When sending goods internationally do you have a tendency of using Delivery Duty Paid (DDP)? You’re not alone if you do, because it really is, or seems like, an easy choice to make when it comes to international business. There are actually many companies that choose international terms of sale based on various factors such as their company philosophy, the costs, the seller options or just how easy the deal may seem to work out. But the truth is, without being aware of the different options available to you, you might end up loosing control of shipments or paying way too much out of your pockets. One solution available is to better understand Incoterms® and selecting strategically wise options for your business.
The Incoterms® rules were developed by the International Chamber of Commerce (ICC) and have become an essential part of the daily language of trade. Within the rules, businesses will find contracts incorporated for the sale of goods worldwide and provide rules and guidance to importers, exporters, lawyers, transporters, insurers and students of international trade. The terms deal exclusively with two important points: the obligation of buyers and sellers (in relation to the responsibilities of shipping and transportation) and the stipulation on which party is held responsible of risk of loss during transit.
In a nutshell, the terms are essentially a set of international rules provided for a better interpretation of the most commonly used trade terms. They’ll help determine who pays the costs of the different transportation segments. The Incoterms® rules will also influence the valuation done by customs of imported merchandise. Consequently, some costs within the supply chain may or may not be included in the value for Customs depending on the term agreed upon.
Larger responsibility on shoulders of seller
Delivery Duty Paid (DDP) puts the larger part of the obligations on the shoulders of the seller and a minimum on the buyer. That makes the seller responsible for delivering the goods and therefore paying duties and taxes related to importing the goods. For buyers, DDP has its advantages : lower risk (the seller ensures responsibilities of transit to destination), at the time of purchase the landed costs are known and there are no administrative headaches related to supply chain management or arranging payments to vendors.
But hold on, there are also some disadvantages for buyers using DDP. For example, if the seller is unable to obtain importing licenses, permits or payments options with Canadian Customs, DDP cannot be used. The buyer will not have control over the transportation of the goods; other than the vendor, the buyer has no other other direct way of tracking the shipment. Should an issue arise, the buyer will not have any possible option to interject and finally, the vendor has the possibility of stuffing hidden fees related to transportation and importation in his markup without the buyer the knowing.
Alternatives do exist
If you’re wondering if there’s an alternative to DDP, there is and it’s caller Free Carrier (FCA). This term paces the maximum of obligations on the buyer and the minimum on the seller. The buyer is now responsible for ensuring delivery of the goods to the expected location and pays for all costs and risks of bringing the good to destination. The seller, having cleared the goods for export, will hand over the goods into the disposal of the first carrier (determined by the buyer), at a determined place. Essentially, the seller makes sure that the goods make it to the determined point of delivery and afterward, the risks are passed on to the first carrier once handed over.
Just like DDP, First Carrier has its advantages and disadvantages for buyers, albeit you’ll realize just how different the two options are after comparison: as a buyer using FCA you’ll have control over the movement of your goods, there is constant tracking of the shipment, if there is an issue – you can jump in to take care of it – and there are no hidden transportation or import fees. What are the disadvantages? The main caveat would be that you’ll probably require and administrative resource in order to liaise with the service provider. But that’s about it.
Paying attention to the terms of sales in any new contractual agreement will allow you strategically consider what’s best for your business. Better understanding the terms allows you to make a wiser decision.
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