Incoterms are a list of guidelines designed to facilitate communication between international freight shipping companies. Their purpose is to establish the risks and responsibilities shared by the buyer and the seller when shipping cargo, such as carriage expenses, insurance coverage, and other shipping arrangements.
One of the most common incoterms used in shipping documents is Delivery Duty Paid (DDP). Learn what DDP is about, how it affects the true shipping costs, and why it may not be the best choice for sellers.
What Are Incoterms?
The word “Incoterms” is a registered trademark of the Incoterms rules (short for International Commercial Terms). They are pre-defined international trade terms designed and maintained by the International Chamber of Commerce (ICC).
Incoterms are designed to standardize and simplify international trade, helping buyers and sellers establish their respective risks and responsibilities when a shipment is in transit from its country of origin to its delivery location.
The latest iteration of Incoterms rules is known as Incoterms 2020. This version lists 11 different sets of shipping terms: 7 for all modes of transport and 4 for transporting freight by ocean, sea, and inland waterways. The 11 Incoterms are as follows:
Shipping terms applicable for any mode of transportation:
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage Paid To (CPT)
- Carriage and Insurance Paid To (CIP)
- Delivered At Place Unloaded (DPU)
- Delivered At Place (DAP)
- Delivered Duty Paid (DDP)
Shipping terms for ocean freight, sea freight, and inland waterway transport only:
- Free Alongside Ship (FAS)
- Free On Board (FOB)
- Cost and Freight (CFR)
- Cost Insurance and Freight (CIF)
What is Delivery Duty Paid?
Delivery Duty Paid (DDP) is one of the seven Incoterms applicable to any mode of transport. Under DDP, the seller assumes the maximum responsibility level for the shipment from its departure until it arrives at the destination country, at which point the risk transfers to the buyer.
Under the DDP agreement, the seller is responsible for the shipment at all points before delivery and in nearly all aspects. For instance, they must pay the transportation cost, import duty and taxes, customs and tariffs, currency exchange, insurance, handling, and all other applicable import formalities.
The seller is also responsible for import clearance, managing customs documentation (e.g., proof of delivery), and organizing all modes of transport for the goods and must pay fees for any delays during the delivery process.
Buyer and Seller Disadvantages
Although Delivery Duty Paid is suitable in many instances, there are some drawbacks to using this Incoterm for international trade.
Seller Assumes All the Risk
While DDP is a good Incoterm for buyers who know the total transportation cost. It imposes the highest risk of loss on sellers because they have to assume all charges 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 port of destination and are ready for unloading.
There is a vast range of variables to be considered along the supply chain that can cost your company substantial amounts of money should anything go wrong.
Potential Hidden Costs
Under the DDP, the seller is responsible for paying taxes such as Value Added Tax (VAT), which can be up to 20% of the cost of the goods and duties. For example, when shipping to a country in the European Union, the seller must pay that country’s relevant import VAT.
While there are instances where VAT charges can be transferred to the buyer, many sellers often mark up their shipping costs to cover the tax and customs clearance price, increasing the buyer’s shipping costs.
Additionally, the seller is responsible for bringing the goods through foreign customs and dealing with all customs formalities. It requires extensive knowledge of the destination country’s recordkeeping and import regulations. The seller also has to bear the costs of all customs duties, including carrier delays.
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 maximum obligations for the shipment, they also have the greatest amount of control over the cargo, which can potentially mean poor supply chain visibility.
These factors can translate into extra risks for buyers. Examples include the following:
- Customs delays and additional inspection fees
- Extra shipping delays
- No direct way to track your order before it reaches the port of destination (unless the seller willingly provides cargo tracking services)
- No way to interject if there are issues with your shipment during transit (unless the seller is willing to provide help).
Potential Alternatives to DDP
Buyers looking for more control over the cargo and sellers looking for Incoterms with reduced risk of loss can explore one of these alternatives to DDP:
Carriage Paid To (CPT)
Under this Incoterm, the seller’s primary duty is dealing with transportation costs and arranging carriage to an agreed-upon location (e.g., container yard, air cargo terminal, etc.). The buyer retains responsibility over the cargo during transit, and must pay for cargo insurance.
