This is part of a series of articles where we break down the definitions of Incoterms for cross-border shipping.
Before you make your first sale to someone outside of your country, you’ll need to learn the ropes of international shipping in order to satisfy your international customer base. As you discuss your shipping arrangements with your logistics partner, you might come across acronyms like DDU and DDP when you’re in talks about customs clearance.
As a new cross-border e-commerce merchant, these acronyms may seem alien to you. However, these are internationally agreed upon terminology known as International Commercial Terms (Incoterms) in international trading.
So what does DDU and DDP mean, and why are they important for you to know? But first, it helps to know what Incoterms mean.
First published by the International Chamber of Commerce (ICC), Incoterms help buyers and sellers define the responsibilities and costs for the delivery of goods in a sales contract.
While these terms are generally used in sea freight, these terms are also adopted into the air freight industry to define the sales contract in various international shipping models.
Delivered Duty Unpaid (DDU) means that the import duties and taxes are not paid for prior to arriving in the destination country. The seller still pays for the other costs related to shipping the goods internationally, such as shipping fees and origin customs clearance.
Because of this, if you choose to ship with DDU, either you or your customer will end up having to pay for import duties and taxes when the item arrives at the destination country’s customs.
Goods shipped with DDU require the import duties and taxes be paid to customs authorities first before the item is released. Once paid, the goods would still need to go through distribution or fulfilment, and last mile delivery before it can reach your customer’s doorstep. This could cause an unpleasant surprise to your customers if they weren’t aware that they needed to cover customs duties.
As customs will hold on to their products until payments have been made, this could result in additional delays.
While Delivered Duty Unpaid (DDU) was not included in the most recent (2010) edition of Incoterms, it is still used in international trade parlance. The official Incoterm in 2010 that substitutes DDU is Delivery at Place (DAP).
However, depending on the shipment’s value and the destination country’s de minimis rate, the fees for import duties and taxes may be waived so your customer will not need to pay for anything and customs might process the shipment quicker.
A de minimis rate is the threshold below which fewer or no taxes are charged on shipments. This threshold is dependent on the total value of your shipped goods, excluding shipping fees. You may refer to the de minimis rate for each ASEAN country in the infographic below.
Delivered Duty Paid (DDP) means that the seller arranges to pay for import duties and taxes in advance. As an international e-commerce merchant, this also means that you would have to arrange to pay for all the expenses incurred for shipping your product overseas.
In this case, your customer would not need to pay customs before they can receive the package, making this arrangement a smoother logistical experience for them.
If you’re using DDP, goods can be released for distribution or fulfilment immediately upon clearing customs, as opposed to DDU goods where the item could be held at customs until the relevant duties and taxes are paid.
Some shipping partners can offer you help in the DDP process. They help arrange payments for duties and taxes on your behalf, thus expediting the customs clearance process.
From an e-commerce standpoint, shipping with DDU / DAP can net you some savings in the short term and may initially look cheaper at checkout since duties and taxes aren’t accounted for. However, the inconveniences posed to your customer risk ruining their online shopping experience, especially if they are not aware of the procedures in customs.
Even if you’re shipping to a country that has a high de minimis threshold, shipping with DDP can offset any surprise costs that may arise from changes to the destination country’s customs policies.
Within a diverse region like Southeast Asia, it can also be hard to keep track of changes to each country’s import duties and tax rates. For example, Indonesia recently increased their import tax range from between 2.5% – 7.5% to 7.5% – 10% in September 2018.
In the long run, a DDP arrangement would be a much better shopping experience for your customers since it offers them the most convenience.
Although shipping with DDP means you will likely foot a bigger portion of the bill, there is a way around the higher costs. You can calculate the costs for import duties and taxes into your sale’s price in checkout. Additionally, it helps to have a line by line breakdown to show clearly how much the item, shipping, and customs duties and taxes will be to prevent any unpleasant surprises.
Some logistics service providers will charge a service fee on each parcel to ensure that your goods are shipped with DDP.
However, other shipping partners can arrange for DDP as a value-added service, meaning you would not have to pay for service fees and hidden charges on top of the duties and taxes you would pay for shipping your parcel.
Because import duties and taxes are hard to determine until your parcel arrives at customs, your shipping partner may give an estimated quote rather than a definite rate, and then invoice you at a later date.
With all these in mind, it’s best to pick a logistics service provider that can simplify the process for each destination country, and is aware of each country’s customs environment to keep you updated on any changes.
Want to learn more about customs procedures in Southeast Asia? Download our Customs Clearance Guide.
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