The Disadvantages Of The Delivered Duty Paid (DDP) Incoterm®
Outsourcing Your Transportation And Customs Control
Have you ever asked yourself why you choose Delivered Duty Paid (DDP Incoterms ®) for your international business? Many companies choose international terms of sale based on their company philosophy, history, costs, seller options or perceived ease of transaction. Without knowing the options beyond Incoterms DDP; a company could be losing control of their shipments and increasing their costs dramatically. The solution is to understand all Incoterms®; the responsibility involved, and to select the most advantageous term for your business strategy.
Incoterms® DDP being an example, are terms that are agreed upon during the negotiation of a contract or sale and deal exclusively with;
- The obligation of buyers and sellers (with regard to each of the 13 stages involved in the transport and clearance of a shipment - see Incoterms® guide), and
- The stipulations on which party bears the risk of loss during transit.
- The purpose of these terms are to provide a set of international rules for the interpretation of the most commonly used trade terms.
- The parties to the transaction select the Incoterms®, which determines who pays the cost of each transportation segment.
- Incoterms® influence customs valuation of imported merchandise. Certain costs within the supply chain may or may not be included in the value for Customs, depending on the term selected.
It is important that your buyers understand and select terms of sale that are in the best interest of your company. The best time to determine the chosen one is when the buyer is evaluating whether or not to move forward with the purchase. Decisions made after the fact will inevitably affect the initial price that was being considered.
Delivered Duty Paid
This commonly used term places the maximum obligations on the seller and minimum obligations on the buyer.The seller is responsible for delivering the goods to the named place, in the country of the buyer, and pays all costs and risks in bringing the goods to the destination, including, import duties and taxes. Risk transfers from seller to buyer when the goods are made available to the buyer, ready for unloading from the arriving conveyance.
- Lower risk, as the seller assumes all responsibilities and charges to the destination. However, risk is not gone!
- Landed cost is known at the time of purchase.
- No administrative supply chain management, arrangement of vendors or payment of such charges.
- Can not be used if the seller is unable to obtain import licenses, permits or certain payment options with Canada Customs. Some taxes such as GST are only payable by registered business entities, so there may be no mechanism for the seller to make payment.
- No control over the movement or importation of the goods.
- No direct contacts to track a shipment other than through your vendor.
- No ability to interject in the event of an issue.
- Hidden transport and import costs may lie in the markup calculated by the seller.
An Alternative To DDP: FCA - Free Carrier
This commonly used term places the maximum obligations on the buyer and minimum obligations on the seller.The buyer is now responsible for delivering the goods to their intended destination, and pays all costs and risks in bringing the goods to the destination, including, import duties and taxes.The seller hands over the goods, cleared for export, into the disposal of the first carrier (named by the buyer) at the named place. The seller pays for carriage to the named point of delivery, and risk passes when the goods are handed over to the first carrier
- Control over the movement or importation of the goods.
- Direct contacts to track a shipment.
- Ability to interject in the event of an issue.
- No hidden transport and import costs.
- Administrative resources to liaise with service provider.
Always review and consider terms of sale proposed for use in a new contractual agreement to ensure they are consistent with your business plan. Ask for advice from your customs broker or freight forwarder, as often times they can recommend advantageous terms of sale.