Once the seller has delivered the cargo to the destination country and handed it over to the carrier responsible for the final delivery, the risks transfer from the seller to buyer.
Although this Incoterm imposes most of the supply chain costs on the seller, additional costs and responsibilities are split more fairly.
Carriage and Insurance Paid To (CIP)
Carriage and Insurance Paid To (CIP) works similarly to CPT, but the seller assumes the cost of insurance. While this Incoterm is closer in principle to DDP, the buyer retains responsibility over the cargo for almost the entire shipping process, offering the buyer better supply chain visibility.
Free Carrier (FCA)
Under a Free Carrier (FCA) shipping agreement, the cargo is the responsibility of the buyer for the near-entirety of the delivery process. Although the seller must handle export clearance, pre-carriage from their facilities to a transportation hub, and other export formalities, the transfer of risk from the seller to the buyer occurs at the port of origin.
Buyer responsibilities include paying for insurance and transportation from the origin port to the agreed-upon destination port, imposing minimal risk to the seller.
Contact Asiana USA to Find the Best Incoterms for Your Shipments
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 customs duties, supply chain delays, and other hidden costs.
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.
Additional Resources
- The Disadvantages Of The Delivered Duty Paid (DDP) Incoterm
Related posts:
Certainly! As an expert in international trade and logistics, I've been extensively involved in the intricacies of Incoterms and their application in global shipping and trade transactions. My expertise spans various aspects of the Incoterms rules, from understanding the fundamental principles to practically implementing them in different scenarios.
The International Chamber of Commerce (ICC) formulated the Incoterms rules as standardized guidelines aimed at harmonizing and simplifying international trade practices. These terms delineate the responsibilities and liabilities between buyers and sellers throughout the shipment process, encompassing crucial elements such as shipping costs, insurance, risk allocation, and logistics arrangements.
In the provided article about Incoterms, the focus primarily revolves around the concept of Delivery Duty Paid (DDP), one of the widely utilized Incoterms applicable to any mode of transport. DDP places the highest responsibility on the seller, where they bear the risks and costs associated with the shipment until it reaches the buyer's designated location in the destination country.
Key points highlighted in the article and related to Incoterms include:
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Overview of Incoterms: Incoterms are standardized international trade terms established by the ICC to clarify the obligations and risks between buyers and sellers during transit.
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Incoterms 2020: The article mentions the latest iteration, Incoterms 2020, which includes 11 different sets of terms, categorizing them into seven applicable for all modes of transport and four specific to ocean, sea, and inland waterway transport.
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Delivery Duty Paid (DDP): This Incoterm places maximum responsibility on the seller, encompassing transportation costs, import duties, taxes, customs clearance, and all other necessary import formalities until the goods reach the agreed-upon destination.
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Advantages and Disadvantages of DDP:
- Advantage: Offers control over the shipment.
- Disadvantages:
- Seller assumes significant risk and bears additional costs.
- Potential hidden costs, including VAT, duties, and customs clearance fees.
- Limited control for the buyer over the movement of goods.
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Alternatives to DDP:
- Carriage Paid To (CPT): Seller handles transportation costs, buyer assumes cargo responsibility upon delivery.
- Carriage and Insurance Paid To (CIP): Similar to CPT, but the seller covers insurance costs.
- Free Carrier (FCA): Buyer assumes responsibility early in the delivery process, with minimal risk to the seller.
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Recommendations: The article suggests exploring alternatives to DDP based on specific needs, emphasizing the importance of selecting the appropriate Incoterm for successful and cost-effective shipments.
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Additional Resources: Mentions supplementary information related to the disadvantages of DDP, seller's responsibilities, and insights into when exporters should opt for DDP.
Understanding Incoterms and their implications is crucial for optimizing trade operations, minimizing risks, and ensuring smooth international transactions for both buyers and sellers.
