Although many checks are mandatory, it is crucial that in a purchase or sale contract, ICC Incoterms® 2020 Rules are noted. These ‘International Commercial Terms’ can assist in providing a common ground between seller and buyer to establish obligations and the division of costs for each party concerning the international movement of goods.

The cost of transportation and the associated charges can vary based on the transport method, the consignment's size and weight, and the distance that the shipment must travel.

Domestic transportation factors must be considered during cost evaluations, since numerous export and import entities are not based close to a port or airport. The exception to the rule is moving goods via a Fast Parcel Operator (FPO), who usually provides a total cost for the door-to-door movements they offer.
Understanding the costs incurred to sell or buy internationally is essential in international trade.

The ExWorks Incoterms® 2020 Rule (EXW) gives a seller the minimum costs and responsibilities. Potentially it makes EXW seem like an excellent choice for sellers, as they don't have many liabilities or obligations. Unfortunately, the limited involvement required of the seller under ExWorks rarely works in reality. Often, the seller does more than they are legally obligated to do, and this can put the seller in a difficult position, for example, thinking their sale is EXW, when the truth is more likely to be FCA (Free Carrier) with the costs and responsibilities relevant to the FCA rule being picked up by the seller.

DDP (Delivered Duty Paid) is another extreme; with DDP, the seller must cover all costs to take the goods to the agreed delivery address and bears full responsibility until the goods are delivered, where the buyer is then obligated to offload the goods and take delivery.

All Incoterms® 2020 Rules require that the relevant party, seller, or buyer, carry out their legal obligations of the chosen rule and understand the costs incurred by carrying out their responsibilities. These checks are essential, especially if the sale is under DDP. The first question to address with DDP is to ascertain how the seller can take responsibility for the export from the country of supply and be the importer in their buyer’s country. Sometimes, DDP is known as the buyer’s friend, waiting for the goods to arrive without being concerned about import Customs clearance or additional costs.

Does this mean that DDP is the seller’s enemy? There is obviously a reason DDP exists in the ICC Incoterms® Rules, and it isn't impossible to supply under DDP, but planning is essential. The question “Can we meet the obligations of the rule?” must be quickly followed by “How much will it cost us?” and “Have we factored our costs into the quotation?” Incoterms® 2020 Rules do not dictate that a cost must be reallocated from the party who has paid it to the other entity involved in the trade. Still, if a seller doesn't recover transport costs and ancillary fees from the buyer, it reduces the sales profit margin.

There are many examples of DDP sales making a loss because the seller didn't incorporate the duty and tax in their quotation. The rules surrounding tax or VAT are complex and vary by country.

While both parties agree to a specific term for the international transaction, it is crucial to comprehend the costs to be incurred to determine whether they will be transferred to your customer.

If you agree on a DDP sale, is expecting your buyer to pay the costs incurred at import unreasonable? Ultimately, it is a commercial decision, but nobody wants to sell their goods at a loss. 

Valuation is one of the pillars of Customs compliance; the potential problem with a DDP sale is that many countries apply duty on a C I F Value - Cost, Insurance and Freight. Could that mean a DDP price will have import duty and tax charged on top of a figure already including duty and tax? It's crucial that the seller can control the import declaration and be clear on the forwarders and Customs costs if DDP has been agreed.

Incoterms 2020® Rules at import also require close control and awareness of costs. When the purchaser agrees on an Incoterms® 2020 Rule with their supplier, it will be very likely that there will be additional costs for the buyer to consider and cover. Duty and VAT are the most likely (though VAT is often recoverable from the Customs authorities), but there are also offloading costs, domestic transport, and storage to be considered. Perhaps Delivered At Place (DAP) has been agreed upon, but is the delivery ‘place’ clear? For a company based in Inverness, for example, additional costs exist if DAP (Delivered At Place) Felixstowe has been agreed upon. Unless the buyer has expressly agreed to a named place, the seller can decide on the place of delivery. Clarity is vital to avoid not only unnecessary costs but also having a problem to resolve.
 
However, buyers need to be aware that purchasing under DDP Incoterms® 2020 Rules can lead to some interesting questions: Can the seller adhere to the rule? Is the buyer in a worse position than potentially DAP? Nothing is definitive, but agreeing with the rule is less than half the story. Can we meet the obligations, and do we understand our costs? It must be in our mindset every time.     

If you are interested in exploring this topic further, you might find it worthwhile to consider the training courses and live clinics offered by Strong & Herd LLP: