Incoterm DDP – be wary

Incoterm DDP – be wary

 

A lot of our customers came to us in the run up to December 2020 with thoughts of changing current DAP Incoterms to DDP for exports, perhaps in fear that their EU customers will find purchasing from the UK less financially attractive should tariffs be imposed bilaterally.

DDP, or Delivered Duty Paid, places the maximum responsibility on the seller as it also involves the destination import clearance and payment of VAT and duties applicable. Our industry body BIFA posted a concise article about this in their September 2020 magazine and a link can be found here at page 16.

Now that we have a Free Trade Deal, this now seems unnecessary. A good alternative to consider, which is becoming more popular, is an adjustment to Incoterm DAP by suffixing with ‘cleared’. So DAP <named place> cleared. By using this variant, the exporter pays for the import clearance process, whilst the importer benefits from preferential duty (see Rules of Origin) under the Free Trade deal, and settles any import VAT for recovery in their VAT returns.

However, some customers are bowing to pressure from their EU customers thus insisting on DDP. So how can we handle this? Well in truth, we can’t really. Whilst our partners are happy to deal with import customs, and will also facilitate the advancing of duty if necessary (under strict and restricted controls), the legal aspect is more complicated.

  • Under DDP, we, and any sub-agent performing customs procedures, would become Indirect Representatives. Therefore we, and any sub-agents would be equally liable for any customs debt should customs not receive settlement.
  • In order to be able to apply DDP, the exporter needs to be registered in the EU as having a fixed establishment. Alternatively, they would need a fiscal representative to do this on their behalf. The exporter would need an EU EORI number in either case and hold a VAT number in each member state where they export to. Also, the exporter would become the importer of record in custom’s eyes and not the actual consignee of the goods.
  • How does one become ‘established’ in the EU? These are questions which we cannot advise on, and I would suggest speaking to one’s accountant.
  • If the exporter did obtain an EU EORI and a fixed establishment or appoint a fiscal representative, we would have to have a legally binding rigid indemnity to defend us and/or our sub-agents in the event we/they became liable as acting in an indirect capacity

So, whilst it is not infeasible to perform such a process, there are also other considerations. Yes, our partners could withhold delivery should our customer not make payment of VAT and Duties, but apart from delaying delivery, certain local regulations, particularly Italy, provide that if the goods are present in their country, they become legally the property of the consignee, whether or not the goods have been paid for, in the case that any party wishes to take a lien on them.

So after reading the above, I ask – Is DDP really worth it?

Well, as long as the goods are able to claim preferential origin, there is no duty to pay. The consignee would have to pay the Import VAT, but recovers it in their returns. The exporter could adopt DAP cleared and pay the import clearance charges.

Based on the above, no, it isn’t worth it. It just needs exporter and importer to accept that life has changed and that there are different processes to undertake.

What makes it worse though is that DDP is being interpreted in two ways

  1. Strict DDP – everything paid by the exporter. In this case, the exporter must have a VAT number in the destination country plus an EU EORI number and have a fixed establishment in the EU, or appoint a fiscal representative. This is so that the exporter can reclaim the Import VAT
  2. Like DAP duties and fees paid – VAT to the account of the importer. In this case, the exporter does not need and destination VAT number or EU EORI number or a fixed establishment or a fiscal representative as the VAT is paid by the importer who will reclaim it in their periodic VAT returns
  3. So, if the agreement is as per item 2, then DDP is really DAP duties and fees paid.
  4. Let us now take this a step further and look at the rules of origin (https://ital-logistics.com/brexit/rules-of-origin/)
  5. If the goods are of UK origin and are exported to the EU,  then there is no duty to pay. So, if there is no duty to pay, why not use DAP Cleared?
  6. If the goods are not of UK origin then duty may be applicable. In this case use DAP duties and fees paid
  7. In any case, unless the importer means as per DDP section 1, we can get the same result using DAP variants

Whatever is decided between trading companies, just be mindful that DDP opens a can of worms and complexity that in truth, with some common sense, can be side-shifted.

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