Incoterms 2010 – DDP – Delivered Duty Paid

The DDP (Delivered Duty Paid) incoterm is one where the seller’s price to the buyer should include all costs required to deliver the goods to the buyer’s door, up to and including customs clearance all duties and taxes payable on import.  All risks and all responsibilities for the shipment should also be for the account of the seller.

The importance of considering Customs Clearance
Hence the difference between DAP (Delivered at Place) and DDP is the additional cost of the customs clearance in the country of import.  However, this does not just include the actual cost of the customs clearance and the payment of any duties and taxes, but also, if there are any delays on import, all storage and demurrage costs as well.  Sometimes it can be difficult to predict if there will be any delays, so in this scenario how does the seller  cover any shortfall if the worse should happen?

Since the seller is controlling the whole shipment (and the supply of all documents) then, as long as there is a good relationship between the shipper and the customs clearance agent and the documentation is correct, the import should go through smoothly.  Please note that in some countries (the USA for example) it is not allowed for the freight forwarder to complete any customs clearance entries.  Legally the two functions of transport and customs clearance must be completed by different organisations.  The seller must check whether this condition applies in the country of import and to make the relevant agreements before the customs clearance procedure has to be completed.  Its usually not a good idea to arrange such matters when the goods have physically arrived, although in the majority of cases the freight forwarder will have facilities or relationships in hand to assist.

Generally speaking, the customs clearance can go one of three ways.  The Customs Authority concerned can accept the face value of the customs entry (and the assumption that the entry matches the documentation and that the documentation accurately reflects the physical characteristics of the shipment) and will allow the clearance agent to present the entry (either electronically or manually) without any further checks.  Alternatively, the Customs Authority may decide to check the information on the customs entry against the supporting import documentation.  Such checks are often done randomly.  However, sometimes they are done because the Customs Authority have received information that the entry is flawed in some way.  In this later case, the Customs Authority is more likely to not only check the information on the customs entry against the supporting import documents, but also to check that the documentation matches what has been physically shipped.  Again, such detailed checks can be done randomly.

It can take extra days for these checks to be made and, unfortunately, this can usually lead to the goods not physically moving within the accepted demurrage/storage period, so these charges can and will be added to the cost of the import.  There is nothing that can be done about random checks – they just have to be accepted as one of the risks when shipping goods internationally.

The problem arises if the Customs Authority finds any discrepancies.  It could be that the discrepancy is due to a typing error made by the clearance agent, which does happen, or because the documentation is not properly prepared so that the clearance agent is unable to complete their documentation correctly.  If the discrepancy is due to any deliberate action and this is discovered to be the case, then the penalties can be rather severe, depending on the Customs Authority in question, the type of goods being imported and the circumstances of the discrepancy.

If the mistake is due to the clearance agent, then the seller should ensure that part of the contact they have with this agent agrees that if any errors are made and costs are levied against the seller as a consequence, then these ‘consequential’ losses should be for the account of the clearance agent.  However, the seller must supply good quality information on their export documentation, otherwise the agent could, quite legitimately, argue that it was the lack of such information which resulted in the incorrect entry.

It should go without saying that the seller must make sure that the export documentation accurately reflects what has been physically shipped and that this information is clearly detailed to allow the Customs clearance agent to do their job correctly.  Declaring 3 items when 6 have been shipped is technically smuggling, even if the extra 3 items are free of charge warranty replacements.  Not stating an HS Commodity code on the invoice could mean that the clearance agent has to make a judgement call about which code is actually correct, which could lead to extra duty and taxes being paid if the wrong code is used.

In all circumstances, the legal responsibility for an incorrect entry under DDP terms belongs to the seller, unless the local law in the country of import determines otherwise.  In my experience, it is rather rare for the local law to do so.

Consequently, this is why the seller (under DDP terms) must always ask the clearance agent to provide a copy of the entry documentation to them so that this can be checked by the seller.  If there are any errors then the clearance agent has a period of time (usually) in which they can amend the entry and ensure it is correct.  Please note, however, that in most countries, trying to claim back any overpaid duties or taxes due to entry mistakes, can be a complicated process with no guarantee of success.  However, it is still important that the seller ensures that the entry has been completed correctly.

