Is DDP the best solution for your shipping process? Regarding Incoterms®, US importers and exporters often choose DDP (Delivered Duty Paid) for their shipments. It is important the buyer and seller understand their obligations and liabilities under this term.
Here are a few highlights for consideration when using this Incoterms®. Under this arrangement, the seller assumes the most responsibility while simplifying the process for the buyer. Below are examples of how a DDP shipment can cause misfortune.
For US Exporters
VAT (Value Added Tax)
DDP may assign the seller/exporter the responsibility of paying the importing country’s value added tax or similar tax, although this can be changed with the consent of the buyer and seller. VAT can be expensive, sometimes 15-20 percent of the value of the goods plus duty. Ironically, in many cases, and depending on what they do with the goods, the buyer may be eligible for a VAT refund. VAT refunds accrue to the buyer. This means that, at best, you must absorb the VAT; or at worst, absorb the VAT while your customer gets a VAT refund.
Foreign Customs Compliance
The exporter or seller is responsible for clearing the goods through foreign Customs. This includes complying with the foreign country’s import regulations and recordkeeping requirements. Do you know anything about import regulations in Brazil or Germany? Do you want to be held accountable by foreign Customs authorities if something goes wrong? If not, then stay away from DDP.
Storage and Demurrage
Under DDP, the seller must absorb the costs associated with Customs clearance. This includes any storage or demurrage charges incurred due to delays by Customs authorities, other government agencies, delivery drivers, and air/ocean carriers. Since these are unanticipated costs, they can quickly eat into your profits or completely negate them.
For US Importers
Customs Exams
When DDP is handled properly, the seller’s US agent arranges clearance with the seller as the importer of record. While this removes most of the import liability from the buyer, it creates another problem: the increased likelihood of a customs exam. US Customs assigns a higher risk score to inbound shipments with foreign importers. The higher the shipment’s risk score, the more likely Customs is to pull the shipment for an exam. It happens quite often and it’s the buyer who loses out.
Delivery Delays
Even if you’re lucky enough to do business with a seller that includes clearance and delivery at cost, you still have no guarantee that the seller has obtained the best price for the level of service required. To keep their costs down, many sellers will choose the lowest-cost services for transportation and clearance. Cheaper transport or clearance for the seller usually translates to delivery delays for the buyer.
Knowing where your responsibility and risk lie as importers and exporters—especially when choosing DDP—is vital to the successful movement of your shipments. An alternative could be choosing DAP. With DAP the consignee would get reimbursement from the shipper after the transaction is completed. If you have questions about which Incoterm® would be best for your business needs, reach out to Mohawk Global.