Introduction to DDP Incoterms
The DDP incoterm is a set of rules established by the ICC or International Chamber of Commerce. With the rise of international transactions, DDP and a few of its siblings, like DAP and FOB, are often looked upon to protect the concerned parties. Like every other international set of rules, DDP is an attempt to standardize the transactions at a global level.
However, DDP incoterm has often been touted as the riskiest set of rules for a seller since they assume this highest risk in logistics. The seasoned merchants have used it otherwise. The application of Incoterm DDP is not mandatory, but apart from protecting interests, DDP has received the wrath of many sellers.
Even so, most experienced sellers prefer DDP as their preferred choice, as it has enormously helped their businesses grow. A few hints are scattered across, but deducing its true potential rests on you.
What Does DDP Mean in Shipping Terms?
Delivery Duty Paid or DDP incoterms transfer all the risks of shipping to the seller of the product till the latter reaches its destination. As a part of the 11 trade terms published in the intercoms series by the International Chamber of Commerce, DDP is sometimes considered a necessary evil. Applicable for any form of transportation, an incoterm DDP arrangement is very favorable
for a buyer.
Risks and Costs for the Seller
As a favored buyer arrangement, it is safe to assume that every cost and potential risk is to be borne by the seller until the product reaches its destination. Due to the diversity of rules in different localities, pinning down precise costs and risks associated with a certain destination might seem redundant. However, a seller is required to handle the VAT charges while incurring the product’s storage cost in case of an unexpected delay.
Furthermore, since customs duties are often involved, some deliveries might require an additional cost in the form of bribery. This also sparks a sense of tension as the seller is considered liable for damage to the goods caused during transit.
Risks and Costs for the Buyer
A buyer, protected by the DDP incoterms, incurs few to no risks. Often dubbed as importers in certain cases, a buyer only needs to pay the unloading charges of the product, which is further increased by the addition of port to warehouse transportation costs. In other words, the buyer must pay only during two instances in the whole journey.
Potential Issues for the Seller
As per the incoterms DDP, the seller is required to pay the VAT, which varies as per the destination, and some countries might even require the seller to pay as high as 20% VAT. Due to a diverse cluster of rules and taxation, potential hidden costs can be considered one of the major issues.
Furthermore, the seller needs to address every risk, as he or she is liable for assuming all the risks associated with the delivery. Due to ever-changing import and taxation laws, this arrangement has been considered troublesome, even by many seasoned sellers.
Potential Issues for the Buyer
Even though a DDP incoterm arrangement has shown its affinity towards the welfare of a buyer, there are some flaws. Since the seller is assuming all the risks, one can say that the seller has the most control over the movement. This has often resulted in poor visibility of the transport chain.
In other words, the buyer might not be able to track the product unless the seller shares the tracking service. This factor, coupled with diverse laws, can often result in unexpected delays with no real-time tracking, which adds more frustration for the buyer.
What are Incoterms?
Like any other set of international rules, Incoterms are the commercial trade rules responsible for defining the scope of responsibilities of the buyer and the seller during an international sale. Incoterms are broadly classified into four principal categories, E, F, C, and D, which specify rules for the concerned parties at various levels of trade.
Enforced by the ICC or International Chamber of Commerce, Incoterms are not mandatory, as these rules are explicitly used by parties in their contracts for legal protection and credibility.
What are the Obligations of the Seller?
The obligations of the seller have been listed under –
- Transport and delivery conditions
The seller is doused with all the responsibilities and risks associated with transportation. This includes optimal delivery conditions to ensure that no damage is caused to the product during transit. There is no such standard for the mentioned delivery condition. However, the seller is considered liable if the product sustains damage during the transit, thus requiring optimal conditions.
As per the DDP incoterms, the seller is required to pay the VAT and any cost associated with customs clearance. Apart from that, the cost of all inspections, loading charges, insurance, and invoicing is added to the equation. Pinning down a specific cost might sound redundant, as the mentioned factors vary from territory to territory.
As per DDP incoterms, all the products must be insured, and the buyer has no obligation to cover the same. In other terms, the seller is responsible for covering the insurance while taking all the required security measures.
- Duty and customs clearances
The phrase “Delivered Duty Paid” defines the meaning of incoterms DDP, where the seller is required to clear the customs duty and is also responsible for incurring any additional cost that might arise during the process. Since the cost depends on the product and the destination, the price might vary as per the mentioned factors.
- Transfer of risk
One can consider the risk transferred to the paying owner when the products are marked available to the buyer. In other words, after the buyer receives the product, the seller can consider transferring the risk.
DDP is not a mandatory set of rules. However, with clear transparency and division of risk, enforcing incoterm DDP might be considered a safe option to protect the interest of both parties. If a seller acts under the rules underlined by the DDP, proper awareness from the buyer end is required. Therefore, a notice underlining the said factors issued by the seller should be considered, even though the seller has no obligation to do the same.
What are the Obligations of the Buyer?
The obligations of the buyer have been listed under –
- Transport and delivery conditions
The safety of a buyer can be considered as the Unique Selling Proposition of incoterms DDP. Therefore, the buyer is not associated with the enforcement of good delivery conditions. However, a buyer can call out a damaged product, which might have resulted from poor delivery
The buyer must pay the cost as decided in the contract by both parties. As per the incoterms DDP, the buyer needs to pay at the time of receiving the promised goods, but there are several instances where the time of promised payment has been altered to a different date. Furthermore, the buyer doesn’t need to only pay the tagged price of the goods, as in most cases, they also have to incur the transportation cost, a price which is agreed upon mutually.
As mentioned, the seller is responsible for covering the insurance of the products. However, DDP incoterm is not a fully enforced law in certain cases, as the cost of insurance and transportation is usually incurred by the buyer and the marked price of the product. Even though this cost falls under the tutelage of a seller, the final price with all these variables is often agreed upon and outlined in the sale contract.
- Duty and custom clearances
Instances like clearing the customs duties, paying for the import and export of goods, and ensuring the compensation of hidden costs related to the mentioned factors fall under the seller’s responsibilities. However, seasoned sellers have often been able to deduce a total average of all such expenses. This allows them to hike the product’s price or propose contracts, including adding all such costs. The buyer often agrees with these summations.
Even though this is not a full implementation of the laws enforced by the incoterms DDP, one can consider it the new norm or the “seller-enhanced DDP”. If you go back to the initial iteration of the laws, the buyer is not liable to pay any such cost, including the cost of customs clearance.
The buyer is required to assist the seller with any form of documentation, which helps the delivery personnel establish the buyer’s identity. Furthermore, incoterms DDP also underlines the buyer’s requirement to help the seller with the required documents for the import and export clearance formalities.
- Transfer of risk
Once the buyer receives the marked goods and he or she confirms the safe delivery of the product, the risk of the product is transferred to the buyer. In short, once the delivery is completed, the buyer has the power to re-issue a claim on a replacement or compensation in case it has been damaged during transit. However, if not, it undertakes the risk of the full lifecycle of the delivered product.
Since DDP incoterms is not a mandatory law, a seller can easily ignore it, but DDP is the only international law that protects both parties interests. In case the rules are enforced by the seller, it is recommended to highlight the same in the contract or the form of a separate notice, thus promoting transparency between the two parties. Even though such notice is not a mandatory provision, a buyer can always request the same from the seller.