Choosing the right Incoterm: Ex Works (EXW) vs. FCA

Get your import & export processes right by understanding the key elements of Incoterms, Ex Works (EXW), common mistakes & best practices.

Having been exposed to a wide range of shipping documents and Incoterms over the past decade, I have reflected on some of the best practices and crucial elements that should consistently be followed for trouble-free import and export processes.  Air Shipment Meaning

Choosing the right Incoterm: Ex Works (EXW) vs. FCA

Although we are moving towards the digitalisation of customs and paperless trade, the transfer of essential shipping information remains a necessity. This can be achieved through various means such as electronic data interchange (EDI), advance shipment notifications (ASN), emailing PDFs, or attaching physical copies of documents to parcels, among other methods.

Sometimes certain discrepancies can be noticed when dealing with various shipping documents and one of the most common mistakes is applying the incorrect Incoterm. 

Currently, it is mandatory to state Incoterms in the UK’s import declarations. This requirement stems from the transition from the old UK customs system, CHIEF, to the new Customs Declaration Service (CDS), along with the introduction of new demands.

The newest version of Incoterms was released in 2020 and these are governed and revised every 10 years by the International Chamber of Commerce. Although not mandatory to be stated in the shipping paperwork, once they are agreed upon and used – the Incoterms become legally binding. 

Numerous trade and customs-related institutions, organisations, and private companies offer training in Incoterms. Understanding these terms helps clarify the rules and obligations between sellers and buyers. It also instils confidence in situations such as resolving insurance claims if any issues arise with the goods during transport.

While many companies adhere to commercial practices and may not always exercise or seek their rights under a specific Incoterms rule, often depending on customer relationships, it’s important to note that Incoterms also determine the allocation of risks and costs. Therefore, it is crucial for businesses to at least understand the Incoterms that are relevant to their operations and when trading goods.

There are advantages and disadvantages of various Incoterms, we’ll focus on the EXW (Ex-Works) Incoterm, what its misuse can lead to, what are the risks and propose a different Incoterm that could be more suitable in various scenarios.  

According to ICC’s Incoterms ® 2020, EXW places maximum responsibility, risks and costs on the buyer which is visualised in the ICC’s practical wallchart (that can be downloaded for free here)

However, what often happens, in order to accommodate for the customer (buyer), the exporter arranges transport and/or an export declaration, which is not in accordance with rules under this Incoterm. 

One of the most crucial aspects to consider is the legal obligation pertaining to the proof of export evidence. Under EXW, it’s the buyer’s (importer’s) responsibility to arrange for an export declaration, however, the buyer may not provide a copy of it, as it is not obliged to do so.

This poses a problem for the seller (exporter), as the exporter is then unable to prove to the authorities the goods left the country (were exported). The seller may lack complete knowledge about the goods’ final destination if they are diverted elsewhere, as the seller is not responsible for arranging the transport. 

Typically, the exporter’s commercial invoice would be zero VAT rated. Strictly speaking, in order to legally apply zero VAT to the invoice, there should be evidence of goods being exported. In the case of a lack of proof of export, authorities have every right to demand the VAT to be paid back by the seller (exporter). 

The safest Incoterm to adopt when the exporter is responsible for arranging the export declaration and is loading the goods upon the vehicle’s arrival is FCA (Free Carrier).

Under FCA these activities are the responsibility of the seller, therefore my recommendation would be to use FCA instead of EXW (e.g. FCA Company XYZ, Bristol, UK, Incoterms 2020) and ensure the FCA Incoterms are stated clearly on the shipping documents or correctly transferred by electronic means.

Although EXW Incoterm was slightly revised in 2020 version (as opposed to 2010 version) to tackle the issue of sea transportation and Bill of Lading’s transfer (and article A6/B6 explains this change in more detail), ICC’s Publication No. 723E explains that businesses should make careful considerations, before using EXW for domestic sales.

For the above reasons, I strongly urge traders to think about the EXW implications and consider using FCA Incoterm instead. 

Choosing the right Incoterm: Ex Works (EXW) vs. FCA

Tariff Hs Code Sylwia Nowak is a Customs & Global Trade Compliance professional with a comprehensive background in the field, holding Bachelor’s degree in Human Geography, Diploma in World Customs Compliance & Regulations and is finalising Master’s Degree in International Trade at Warwick University. With extensive experience in customs operations, customs auditing and trade regulations, she excels in ensuring compliance, promoting trade technology and customs digitalisation. Sylwia holds expertise in customs special procedures and trade compliance strategy, is an ‘alumna’ at Model WTO. member of the Trade Policy Working group at Make UK and IOE&IT NTFC Women in trade and SME’s working group & Membership Committees.