Delivered Duty Paid: It’s Only Double the Work

The Incoterms® Rules, published by the International Chamber of Commerce in Paris, France, are a set of globally recognized standards for international trade. Arthur O’Meara, Principal of O’Meara and Associates, Inc., holds the distinction of being one of only two ICC-certified Incoterms® Rules instructors in the United States.

We are frequently asked about our perspective on selling under the Incoterms® Rule Delivered Duty Paid, and our typical response is rather nonchalant: “Eh.”

Here’s the rationale behind our response: under DDP, the seller assumes all costs and responsibilities for import formalities (including import customs clearance) and all associated duties and fees. This entails the seller either becoming the importer of record (IOR) or appointing someone in the destination country to act as the IOR.

In regions like the US, Canada, and the EU, among others, it is feasible for a foreign entity to serve as a non-resident IOR. The process is relatively straightforward and can be completed in minutes by filling out the necessary documents. However, it’s important to secure approval from the Legal department beforehand.

If you, as the seller, find a local company to act as IOR, then kudos. Carry on.

However, if you are indeed acting as non-resident IOR, you are now also tasked with customs compliance in the foreign country or customs zone. And customs compliance is difficult enough when an American importer is in the US, so imagine an American exporter managing a European customs compliance program: they would have to deal with language barriers, time zones, differences in holidays (does ANYONE in the EU work in August?). Plus, the US customs regulations are easy to access online, and the International Trade Commission makes it easy to access the Harmonized Tariff Schedule of the US as well.

So much for the HTSUS, but what about the Canada customs tariff? Right here. And Canadian customs regulations? Nope, they use D-memoranda. Credit if you already knew that. 

The EU tariff? No such document. Instead, it’s called the Combined Nomenclature.

You get the point: customs compliance is an art and requires more than a little knowledge of the tools needed to practice. These tools are not called the same in different countries, not found the same way, and are interpreted by the local customs authorities differently in each customs regime.

Customs compliance is a nuanced skill that demands a deep understanding of the tools essential for the trade, which can vary significantly between countries and are subject to diverse interpretations by local customs authorities.

Let’s delve into value-added taxes (VAT). Countries like Canada, the UK, the EU, and Mexico levy a VAT, with some also imposing regional or provincial taxes. For instance, Mexico applies a flat 16% VAT, while the EU and Canada have varying rates based on location. The responsibility for paying VAT rests with the importer of record (IOR), which could be you. This entails several key points:

• Apart from registering as the non-resident IOR with local customs authorities, you must also register with local tax authorities to collect and remit VAT, typically on a monthly basis. This requires approval from your tax and finance departments.
• Failure to register for VAT means you cannot collect VAT from your foreign customer, resulting in a loss that cannot be recovered through price adjustments. It is illegal to attempt such a practice.

In summary, while selling Delivered Duty Paid (DDP) may seem low-risk for small, sporadic shipments via couriers (like “brown,” “yellow,” or “purple”), it becomes high-risk when done regularly. If your business heavily relies on selling DDP and involves customers in Mexico, where non-resident IORs are not permitted, you must either find a local entity to act as the IOR or refrain from using DDP.

What about buying DDP from your foreign suppliers? 

It can be tricky. If your supplier uses couriers like brown/yellow/purple and ships goods on their account, US Customs may still hold you accountable for compliance if you are listed as the ultimate consignee and caused the import. 

To avoid such complications, it’s advisable to have the shipment transferred to your customs broker, who can handle the process correctly under different Incoterms® Rules like DPU or DAP. Importers have successfully argued for the exclusion from CBP’s audit pool of infrequent, small shipments that arrive unexpectedly. However, switching to DAP or DPU can often be a simpler and more reliable solution to avoid potential issues altogether.