Finacial pitfulls for the Seller with the DDP Incoterm

According to the International Chamber of Commerce (ICC) Incoterms 2010, DDP (Delivery Duty Paid) means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination.

The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

This term carries a number of risks and costs to the seller that may never have been anticipated at the time that the contract was agreed. In fact, the seller may be placed in a position where they become victim to bad management and unless they are protected in their contract with the buyer, they may find no recourse to these costs.

The first problem is that in a number of countries an organization cannot clear goods through customs and pay any duties or taxes due unless they are registered in that country. Since registration can carry other responsibilities such as company account reporting or a liability to various taxes (e.g. Corporation Tax), then becoming a registered company may not be a possible course of action. This is especially the case when there is only one shipment involved.

The best course of action is to use a term such as DAP (Delivered at Place) where the clearance is down to the buyer, but what if obtaining the contract is based on accepting DDP terms only? Does an organization decide to avoid a lucrative contract because of potential risks? Only the organization concerned can make this decision.

It could be that the buyer will offer to clear the goods for the seller and then charge back the costs to the seller. This might be acceptable if the seller can use their own agents for the job, but what if the buyer insists on using their own clearance agent? The problem here, immediately, is that the seller loses complete control on what happens to the goods once they are delivered to this third party, and have no way of determining costs, whilst simultaneously being completely responsible for all costs.

The most unpredictable and potentially costly of all charges is storage (often known as demurrage), especially with airfreight shipments. If the clearance agent of the buyer does not clear the goods in a timely fashion, or “loses” the goods in a bonded warehouse for some time once they have been passed to them by the transport company, (especially with large shipments) then the storage costs that accrue have to be paid by the Seller, even though they have completed all documents correctly and shipped the goods in the agreed manner. These costs can be anything from a few hundred US Dollars to USD 30,000 depending on the size of the shipment.

Unless the Seller has asked for this eventuality to be considered in the contract, and the costs, if any, passed to the buyer due to the mishandling, or worse, from their clearance agent, then the Seller might find their profit margins seriously eroded by such costs. One solution might be to add financial coverage at the time of negotiation, but this could end up with the Seller out-pricing themselves in the market place.

So it would be good practice to negotiate, at the contract stage, for any additional costs, after a period of perhaps 2 days after the goods have been released by the transport company, to be borne by the Buyer, because their clearance agent has misplaced the goods or been tardy in their work. If the Buyer refuses, whilst still insisting on using their clearance agent, then the Seller may have to consider the reasons why and make a commercial decision at the time whether to proceed with the contract.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other useful articles on exporting on the Point to Point Export Services website at www.point-point.com
 

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