This is where additional problems can arise, because, naturally enough, such documentation will be in the language and script of the importing country.  It is part of the responsibility of the seller under the DDP term that they can read the entry documentation supplied by the local clearance agent.  Not being able to make any sense of what has been sent to you is not an excuse for allowing mistakes to go unresolved.  Surprisingly enough, very few companies actually ask their clearance agent to supply this documentation, if it is not supplied automatically, and even when it is supplied, a lot of importers don’t bother checking the entries.  Sometimes, they have no idea what they are checking anyway.  Its not a legal requirement to check the entries, but bearing in mind that all entries are legally the responsibility of the importer (be it the buyer or seller) then it seems strange that some organisations accept the responsibility without having checking procedures in place.

It can be complicated setting up effective communication channels with an import facility in a different country, but it is not impossible.  However, communication is not usually the most problematic factor.  More and more countries globally are now requesting that anyone importing into that country must be registered in that country to do so.  In the United Kingdom, for example, anyone wishing to import must have an EORI registration number.

Different countries have different registration requirements and sometimes the requirement for registration to import can carry other legal and financial responsibilities as well.  In some cases it may not be possible, or it may be economically unviable, for the seller to register themselves in the country of import.  In which case under these circumstances, can the seller still sell on DDP terms?

If the ICC wording on the DDP term (2010 edition) is carefully read, it does not actually state that the seller must undertake the import customs clearance.  The implication (and tradition) is that the seller should have the responsibility and cost of the clearance.  This lack of explicit wording does leave the interpretation of the DDP term with regards to the customs clearance rather open.  In some circumstances, therefore, the seller could ask the buyer if the buyer can complete the customs clearance on the understanding that all the costs relating to this action is paid by the seller.

Sometimes this may be the buyer’s preferred course of action anyway.  In some countries, obtaining foreign exchange sometimes requires the presentation of the import clearance documentation.  If this documentation is not in the name of the buyer then they potentially have no proof that they imported the goods into the country, even if they argue they purchased the goods under DDP terms.  Therefore, if the payment terms between buyer and seller is on credit, the buyer may find, even if they themselves have both the funds and the determination to pay, that they cannot obtain the necessary currency to do so.  This can be avoided if the payment is made against a Documentary Credit, for example, since the funds are already in place.  However, Documentary Credits are not always the best or most effective method of payment, so it is rather important that the buyer and seller determine at the contract stage whether the DDP term can work for them, and if so, how.

If the buyer allows the seller to use their import registration, then it is good practice for the seller to maintain control over the shipment by ensuring that the organisation completing the customs entry is separate from the buyer.  I give this advice based on something that happened to one of my clients some years ago.  They shipped goods on DDP by airfreight and accepted the buyer’s offer to use the buyer’s clearance registration.  However, the buyer also insisted that their customs clearance company complete the entry.  The goods arrived in the country of import and then “disappeared.”  Since these were two large wooden crates their disappearance was a bit suspect.  The customs clearance agent nominated by the buyer stated that they could not locate the crates in the Customs warehouse and that, consequently, both demurrage and storage would be due until the goods were located.  On behalf of my client representatives from the shipping company managed to access the warehouse and found the crates without any problem.  They took pictures which were presented to the customs clearance agent, who had no choice but to agree the goods had been found.  They then completed the customs clearance, but my client was presented with an additional bill of nearly GBP 3,000 for the storage and demurrage charges.  They were actually lucky.  Someone else, shipping to the same client under the same terms and using the same clearance agent, were reportedly hit with a bill for storage and demurrage which dramatically exceeded this amount.

Conclusion
In theory, DDP seems like a useful term to use for certain types of shipments.  A lot of buyers like the DDP term because it means they can use the DDP price to compare the costs of purchasing the goods from overseas with domestic suppliers and not worry about any additional costs. However, for a number of reasons, as detailed above, the seller might find that the DDP term is much more problematic.  However, as long as there is a clear written agreement between buyer and seller and between the seller and their transport agent and a customs clearance agent, any additional costs should be kept to a minimum.

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 the Point to Point Export Services website at www.point-point.com for more information on International Trade matters.
 
 

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