Incoterms - In at The DDP End?

BY:

Sandra Strong
24 July 2023

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Rather than seeing Incoterms as just one more piece of bureaucracy that exporters and importers have to face, they should be viewed as an opportunity to improve company performance, maximise customer satisfaction and boost profits. 

Of the eleven Incoterms in the 2020 system, Delivered Duty Paid (DDP) is the one that places the most responsibility on the exporters. Uniquely, an exporter supplying goods on a DDP contract is responsible for the customs formalities and payments of local duties and taxes in the recipient's country. Moreover, the exporter also carries the risk if the goods are lost or damaged at any time before they reach their stated final destination.


That's a serious responsibility for any exporter and one that may be beyond the capabilities of many. Rules and procedures are different for every country. Still, in many cases, the exporter would have to have a registered business and also be registered as an importing country in the country of destination. It can also be challenging to control and predict the costs involved and, therefore, to agree on an appropriate price. In some countries, it's complicated for anyone who isn't regularly dealing with customs procedures in that country to predict precisely what taxes, duties and other charges might be incurred.


So DDP is not something to be entered into lightly, and in many exporting businesses, the three letters will rightly be met with reluctance and scepticism.


However, every Incoterm is there for a reason, and there are several situations where the term can be the most appropriate or even the only workable solution. When I was exporting medical products, most of my sales were to established distributors who knew the import procedures in their countries and were perfectly comfortable with handling arrangements and settling local taxes and costs. Still, occasionally, I would have to send goods to medical practitioners, such as a private practice. They were a commercial operation, but they had no knowledge of customs procedures or desire to learn them. The terms of business would be delivery to their premises, all costs, duties, and taxes paid. Before Brexit, that was relatively easy for customers in an EU country, but it was a different story elsewhere.


From the importer's point of view, a major potential problem with receiving goods on a DDP basis is that the supplier may be paying VAT in the importer's country and unable to reclaim it. So, the cost would be calculated as part of the importer's price, but they wouldn't be able to reclaim it as they would on any other Incoterm. This, however, wasn't a problem for many medical practices in other countries, as often they aren't registered for VAT. Some countries exclude medical practitioners from the requirement to register for VAT. Before Brexit, I'd be obliged to charge UK VAT on such a customer's invoice, as they couldn't give me a VAT number. After Brexit, the goods leave the UK without VAT being charged (I'd need to ensure I had proof of export that would satisfy HMRC), and VAT would be charged at the local rate in the customer's country.


This situation, therefore, removes at least one objection to using DDP; the customer wouldn't be able to reclaim the VAT due to the nature of their business. I still had to be able to complete customs clearance in the customer's country, however, and this usually meant either having legal status in that country or having an arrangement with someone who did. Fast parcel carriers typically operate under special arrangements, meaning they can take responsibility for import clearance and settle local duties and taxes. They'll usually charge an administration fee for doing so, so it's essential to understand the costs upfront. As our company was a regular shipper of goods, the chances were that we could negotiate a better price for the whole delivery than the customer could, and that's another solid commercial reason for the exporter to take most of the responsibility. It will often work out cheaper that way.


Alternatives to using a fast parcel courier include local fulfilment centres and, in some countries, a legal agreement such as a fiscal attorney with a local customs or shipping agent.


It's ideal for any exporting company to ensure that staff understand Incoterms well and can discuss the choice of Incoterm confidently with customers and shippers. This should include teams working in sales, procurement, and finance, as well as in export, import and shipping roles. Strong and Herd offer ICC-registered training in Incoterms, delivered by qualified Incoterms trainers.


While you are here you may be interested in some Strong & Herd LLP training courses & live clinics related to this topic:

Focus On: Incoterms® 2020 Rules

Trading goods worldwide can expose companies to greater risk & cost in the form of lost goods or unnecessary delays or disputes. The simple allocation of responsibilities in the supply chain can help, which is what Incoterms® Rules have been doing since 1936. Generally, Incoterms® are misunderstood and frequently misused; ensure you are using them correctly by joining us on this full-day interactive course.


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