Introduction

Many articles discuss INCOTERMS® (International Commercial Terms) and explain how specific terms in business contracts outline responsibilities between the seller and buyer regarding factors such as packing, transportation, insurance, and risks associated with cargo movement. However, what is often overlooked is how INCOTERMS influence your company's trade compliance responsibilities.

 

Money, Money, Always Funny!

Choosing the appropriate INCOTERM is a critical part of negotiating any contract in international trade. It influences the landed cost of products, which can heavily impact the bottom line of the deal. Unfortunately, attention to INCOTERMS often goes no further than evaluating their impact on costs. This short-sighted approach might not only cost you money but also lead to non-compliance issues.

 

Let’s Consider Two Scenarios Highlighting Risks Associated with EXW and DDP

1. Shipment #1 – EXW (Ex Works – Named Place of Delivery: Seller’s Warehouse)

2. Shipment #2 – DDP (Delivery Duty Paid – Named Place of Destination: Buyer’s Warehouse)

 

To provide context, let’s define these terms to better understand their implications.

• Ex Works (EXW): The seller fulfills their obligations by having the goods available for the buyer to pick up at the seller’s premises or another named place (e.g., factory, warehouse). The buyer bears all risks and costs starting when they pick up the goods until delivery to their location. The seller has no obligation to load the goods or clear them for export.

• Delivered Duty Paid (DDP): The seller bears all risks and costs associated with delivering the goods to the named place of destination, ready for unloading and cleared for import.

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How Is It Done in Real Life?

In Scenario #1 (EXW), the buyer acts as the exporter and is responsible for fulfilling all export requirements outlined by the government of the exporting country. In practice, the buyer often schedules a pickup with their freight forwarder from the seller’s warehouse and relies on the freight forwarder to handle export compliance correctly.

 

In Scenario #2 (DDP), the seller must act as a Non-Resident Importer of Record in the foreign country, shipping the product to the buyer while paying duties in the importing country. Here, the seller relies on the professionalism and diligence of the customs broker in the importing country to fulfill all legal obligations.

 

Risk – A Situation Involving Exposure to Danger

When we think about the word "risk" in the context of INCOTERMS, we often focus on financial responsibility in the event of damaged or lost cargo. However, non-compliance risk is frequently overlooked.

 

Here’s an important question that companies shipping under EXW or DDP should ask: How much control do we really have over these transactions? Keep in mind that acting as the Exporter (USPPI) or Importer (Importer of Record) comes with specific responsibilities. Failing to fulfill these responsibilities can expose your company to risks, including non-compliance penalties. Unfortunately, this aspect is often neglected, leading to unnecessary risks and costly fines.

 

Questions for EXW:

• Are we controlling every aspect of exporting the product from the seller's country?

• Do we verify export filings with the relevant government agencies?

• Do we audit and oversee what is being done by the freight forwarder on our behalf?

• Are all details reported to the required agencies, including permits (if needed)?

 

Questions for DDP:

• Do we establish a presence in the importing country to pay duties and taxes?

• Do we have an accountant or representative to handle documentation requests from tax authorities?

• Do we have access to all records in case of an audit?

• Are we meeting recordkeeping requirements in the importing country?

 

If the answer to any of these questions is "no," shipping under EXW or DDP terms may already make you non-compliant.

 

Possible Solutions

Implementing early mechanisms to protect your company in these situations is critical. For example, establishing a "No EXW or DDP Shipment Policy" might be a viable option. While shipping under EXW or DDP terms may sometimes be the only way to close a deal, introducing strong control policies can help manage these risks. Here the policies that ensure oversight of freight forwarders or brokers handling shipments overseas can be key to securing new deals while maintaining compliance.

 

So, How Do INCOTERMS Influence Trade Compliance Responsibility?

The definitions of EXW and DDP clearly outline who is responsible for moving cargo between point A and point B. However, what is often missing is clarity regarding trade compliance responsibilities during international shipments, especially when these specific terms are used.

 

The link between INCOTERMS and trade compliance risks may not be immediately apparent but is vital to understand. Identifying these nuances often requires the expertise of a seasoned professional who understands the intricacies of international shipping and supply chain management.

 

Control of the process is critical—so pay attention and choose wisely!

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Don’t wait -  Check our main page or ​Contact us today to discuss how BioPharma Trade can help you streamline your trade compliance needs and ensure your global operations are compliant, efficient, and risk-free. We look forward to working with you!

 

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