What is DDP?
Delivery duty paid (DDP) is a delivery agreement where the seller (exporter) is responsible for the shipment and for all potential risks and costs, until the shipment reaches its final destination. The potential costs ”include all transportation costs, any loss due to damage during transit, and the payment of customs duties, import taxes, and other relevant charges.” The buyer is responsible for unloading the goods and transporting them from the port to the warehouse,if the mutually agreed upon terminal destination is the buyer’s port.
DDP is one of the terms published by the International Chamber of Commerce (ICC). It is an international commercial term (Incoterms®). Different practices and legal interpretations between traders around the world necessitated a standardization of terms and the “Incoterms® rules provide specific guidance to individuals participating in the import and export of global trade on a daily basis,” according to the ICC.
DDP shipping: advantages & disadvantages
With delivery duty paid shipping, it’s a huge advantage for the buyer that the seller assumes responsibility to deliver the goods and take on the cost and risk of all import clearance formalities. DDP shipping is considered a good customer experience because it takes all fees into consideration upfront, with no surprises later on. The seller can choose whether they pass those fees to the customer by increasing the product pricing, or pay those costs themselves. Delivery duty paid shipping works well for domestic transactions or transactions within a customs union, but for international trade, it can be problematic.
According to Trade Financial Global, “The importing country’s rules might require an importer to be a registered commercial entity in that country, there might need to be an import permit being issued, and as the seller is highly unlikely to be a registered or recognized commercial entity in the importing country (not through another related entity that is itself registered there), there are likely to be all sorts of problems.” With DDP shipping, the seller also has to deal with various risks, like non-refundable VAT charges, bribery, and possible storage costs if unexpected delays occur.
DDP vs FoB
What is Freight on Board (FOB) shipping? “It’s an Incoterm® indicating the point where costs of shipping and liability of goods transfer from the seller to the buyer. The term, which was defined as part of the ICC, is the most common agreement when shipping internationally.”
With FOB shipping, the seller is responsible for the goods and transport costs UNTIL their delivery to the shipping ports. Subsequently, the buyer takes responsibility from the port until the goods’ final destination. In comparison, with DDP shipping, the seller is responsible for all costs and risks until the goods are delivered to their final destination. Buyers often prefer DDP for its fuller coverage, but some who are cost-conscious may choose FoB.
Every country has its own FOB regulations and documentation, which differ slightly from country to country. Researchers have criticized these FOB procedure variations as complex and it is believed they are sometimes the cause for FOB agreement misunderstandings between international partners. This can be quite critical in maritime shipping, where lengthy shipping periods, port regulations, and many players are involved in one shipping sale contract. Companies should carefully choose the best FOB for them and clarify the type of FOB used, so the risks and liabilities are concise and help facilitate a smooth shipment process.
DDP vs DDU
What is delivery duty unpaid (DDU)? Once the package enters the destination country, the customer receiving or importing the package needs to pay the duties incurred.
Customs will contact the customer receiving the package once the package arrives and they may have to collect the package from their post office. Often, the customer doesn’t know that their order was DDU and will contact customer support and cancel their order, or refuse to get it, and return it to the sender.
With delivery duty paid (DDP), the seller must cover duties, import clearance, and any taxes. Delivered duty unpaid (DDU) means the seller is responsible for ensuring goods arrive safely to their final destination, but the buyer is responsible for import duties.
DDU shipping allows the seller to take a more “hands-off” approach regarding the destination country’s shipping rules, but for the buyer, it can involve surprise duties and/or tax charges when their shipment arrives. DDU is still commonly used in transportation contracts, even though the International Chamber of Commerce has officially replaced it with the term Delivered-at-Place (DAP) shipping.
The shipping industry is changing rapidly. As a fundamental part of global trading, organizations throughout the maritime ecosystem are facing headwinds, experiencing rising challenges in regards to safety, growing regulatory demands, competitive commercial landscape, and operational complexity. To overcome these challenges,it is important to fully understand the different possible delivery agreements and to select the one that will be most beneficial. A trusted advisor to many organizations, Windward can help.