Incoterms are a list of guidelines that have been developed by the International Chamber of Commerce to facilitate communication between international shipping companies. They are used during the negotiation of a contract and set out the responsibilities of the buyers and sellers during the transport of a shipment at each stage, and which party bears the costs and risks of a loss of goods during transit. One of the most common incoterms to show up in shipping documents is DDP or Delivery Duty Paid.
What is Delivery Duty Paid?
The Delivery Duty Paid incoterm represents the highest risk for the seller of goods. This means that the seller assumes complete responsibility for the DDP shipment until it arrives at its destination. The seller must pay the cost of transportation, duties and taxes, customs and tariffs, currency exchange, insurance, and handling. They are also responsible for organizing all modes of transport for the goods and must pay fees if the shipment is delayed.
Buyer and Seller Disadvantages
Although the DDP is suitable in many instances, there are some distinct disadvantages to using this incoterm for international trade.
Seller Assumes All the Risk
While the DDP is advantageous for buyers who know the total landed cost, for sellers, it is a high-risk position as they remove the obligations from the buyer and assume all costs to the point of delivery.
This does give the seller control over the shipment, but it also means they are responsible for the goods from the time of purchase until they reach their destination and are ready for unloading. There is a huge range of variables to be considered along the supply chain that can end up costing your company substantial amounts of money should anything go wrong.
Under the DDP, the seller pays for the cost of Value Added Tax (VAT) which can be up to 20% of the cost of the goods as well as duties. Unfortunately, any potential VAT refunds are accrued to the buyer and the seller must absorb the cost. While there are instances where the cost of the VAT can be transferred to the buyer, many sellers often mark up their freighting costs to cover the price of tax and customs clearance which ends up costing the buyer more.
Additionally, the seller is responsible for bringing the goods through foreign customs, which not only means familiarity with the country’s recordkeeping and import regulations but also bearing the costs of customs and carrier delays which can quickly eat into your profits.
Buyer Has No Control Over the Movement of Goods
One of the biggest advantages for sellers is also the biggest disadvantage for buyers. As the seller assumes the maximum risk for the shipment, they also have the greatest amount of control, which means poor supply chain visibility for buyers.
This can mean an increased risk of customs exams, shipping delays, no direct way to track your order other than through the vendor, and no way to interject if there are issues with your shipment.
For buyers, a DDP shipment means less risk and stress, and for sellers, it means greater control over the shipping process. However, a DDP incoterm is unsuitable for all shipments and can end up costing you more than you bargained for in hidden costs and supply chain delays.
To ensure your shipment reaches its destination smoothly, contact Asiana USA at (855) 500-1808 to find out whether the DDP incoterm can work for you, or let us help you find a better option for your business.