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24 Oct 2021

DDP or DDU – Which Incoterm Works Best for You?

Sara was eagerly awaiting the delivery of a new pair of designer shoes, ordered online from an international retailer. When her doorbell rang, she happily went to receive her shoes. But there was an unexpected extra charge --she needed to pay import duties and taxes to the delivery person before she could receive her shoes. This is a classic and very common occurrence with international shipping and purchasing.

The problem was that Sara had not understood that the check-out price she had paid to the international merchant--based abroad was not the final bill. It did not include the import duties and taxes imposed in her country of residence.

DDP vs. DDU: Understanding the Difference

The way to avoid surprising customers with unexpected extra charges is for buyers and sellers alike to understand the meaning of two important three-letter international trade terms, DDP (Delivery Duty Paid) and DDU (Delivery Duty Unpaid).

Both DDP and DDU are part of the Incoterms® rules compiled by the International Chamber of Commerce (ICC) to standardize the terms of trade for the sale of goods internationally. The rules are periodically reviewed, with the ICC recently publishing Incoterms® 2020 to coincide with the 100-year anniversary of the organization.

These trade terms apply to any international shipping, including personal online orders, gift packages, and commercial freight shipments. They determine who is responsible for paying import duties and taxes.

Let’s look at the two terms more closely.

DDP—Delivery Duty Paid

A Delivery Duty Paid agreement means the seller assumes all the responsibility, risk, and costs associated with transporting the goods until the buyer receives them at an agreed destination, which could be a port, fulfillment center, or the buyer’s doorstep.

The buyer and seller agree on all payment details and state the name of the place of delivery before finalising the transaction. The expectation from the buyer is that all DDP costs are included in the final price, with no surprises on the doorstep at delivery.

The seller is responsible for:

Shipping costs

Export and import duties and licenses

Customs documentation

Taxes, including VAT

Insurance

Storage costs if there are delays

Replacement costs if goods are damaged or lost in transit

Final delivery to the agreed destination

DDU—Delivery Duty Unpaid

The trade term DDU has been discontinued by the ICC since 2010 but is still widely used. Officially, the ICC has replaced it with the Incoterm® rule DAP, meaning Delivered at Place, but the trade rules are the same as they were for DDU.

DDU means it's the buyer’s responsibility to pay for any of the destination country's customs charges, duties, or taxes. These must all be paid for customs to release the shipment after it arrives at a pre-agreed point e.g. Delivered-at-Place, Port of Jebel Ali. The seller takes responsibility until the agreed delivery point, at which stage the buyer becomes responsible.

The Pros and Cons of DDP and DDU

There are pros and cons to each system, depending on the realities of your markets and the size of your business.

DDP

  1. Sellers may have more responsibilities under DDP but they also have more control over the process. However, taking all the financial, legal, and bureaucratic responsibility can add significant costs to sellers when things go wrong en route, such as unexpected delays because of port strikes, political unrest, or bad weather.

  2. DDU may appear cheaper at checkout but if customers do not understand that there are additional costs involved, it could prove expensive both for buyer and seller. If the extra charges are unexpected, the customer may not buy from that seller again. Even worse, they may decide not to take delivery at all and the shipment could be abandoned in customs.

  3. Some countries do not allow DDP while others have complicated systems in place. In these markets, sellers may prefer to take a hands-off approach and to leave customs clearance to buyers or their agents with better knowledge of local realities.

  4. The seller may pay DDP costs to take into account unforeseen circumstances and may not use the cheapest logistics partners, leaving the buyer with significant extra charges compared to a DDU delivery.

    DDU

This method is potentially cheaper overall for the buyer, with an unpadded checkout price. However, even if the buyer expects to pay duties and taxes, the amount may be difficult to predict and be more than anticipated. Unexpected brokerage, storage, and late payment fees may be incurred.

Tips for Customers to Avoid Surprises

If the merchant gives you a choice of ordering DDU or DDP delivery, make sure you understand the difference before ticking the box! Generally, DDP is better and less complicated. Read the small print before checking out and paying for your order. Understand what your payment includes and does not include. Sometimes the payment will include delivery, but not customs, import taxes, and VAT. Sometimes there will be an extra charge for delivery, especially for larger items.

If the payment is DDU, (does not include customs duties, import taxes, and VAT), ask the business what these charges will be before finalising your order.

If you REALLY want the item and the retailer is unable to provide you with details of additional charges, you will need to do some research about tax rates and customs charges. If your government does not have an accessible website with these details, a customs agent should be able to help you.

Tips for Businesses to Manage their Delivery Choices

1. Do Your Homework

Every country has different rules and realities, so you need to do your homework before deciding whether to opt for DDP or DDU. What’s fine in one country may not be in another, and some factors may preclude DDP delivery (Russia for example does not allow DDP imports). Even within markets, some goods may have import duties while others may be duty-free.

For smaller ecommerce businesses that want to grow in a particular market, taking the time to get the best DDP delivery deals for customers can significantly boost sales.

2. Choose Logistics and Delivery Partners Well

Select reliable logistics partners who understand the markets you are sending to. DDP sellers take all the risk. They, too, do not want unwelcome and costly surprises.

3. Be Upfront with Your Customers

Whether you decide to ship on DDU or DDP terms or mix it up according to the delivery destination, you should communicate clearly with your customers so they know what to expect. Explain how taxes and duties will be handled on your website’s product pages, at checkout, in email confirmations, in your shipping policy, and on your FAQ page.

The last thing any buyer wants, or needs, is an unwelcome surprise attached to a purchase, especially when the surprise involves additional charges. To make sure this doesn’t happen to your customers, choose your incoterms wisely--and communicate them clearly.