Selling Goods Internationally on DDP Terms

The Implications of Selling on Delivered Duty Paid (DDP) Terms

Selling on DDP sales terms is a workable solution for domestic transactions or with only some transactions within the European Union, but for other international trade it can be particularly problematic. Under the terms DDP, the seller is responsible for door to door delivery, the payment of import duties and any applicable taxes. Under the eleven Incoterms® Rules, DDP terms impose the maximum level of obligation on the seller.   

Insurance Obligations

The DDP risk transfer point or delivery point, is important in relation to marine cargo insurance underwriting and claims, because it establishes the seller’s liability for insurance cover. Under DDP terms, the seller has no obligation to the buyer to make a contract of insurance. The buyer also has no obligation to the seller to make a contract of insurance. However, the buyer must provide the seller with information they need for obtaining insurance.

As the seller will bear all risks of loss of or damage to the goods from the time they are dispatched until they are delivered to the overseas buyer at the delivery point, it is advisable that the seller obtains insurance cover for the goods whilst in transit.

Registered Importer of Record

Under DDP terms, the seller may be required to act as the registered Importer of Record in many countries. It is not always possible for a foreign business to become the Importer of Record and this may cause issues in some countries, such as the USA and South Africa. In addition, the EU requires the importer of goods to be registered with a relevant government authority (in the EU this registration is under the EORI system) and often the importer needs to have a physical presence in the country as well.

Import Customs Clearance

Under DDP terms, the seller will be responsible for preparing customs clearance documentation and each country has specific documentary requirements. The seller will be responsible for the costs related to customs clearance. These costs may include any storage or demurrage charges incurred due to delays during customs clearance, investigations by government agencies and service issues with the freight forwarders. These additional costs can very quickly impact profit margins on export sales.

Paying Customs Duty and Import Taxes

Under DDP terms, the seller will be responsible for paying customs duties and relevant taxes due at the time of import. Appointing a freight forwarder / customs agent to provide customs clearance services and to pay the import formalities (import taxes and duties) is a solution. However, these companies may require funds to be logged prior to shipping and/or charge for usage of their customs deferment account.

Import Tax Implications

There may be tax implications due to the import taxes being paid by the seller. The overseas buyer may be eligible for an import tax refund, but these tax payments may not be recoverable by the buyer within the overseas country due to the seller being the Importer of Record. In other cases, the seller may have paid the import tax, been unable to recover the tax and the overseas buyer obtains a tax refund. The seller not being able to offset the import tax paid has a true added cost to the price of the exported goods, which may not be accounted for within the selling price.

Domestic Tax Implications

The seller being engaged in business in a foreign country without a physical presence and distributing goods to the buyer within that foreign country, may be classified as having a permanent establishment. In this situation, the company could be subjected to direct as well as indirect taxes within that foreign country.

Import Permits and Import licences 

Under DDP terms, the seller will be responsible for obtaining any import permits or import licences (if required) as the registered Importer of Record.

Bribery

Selling on DDP terms can expose the seller to greater legal risks, such as the severe legal consequences of a bribe being offered during the customs clearance process without the seller’s knowledge.

Conclusion

If the overseas buyer does require delivered terms within the sales contract, it would be a good business strategy to trade under a different Incoterms® rule. Using either Delivered at Place (DAP) or Delivered at Pace Unloaded (DPU) would allow the seller to deliver the goods and the overseas buyer would be the Importer of Record (the legal entity within the export market).

The seller’s choice of Incoterms® will be an integral part of their commercial transaction stated within the sales contract and must be applicable to the type of goods that will be shipped and the type of transportation that will be used.

If you would like more details, please call +44 (0) 118 932 8447 or email info@icsglobalservices.co.uk  

ICS Global Services Limited