Understanding the Differences Between EXW and FCA Incoterms: Which is the Best Option?
- Arne Mielken
- Mar 24, 2024
- 6 min read
Mastering Incoterms - How to Avoid Common Mistakes and Optimize Your Import and Export Processes with Ex Works (EXW)
Sylwia Nowak has recently written about Incoterms and published the article on LinkedIn.
Even if digital customs and paperless commerce are the way of the future, vital shipping data must still be sent. There are many methods to do this, such as providing physical copies of documents with goods, using electronic data exchange (EDI), emailing PDFs, and getting advance shipping notifications (ASN).
Using the incorrect When dealing with various shipping documents, one of the most common mistakes committed is using the incorrect Incoterm, and sometimes discrepancies may be seen.
The Incoterms are now required to be included in UK import declarations. This need stems from new regulations and the move to the Customs Declaration Service (CDS) from the former UK customs system, CHIEF.
Every 10 years, the International Chamber of Commerce revises and administers the Incoterms. In 2020, the most current version was released. It is not necessary for the Incoterms to be contained in the shipping papers; once they are agreed upon and used, they become legally enforceable.
Many institutions, groups, and private companies involved in trade and customs provide incoterms training. Knowing these terms can help you better comprehend the obligations and rules that buyers and sellers have. Furthermore, it instils confidence in situations such as managing insurance claims if issues arise with the assets during transportation.
It's important to keep in mind that Incoterms also regulate how costs and risks are allocated, even while many companies adhere to corporate policies and may not always seek or exercise their rights under a specific Incoterms rule—this is sometimes depends on client relationships. Therefore, businesses must understand the applicable Incoterms at the very least while selling goods and doing business.
The use of several Incoterms has advantages and disadvantages. This essay will focus on the EXW (Ex-Works) Incoterm, go over use issues, and provide a substitute that could be better suitable in certain circumstances.
What is Ex Works (EXW)?
The Incoterms ® 2020 of the ICC state that for EXW, the buyer is primarily responsible for all obligations, risks, and costs.
The items are made available for pickup at the specified location under EXW by the exporter of record. In many businesses, this is very impractical, which contributes to the widespread misuse of EXW. Typically, the exporter's forklift driver loads the goods once a vehicle arrives at the exporter's (specified) site.
However, this is not what the terms of EXW (Ex Works) call for.
The buyer's transport company should arrange for a Moffett or a vehicle with a tail lift instead of using a less expensive vehicle. When this truck comes, the driver is responsible for loading the goods. It isn't practical for many organisations, and there are often misunderstandings over who is responsible for what, particularly when loading large, heavy objects. This means not just putting up specific equipment but also accurately filling out method statements and risk evaluations. Effective communication and preparation are crucial amongst all stakeholders involved, including the buyer, the transport company, the vendor, and the health and safety personnel.
EXW does not require exporters or sellers to make an export declaration or apply for any export permits if an item is subject to export restrictions. Since the seller is the one with the most knowledge about the products it sells or exports, this would also be very troublesome from the importer's (buyer's) perspective. The buyer may not be aware of the technical specifications or have access to any technical drawings, which are necessary for:
properly classifying goods under the Harmonised Tariff Schedule (HTS) and asking permission for export
However, in order to accommodate the buyer, the exporter often arranges transportation and/or an export statement, which is against the terms of this Incoterm.
Export paperwork and legal obligations under the FCA and EXW
One of the most crucial legal needs to consider is proof of export evidence. It is the buyer's (importer's) responsibility to arrange for an export declaration under EXW, however they are under no obligation to do so and are free to decline to provide one.
This is a problem for the seller, or exporter, since it is hard for the exporter to prove to the authorities that the goods were sent from the country. Since they are not responsible for arranging transportation, the seller may not be fully informed if the things are sent to a different location.
Normally, the exporter's business invoice would have a zero VAT rate. Strictly speaking, the invoice cannot be rightfully tagged with zero VAT unless there is evidence that the goods were exported. In the case that there is no record of the export, the authorities have complete authority to order the seller (exporter) to reimburse the VAT.
What is the most effective Incoterm for an export declaration?
FCA (Free Carrier) is the safest Incoterm to employ when the exporter is in charge of organising the export declaration and is loading the cargo when the vehicle arrives.
My recommendation would be to use FCA rather than EXW (e.g., FCA Company XYZ, Bristol, UK, Incoterms 2020) and to ensure that the FCA Incoterms are correctly delivered electronically or appropriately specified on the shipping documents. The seller is in charge of these tasks under FCA.
Companies should use caution before using EXW for domestic sales, according to ICC Publication No. 723E, even though the 2020 version of the EXW Incoterm slightly revised the 2010 version to address the issue of sea transportation and the transfer of Bills of Lading (more on this in article A6/B6).
Due to the above listed reasons, we recommend that traders consider the implications of using FCA Incoterm rather than EXW.
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