Incoterms 2020: Who Pays, Who Bears Risk, Who Clears

Incoterms are usually read as a pricing convention, which is why disputes over damaged goods so often surprise both parties. The terms answer three separate questions — who pays freight, where risk transfers, and who clears customs — and the answers do not line up as neatly as the shorthand suggests.

Last updated:2026-08

Three questions, answered separately

Question	What it affects
Who bears freight and insurance	The quoted price and how the customs value is assembled
Where risk transfers	Who carries the loss if goods are damaged or lost
Who handles clearance	Procedural burden and where liability sits

These are independent. A term that puts freight on the seller does not necessarily keep risk with them, and this is where most disputes originate.

The eleven terms

Code	Full name	Seller's responsibility extends to
EXW	Ex Works	Making goods available at their premises — the lightest seller obligation
FCA	Free Carrier	Handing goods to the carrier nominated by the buyer
CPT	Carriage Paid To	Paying carriage to the named destination
CIP	Carriage and Insurance Paid To	Carriage and insurance to the named destination
DAP	Delivered at Place	Delivery to the named place, not unloaded
DPU	Delivered at Place Unloaded	Delivery and unloading at the named place
DDP	Delivered Duty Paid	Delivery with import duties paid — the heaviest seller obligation
FAS	Free Alongside Ship	Alongside the vessel at the port of shipment
FOB	Free On Board	On board the vessel at the port of shipment
CFR	Cost and Freight	Freight to the destination port
CIF	Cost, Insurance and Freight	Freight and insurance to the destination port

The first seven apply to any transport mode. The last four are for sea and inland waterway only — using FOB for an air shipment is a common contractual error that leaves the risk transfer point undefined.

Where cost and risk separate

Under CIF the seller pays freight and insurance to the destination port, but risk transfers when the goods are loaded at the port of shipment.

That means the entire voyage is at the buyer's risk while being paid for by the seller. If the vessel is lost, the buyer bears the loss and claims on insurance the seller arranged.

The same split applies to CFR, CPT and CIP. It is the single most consequential thing to understand about the C-group terms, and the reason "the seller is paying for shipping, so it is their problem until it arrives" is wrong.

How this feeds into Taiwan import tax

Incoterms determine what the invoice covers. They do not change the customs value.

Customs value is always goods price plus international freight plus insurance — see How customs value is calculated. What changes is where those figures come from:

Term	Invoice shows	How freight enters the value
FOB	Goods price only	Added from separate freight documents
CIF	Goods, freight and insurance	Already inside the invoice figure
DDP	Delivered price	Requires unpicking, since it includes duty and tax

DDP creates the most work here, because the delivered price contains items that are not part of the customs value — the import duty and tax themselves. Declaring a DDP invoice amount as the customs value overstates it.

Choosing a term

For a first-time importer, CIF is usually the simplest. The seller arranges freight and insurance to the destination port; the buyer retains control of import clearance and sees the tax assessment directly.

EXW gives the buyer most control and most work. Every leg from the seller's premises onward is the buyer's to arrange, including export clearance in the seller's country — which a foreign buyer is often poorly placed to handle.

DDP looks attractive and hides the tax. The seller handles everything including import duties, so the buyer sees one price. The cost is visibility: you no longer know what was declared, at what value, under which tariff code. If the declaration was wrong, the consequences still reach the goods.

The version matters

Incoterms are contractual, not statutory. They bind because the parties incorporated them, which makes the edition part of the agreement.

A contract should state "Incoterms 2020" explicitly. Terms have changed between editions — DPU replaced DAT in 2020, and the insurance level required under CIP was raised — so an unversioned reference leaves genuine ambiguity about which rules apply.

Where disputes actually arise

Three recurring patterns:

Sea terms used for air shipments. FOB, CFR, CIF and FAS reference loading on a vessel. Applied to an air consignment, the risk transfer point has no meaning.

Named place left vague. "FCA Taipei" does not identify a location. The term requires a named place, and the risk transfer point depends on it.

DDP agreed without the seller being able to perform it. Import clearance in Taiwan requires a party able to act as the taxpayer. A foreign seller with no presence may be unable to complete what DDP obliges them to do.

What Incoterms do not cover

Worth stating, because gaps here are often assumed to be handled by the term when they are not.

Transfer of title. Ownership is a matter for the sale contract and the applicable law. A term settles risk and cost, not who owns the goods at any given moment.

Payment terms. When and how the buyer pays is entirely separate. Pairing a term with a letter of credit or open account is a distinct negotiation.

Breach and remedies. What happens if goods are late, short-shipped or non-conforming is contract law, not Incoterms.

The practical consequence is that a purchase order stating only "CIF Keelung" has settled three questions and left several more open.

Further reading

For the three most commonly used terms compared side by side, see FOB, CIF and DDP compared. For how the resulting figures are assessed, see the Taiwan import tax guide and How customs value is calculated. For valuation disputes, see Customs valuation in Taiwan.

Primary source: the International Chamber of Commerce, which publishes and maintains the Incoterms rules.

Frequently asked questions

What do Incoterms actually determine?

Three things: which party bears freight and insurance costs, at which point risk of loss or damage transfers from seller to buyer, and which party handles export and import clearance. These are separate questions and a single term can answer them differently.

Does the party paying freight also bear the risk?

Not necessarily, and this is the most common misunderstanding. Under CIF the seller pays freight and insurance to the destination port, but risk transfers when the goods are loaded at the port of shipment. Cost and risk part company for the entire voyage.

How do Incoterms affect the customs value?

They determine what the invoice amount covers, not what the customs value is. Customs value is always goods plus international freight plus insurance. Under FOB the freight is added from separate documents; under CIF it is already inside the invoice figure.

Which term is best for a first-time importer?

CIF is usually the simplest starting point, because the seller arranges freight and insurance to the destination port while the buyer keeps control of import clearance. DDP shifts the most work to the seller but also removes the buyer's visibility of the tax assessment.

Are Incoterms legally binding?

They are contractual, not statutory. They apply because the parties incorporated them into their contract, so the version matters — a contract should state Incoterms 2020 explicitly rather than leaving the edition ambiguous.