Client Question:

We’re considering importing on a DDP basis – what should we look out for?

Answer:

The introductory notes to Incoterms Rules 2020 caution against using DDP (Delivered Duty Paid) for cross-border trade, the caution implying that its true application is in domestic models. However, the ICC do not elaborate further.

In my experience, it is often the case that although the international contract negotiations might end up incorporating the expression DDP, the model that is executed is not actually DDP.

And, of course, what we ‘do’ is always more important that wat we ‘say’ we’ll do. The misuse of the term often leads to disputes, particularly over cost allocation between the Seller and Buyer.

In a classic, unmodified import DDP model, the one party who is not the importer on the SAD500 is the Buyer. The Seller has the obligation to manage the import customs risk and cost.
Technically, the importer of record might not be the Seller (although they could apply for an importer’s code, even as a foreign entity), but a local representative of that entity. However, although we can’t say who will be the importer, if we’ve applied Incoterms correctly then we know it cannot be the Buyer.

As such, the first challenge to DDP is Exchange Control as only the importer of record named on the SAD500 can make the foreign payment.

This is the case unless the Buyer has SARB approval to make the payment on behalf of the named importer. So, in a true DDP Rule, the Buyer could not pay the Seller without first having secured special permission to “pay against third party documents.” (The Buyer, who is not named on the SAD500 wishes to make payment on behalf of the ‘third-party’ named on the entry.)

The second challenge is import VAT.

Again (with narrow exceptions), only the importer of record may claim (neutralise) the import VAT and only if they incur it “in the course of making taxable supplies”.

If the non-resident Seller or their local representative act as importer, but the Buyer has SARB approval to make the payment, SARS should not allow the named importer to recover the import VAT.

To avoid these and other complications, common practice is that the foreign Seller will request to use the Buyer’s importer’s code, (albeit that the Seller pays the clearing agent’s charges, as well as any import duty, if applicable).

In this way the Buyer may legitimately pay for the purchase, and further, provided that the Buyer settles the import VAT (directly with SARS or via the clearing agent), they will be allowed to recover the VAT thereafter in the ordinary course of business.

Accordingly, what you end up with is a model where the foreign Seller pays all charges except ‘recoverable taxes’ (i.e. the VAT), which the Buyer incurs, and further, the contract terms agree that the Buyer will sign the import clearing declaration offered to them by the seller’s local clearing agents, with the Buyer then acting as importer of record.

This model works, in as much as it is legal and does not require SARB or SARS approval. However, it isn’t DDP.

Particularly once the Buyer signs off the clearing instruction, the Buyer (as importer) takes the obligation and risk of the import customs process, which is a wholly contrary position to the intention of DDP.

This then brings me back to my first point – people ‘say’ DDP but they execute something else entirely; they execute a tailored model that has no direct translation into Incoterms, because Incoterms only covers the common ways of doing business, not every way of doing business.
The parties are then advised not to refer to Incoterms Rules at all, but rather to state longhand in the contract terms what roles, risk and costs each party will take.

The second place you might encounter the misuse of DDP is when a foreign supplier gives the Buyer a price to their door, but the Buyer pays the supplier’s local branch.

This avoids regulatory complications in that the local branch will act as importer of record and may pay the Seller in due course, etc.

But I always liken this model to walking into a retail outlet and asking to buy a fridge “DDP”. Really, it is just a local purchase. Your knowledge that the retailer may have bought the fridge from China is irrelevant, and the ‘international’ language of trade terms is not needed.

It is a possible model to buy on, and it has advantages – the ultimate Buyer has a fixed price in local currency and no supply chain obligations or risks. But it is just a local sale and purchase.
Going back to the question.

Look to what your proposed model physically and administratively requires and compare this to the Incoterms Rules. Is it really DDP?

Incoterms are ready made suits – when they do not fit you, don’t try to squeeze into them. Rather, go see a tailor and get something that exactly fits you, that is to say, describe the model longhand, using clear and exact phrases and words in your sale or procurement agreement, and avoid the shorthand of Incoterms entirely.

Source: Freight Training