Navigating the complexities of international trade requires a clear understanding of Incoterms, the standardized rules set by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in global shipping. Choosing the right Incoterm is crucial for supply chain efficiency and cost management.
Among the eleven Incoterms 2020 rules, Delivered at Place (DAP) and Delivered Duty Paid (DDP) are two terms that place significant responsibility on the seller. While they appear similar, particularly regarding the point at which risk transfers, they have critical differences, primarily concerning import clearance and associated costs. This article will define DAP and DDP, outline the responsibilities under each, and highlight the key distinctions to help you make informed decisions.
What Is DAP (Delivered At Place)?
DAP means the seller is responsible for delivering the goods to a specific, named destination agreed upon with the buyer, ready for unloading. The seller arranges and pays for all transportation costs to reach that destination and bears all risks associated with the goods until they arrive and are available for unloading. DAP is flexible and can be used for any mode of transport. The named destination can be any place, such as a port, airport, or the buyer’s premises, not necessarily a traditional freight terminal.
Responsibilities under DAP:
Seller
- Prepares and packages goods for shipment.
- Arrange and pay for transportation to the named destination.
- Handles export customs clearance in the country of origin.
- Bears all risks until the goods arrive at the destination, ready for unloading.
- Provides necessary shipping documents to the buyer for import clearance.
Buyer
- This person handles import customs clearance in the destination country, including filing documentation.
- Pays all applicable import duties, taxes (like VAT), and other customs-related charges.
- Is responsible for unloading the goods upon arrival at the named destination.
- Bears risks associated with unloading and potential delays in import clearance, including storage or demurrage charges.
Sellers choosing DAP often want control over the freight process but wish to avoid the complexities and risks of handling import formalities in the buyer’s country. Buyers using DAP retain control over the import process, which can be advantageous if they have logistics expertise or preferred customs brokers.
What Is DDP (Delivered Duty Paid)?
DDP represents the maximum obligation for the seller among all Incoterms. Under DDP, the seller bears all risks and costs associated with delivering the goods to the named destination, cleared for import, and ready for unloading. This means the seller handles virtually the entire process from origin to the agreed destination point in the buyer’s country.
Responsibilities under DDP
Seller
- Prepares and packages goods for shipment.
- Arrange and pay for transportation to the final destination [91].
- Handles both export clearance in the origin country and import clearance in the destination country.
- Pays all import duties and taxes (like VAT) and executes all customs formalities.
- Bears all costs and risks associated with delivering the goods until they arrive at the destination, ready for unloading.
- Handles all necessary shipping documentation for both export and import.
Buyer
- Is only responsible for unloading the goods upon arrival at the named destination.
- May need to assist the seller with information required for import clearance if necessary.
DDP offers maximum convenience for the buyer, as their involvement is minimal. The total cost (including shipping, duties, and taxes) is often bundled into the final price, providing cost predictability. However, this convenience comes at the cost of relying entirely on the seller’s ability to navigate import procedures.
Key Differences: DAP vs. DDP
While both terms involve the seller delivering goods to a named destination and bearing risk until that point, the crucial difference lies in the handling of import procedures and costs:
Import Customs Clearance:
- DAP: The buyer is responsible for import customs clearance.
- DDP: The seller is responsible for import customs clearance.
Import Duties and Taxes:
- DAP: The buyer pays all import duties, taxes (VAT), and related charges.
- DDP: The seller pays all import duties, taxes (VAT), and related charges.
Responsibility & Risk:
- DAP: Risk transfers from seller to buyer when goods are available for unloading at the named destination before the buyer completes import clearance.
- DDP: Risk transfers from seller to buyer when goods are available for unloading at the named destination after the seller has handled import clearance. DDP places the maximum level of responsibility and risk on the seller.
Unloading
Under both DAP and DDP, the buyer is typically responsible for unloading the goods at the named destination, unless otherwise agreed or specified in the seller’s carriage contract.
Cost Implications
Under DAP, the buyer must budget for import duties, taxes, and clearance fees separately from the goods’ purchase price. Any delays or issues during import clearance can lead to additional costs like storage or demurrage for the buyer.
Under DDP, the seller factors all transportation costs, export/import clearance fees, duties, and taxes into their price. While this offers cost certainty to the buyer, it might result in a higher overall price compared to DAP if the seller adds a margin for the risks and complexity they undertake. It also limits the buyer’s flexibility and ties them to the seller’s logistics arrangements.
Conclusion
The fundamental difference between DAP and DDP lies in who manages and pays for the import clearance process, including duties and taxes. DDP places this burden entirely on the seller, offering convenience to the buyer but significant risk to the seller. DAP shifts the responsibility for import formalities and costs to the buyer, allowing the seller to control transport without navigating foreign customs regulations.
The choice between DAP and DDP depends heavily on the seller’s knowledge of and willingness to engage with the import country’s procedures, the buyer’s desire for control over the import process, and the overall risk tolerance of both parties. Understanding these differences is essential for selecting the Incoterm that best suits your specific international trade transaction.
