Incoterms are integral to global trade and commerce. The International Chamber of Commerce introduced a set of Incoterms or International Commercial Terms that are globally recognized. Incoterms enable global trade by clarifying buyers’ and sellers’ obligations and responsibilities and preventing confusion in various domestic and international trade contracts.
Incoterms establish a standardized terminology applicable to all in international business, thereby eliminating any room for confusion or conflict about each party’s responsibilities and costs. Knowing your Incoterms helps determine shipping costs accurately and also indicate correct product prices.
What is DAP?
DAP stands for Delivered-at-place and essentially means that a seller has agreed to pay all the costs, including transportation costs, and is ready to incur any probable losses of moving cargo from origin to destination. The buyer’s responsibilities include carrying out all import formalities and paying for unloading, import duties, and clearance or local taxes after the shipment arrives at the destination port.
The Incoterm Delivered-at-Place applies to any mode of transportation or a combination of different modes of transportation. DAP is accompanied by the name of the point where the financial responsibilities transfer to the buyer, which is commonly the port of destination, e.g., ‘Delivered-at-place, Port of Jeddah.’
DAP was introduced very recently in the International Chamber of Commerce’s eighth publication of Incoterms in 2010. To understand it clearly, we can outline the responsibilities of both the seller and the buyer.
As mentioned earlier, in DAP, a seller is responsible for all costs and potential losses in moving the goods. These costs are associated with the following activities:
- Approval for Export
- Freight charges for domestic movement
- Freight charges for the international movement
- Delivery at Destination
The buyer’s responsibilities, in this case, are quite limited and essentially consists of paying for and facilitating the following:
- Unloading of the cargo
- Custom Clearance
- Import Duties
- Local Taxes
What is DDP?
DDP stands for Delivered Duty Paid. This Incoterm states that the seller is responsible for all costs and risks related to the goods’ movement from origin to destination port until the buyer receives them. This is the Incoterm that places maximum responsibility on the seller while the buyer is only responsible for receiving his cargo and unloading it.
Just like Delivered-at-place, DDP applies to all modes or a combination of modes of transportation. DDP must also be accompanied by the destination port’s name wherever mentioned within the agreement or other shipping documents.
Delivered Duty Paid entrusts the seller with the full responsibilities, making the Incoterm more buyer-friendly than seller-friendly. Therefore, DDP means more responsibilities, risks, and transportation costs for the seller. The seller is responsible for all of the following activities:
- Payment of domestic freight
- Payment of international freight
- Payment of export and import duties
- Payment of insurance
- Proper packaging
- Arrange for export clearance and customs documentation
- Arrange for import clearance and approvals from the destination country’s authorities
- Arrange the proof of delivery
- Payment of any local taxes or inspection charges
- Payment of any other expenses incurred such as VAT charges, bribery, and additional storage costs in case of delays
- Also, the seller is liable if the cargo is damaged or lost in transit
The buyer is only responsible for arranging and paying for the unloading of cargo in the DDP Incoterm.
DDP as an incoterm is not commonly preferred as it may highly burden the seller to make his goods available to the buyer. The seller may not always be capable of clearing the cargo through customs in other countries. Import clearance varies from country to country and maybe a complex set of procedures. Therefore, it is a preferred practice for buyers to manage the import-related obligations in their home country.
Also, there can be increased chances of delaying a DDP shipment at customs clearance if it falls short of correct shipping documents. The seller may also be liable to pay for unprecedented storage and demurrage costs resulting from delays by custom authorities, agencies, or carriers.
For a first time importer, the Incoterm may seem quite lucrative as the seller is subject to maximum risk. But DDP can mean paying high prices for products and limited supply chain information as the control lies with the seller and his freight forwarder. The seller charges higher for products or fixes higher freight markup to cover the cost of added liability due to DDP.
While comparing both these incoterms, DAP & DDP, we may conclude that DAP may be a less risky option for US Export shipments than DDP. If you want to have more control over the freight but do not want to get involved in local taxes that may be unfamiliar to you, DAP is a preferred choice. DAP eliminates the need to pay unexpected duties, tax bills while still having adequate control over the freight and access to critical supply chain information.
Being well informed about Incoterms gives you clarity about several things from roles, responsibilities, liabilities to transparency in product pricing. Therefore Incoterms can help save millions of bucks and avoid expensive mistakes for your business by merely clarifying tasks, costs associated, and risks involved in moving the goods from origin to destination.
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