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Key Highlights

• For any exporter, importer, logistics professional, or global seller involved in international trade, understanding the CFR (Cost and Freight) Incoterm is important.

• The CFR Incoterm determines which costs, risks, and responsibilities will be borne by the seller and the buyer.

• While the seller pays for the cost and freight to send a shipment to a named port of destination, the buyer assumes risk after the goods have been loaded onto a ship.

• Export documentation (HS code classification) is an important part of obtaining customs clearance, calculating duties, and being compliant with all import/export regulations. Correctly declaring the HS code will help you avoid delays.

In this guide, you will learn about obligations, risks, compliance for imports and exports, as well as how using an HS code impacts both parties in a CFR agreement.

What Is CFR Incoterm?

• CFR is an abbreviation of Cost and Freight. It is an Incoterm rule defined by the ICC for global transactions.
• The seller bears the freight and transportation charges until the port of destination as specified.
• The risk is transferred to the buyer as soon as the goods are loaded into the ship at the port of origin.
• However, CFR Incoterm is only applicable to sea and inland waterway transport. It is not applicable to air, road, or multi-modal transport.

• The documents for the goods involve the commercial invoice, packing list, bill of lading, and, more importantly, the HS code for customs and tariff purposes.
• The HS code classification must match the product description exactly for smooth customs clearance.
• The importers must check the HS codes used to calculate duties and taxes at their end.

Seller (Exporter’s) Responsibilities Under CFR

• Preparation of goods in conformity with the sales contract and terms.
• Export compliance, including correct HS Code declaration on all export documentation.
• Provide inland transport of goods from the factory to the port of shipment.
• Complete export customs clearance, including the submission of export declarations with HS Code.
• Appropriate packing for ocean transport, including marine quality packing when required.
• Delivery of goods onto the vessel onboard by the date specified.
• All costs to be borne by the seller until loaded onto the vessel, and freight prepaid to the destination.
• Provide the buyer with proper documentation so they can fulfil payment requirements (invoice, packing list, bill of lading, and HS code details are required).

If a pre-shipment inspection is required based on the type of product, port, and commodity classification, the seller will be responsible for handling the required inspections.

Responsibilities of the Buyer (Importer) under CFR 

• Design and implement procedures for import compliance at the point of destination.
• Review and verify documentation from the Seller, as well as reviewing the Harmonized Code(s) and Terms of the Bill of Lading.
• Acknowledge that the seller has no further risk after goods have been loaded onto the Vessels.
• Purchase marine insurance since the Seller is not required by the CFR terms to purchase such coverage for the Buyer.
• Complete all customs export procedures and pay all taxes, duties, and fees based on the HS code.

• Provide for costs related to discharging cargo at the Port of Destination and providing for domestic transportation to the Buyer’s final receiving point.

Work with Freight Forwarders, Customs Brokers, and Logistics Providers to ensure goods are received efficiently.

CFR Shipping HS Code Significance

• The HS code (Harmonized System Code) categorizes products internationally using numerical criteria to facilitate the movement of goods between countries.
• The HS code provides import/export duty classifications and tax requirements based on the hs code. Customs uses the hs code for valuation, determining duty rates, applying quotas against shipments, and as an element of trade agreements.
• The use of an incorrect HS code may result in significant penalties, improper tax assessments, or processing delays. Exporters should ensure they list an accurate HS code before shipping goods globally to prevent compliance-related problems. 
• Additionally, buyers should review the hs code listed on the exporter invoice to ensure accurate duty/tax assessment at the destination.

The accurate use of the HS code improves transparency in international transactions and reduces potential contractual risk associated with international sales transactions.

The cost component involved in the CFR process

• Cost of Goods Sold (COGS). This is the base product to be shipped.
• Cost for inland transportation from the factory to the shipment port.
• Cost for export documentation and export customs.
• Cost of freight to the customer’s destination.
• Cost for packing and handling of the goods.

Sellers must provide the HS code for all export documentation, identifying the commodity classification.

Risk Transfer in CFR Terms

• When the goods are loaded onto a ship at the origin port, the risk of loss or damage transfers from seller to buyer.
• From that point onward, the buyer is responsible for insuring the goods.
• Sellers may be responsible for freight costs, but they are not liable for loss or damage while the goods are being transported.
• Providing proper documentation (such as an invoice) and correct HS code classification are important for mitigating risk and facilitating claim processing.
• Buyers should arrange insurance coverage for their cargo throughout the shipping process and during unloading.

Buyers (the purchaser of the product) are responsible for any costs incurred after unloading from the vessel at the destination port.

Documents Required Under CFR for Importing Cargo

• Commercial Invoice with a detailed description of the items sold and an HS code for product classification.
• Packing List with item quantities and packaging details.
• Bill of Lading (BOL) indicating the name of the carrier vessel, the shipping terms (CFR), and who is receiving the goods.
• Export Declarations (X-D) with the appropriate hs code for importing goods into the country of origin.
• Certificate of Origin (when required)
• Specific Export Permits or Certificates (i.e., Quality, Health, and Phytosanitary) based on the type of product.

To create the above, when the importer receives their customs paperwork, based on the HS code of the items in the imported cargo.

CFR Restrictions/Considerations

• Sea and inland waterway only, not air/multimodal
• No insurance coverage – buyer arranges ins.
• Misclassification (HS Code) can result in a dispute or additional duty.
• CFR is usually better for bulk cargo than for complex/ high-value items.

Tips For Exporting And Importing

• Make Sure That You Review The HS Code To The Official Tariff.
• Clearly Define Responsibilities In Contract Regarding HS Code And Documentation.
• Utilise Freight Forwarders And Customs Brokers Who Are Experienced With CFR And HS Code Classifications.
• Ensure All Export Papers List the Correct Product and HS Code.

Develop Methods of Communication Regarding Corrections That Need to Be Made For HS Code Post-Shipment Documentation Errors.

Final Thoughts

The CFR Incoterm is a key element of international trade, establishing a clear separation of costs, responsibilities, and risks between the exporting and importing parties. The successful application of the CFR depends on proper documentation, including accurate HS codes for both duty calculation and compliance. Exporters should gather and provide appropriately organized documentation with the proper HS classification; importers should confirm the classification is correct and handle insurance, duty payments, and import clearances. By grasping the intricacies of the CFR Incoterm and applying best practices for using HS codes, businesses can reduce risks, prevent delays, and create seamless global shipping strategies.