Key Points:
- FOB means “Free On Board” or "Freight on Board"
- CIF means “Cost Insurance Freight"
- If you want to know the valuation method for a particular destination, you can always find out from our Easyship's Countries page.
“FOB” and “CIF” are terms that you’ll come across often in international shipping. They outline the agreement between a buyer and seller when it comes to transporting goods between them.
These Incoterms mainly apply to bulk cargo and oversized items that are transported by sea freight or inland waterway.
However, even if you’re an eCommerce seller that ships small parcels via air freight, it’s still useful to have basic knowledge of these terms.
This is because they are also used by customs departments worldwide to determine the value of incoming shipments. By using these terms as a benchmark, they can see whether duties and taxes are owed from your shipment.
Table of Contents
What Does FOB in Shipping Terms Mean?
FOB means “Free On Board” or "Freight on Board."
What the seller is responsible for: Getting the product on the ship and clearing it for export.
What the buyer is responsible for: Ensuring the shipment and handling the importation process, including paying for any import duties.
From a buyer’s perspective, it’s preferred to have goods delivered FOB because you will have more control over the freight and its costs. Should a problem arise during transport, your freight forwarder will be more responsive to you and your concerns, versus a forwarder that works for your supplier instead.
What is CIF delivery?
CIF means “Cost Insurance Freight."
What the seller is responsible for: The cost of the goods being transported, having the goods insured, and paying the freight charges to deliver the goods to the buyer’s chosen destination.
What the buyer is responsible for: Unloading charges at the destination and any further shipping costs to the final destination.
Choosing to deliver goods by CIF is convenient if you’re new to importing and don’t have the capacity to explore your freight and insurance options. However, by leaving these tasks up to your seller/supplier, they will most likely mark up these costs to make a profit.
Additionally, should problems arise during transit, it may be difficult to get a resolution as you’ll be working with the supplier’s vendors. Since you’re not their client, they may be more reluctant to deal with your situation and not have your best interests in mind.
Which is Better FOB or CIF?
As mentioned earlier, customs departments will use either FOB or CIF as a valuation method to determine the taxable value of foreign imports.
Valuation methods differ for each country. If you want to know the valuation method for a particular destination, you can always find out from our Countries page.
Here’s an example of how shipping costs for a shirt can vary based on a country’s valuation method.
Calculating tax with the FOB method
Let’s say you want to ship a shirt, valued at $100USD, from the US to Australia. When getting a quote on Easyship, this USPS solution comes up.
Here’s how the tax & duty amount was calculated.
Australia’s tax & duty calculation method: FOB
Tax threshold: $0 AUD
Duty threshold: $1000 AUD
Since the value of the item is $100USD, taxes but not duties will apply.
Australia’s tax rate (VAT/GST): 10%
Because we’re using the FOB method, the tax will simply be a percentage of the product price. The calculation will look like this:
$100USD item value x 10% tax = $10 import tax
Calculating tax with the CIF method
In this case, we’ll ship the same $100USD shirt from the US to the UK.
You’ll notice that shipping this item via USPS to Australia and the UK is the same rate. However, the tax & duty amount is different ($24.47 for the UK vs $10 for Australia).
The UK’s tax & duty calculation method: CIF
Tax threshold: £15 GBP
Duty threshold: £135 GPB
Since the value of the item is $100USD, taxes but not duties will apply.
The UK’s tax rate (VAT/GST): 20%
Because we’re using the CIF method, the tax will be a percentage of the product price and the cost of shipping.
($100USD item value + $22.33 shipping cost) x 20% tax = $24.47 import tax
This also means the tax amount may vary, as it’s dependent on which courier you use. That’s why the tax amount is different if you use the DHL solution, as the tax calculation will be based on the $23.90 shipping cost versus USPS’ $22.33 shipping cost.
Conclusion
We hope this article clarifies the difference between FOB and CIF!
To better understand duties and taxes in eCommerce, check out our comprehensive duties and taxes guide that will help you prepare your business to comply with trade regulations.
