International commerce terms, often referred to as Incoterms, enjoy global recognition through their worldwide implementation for carrying out international trades between nations. These are the set of rules defined by the International Chamber of Commerce (ICC) that outlines the trade terms. There are 11 incoterms including our subject for the write-up, i.e. DDP shipping.
DDP shipping, meaning: Delivery Duty Paid, is one of the most commonly used incoterms which appear in shipping documents and is mostly used by E-commerce companies.
For example, when you buy a good through an online platform, the price you agree to pay to an e-commerce site includes everything, i.e. price of the product, transportation cost, taxes, import clearance, etc.
The shipment company delivers the product at your doorstep, and the transaction is completed. However in the event of any incident during the shipment resulting in the damage of the product, you get a new product. The risk of such damage and additional bearing of cost is on the seller.
Let us view it from both buyer and seller point of view
- Seller is in a high-risk position as buyer obligation is removed from the supply chain. The seller bears the entire cost till the point of delivery. There are a large number of variables that need to be deliberated along the supply chain that may end up costing your business huge amounts of money in case if anything goes wrong.
- Seller is responsible for clearing goods through customs of a foreign land, including import regulations and recordkeeping requirements. You wouldn’t want to get entangled in the legal complications with foreign customs authorities should something go wrong, would you? It is advisable to stay away from DDP.
- Value Added Tax (VAT), under DDP, is the responsibility of the seller, and it can be expensive sometimes, which can be up to 20% of the value of the goods. Any probable VAT refunds are accrued to the buyer, and the seller has to absorb this component.
- A buyer has practically no control over the goods movement. It means that you cannot track the shipment directly, and each time, you will have to rely on the shipper to gather the information. There is no way to intervene if there is a delay in the shipment.
- Hidden costs levied by the seller in the selling price of the item, for example, transportation and customs costs, that eventually increases the final price of the product.
Another incoterm, Ex Works, which is in contrast with DDP, is explained as follows-
EXW meaning in shipping: It allows the seller to bargain favourable terms when it comes to international trade. Unlike DDP, the seller is under no obligation for transportation, shipping, customs, and insurance of the product. Buyer takes upon himself the entire responsibility in the case of Ex Works.
Escrow service providers, like Tazapay, take into consideration the agreement terms and facilitate the monetary transactions between buyer and seller once proof of its full execution is provided.
Final Thought: A DDP shipment means higher risk for sellers and lesser risk for buyers. DDP incoterm is unsuitable if it is not used wisely and can end up costing you more than you negotiated.