, no ship involved | FCA with a named handover place |
| EXW for international sales | Buyer cannot clear export; seller still exposed | FCA at seller’s premises |
| Code without named place | Disputed delivery and cost point | Name a precise address or terminal |
| DDP without local tax registration | Seller cannot legally pay import VAT | DAP or use an importer-of-record service |
| Edition not stated | Ambiguity between 2010 and 2020 rules | Write Incoterms 2020 explicitly |
For marketplaces and direct-to-consumer stores, the decision also interacts with de minimis thresholds, localized pricing and multi-currency checkout, because duty-inclusive prices must be calculated before the customer pays.
Stripped to the essentials
Incoterms are short codes that buyers and sellers in different countries use to agree on who does what during shipping. They answer simple questions: who books the truck or ship, who pays for it, who pays the import taxes and at what moment the goods become the buyer’s responsibility if something breaks or gets lost.
Think of it as a handover point in a relay race. Before the handover, problems belong to the seller; after it, to the buyer. Each code moves that point closer to the seller’s warehouse or closer to the buyer’s door.
Where it is applied
A small outdoor-gear brand based in the United States starts selling jackets to customers in Germany and the United Kingdom. Its first shipments go out on DAP terms, so customers pay VAT and handling fees to the courier at delivery. Refused parcels and complaints about surprise charges quickly follow.
The brand switches to DDP for these markets. It registers for IOSS, assigns HS codes to every product, adds landed-cost calculation to checkout and uses the courier’s duties-paid service. Prices on the site now include all import charges.
Conversion improves and refused deliveries almost disappear, while the brand gains a clear view of its true landed cost per order and adjusts prices for each market accordingly.