DDP ex-VAT – a new Incoterms® rule? - International Trade Matters Ltd

As I write this in the second half of 2024, we are receiving several questions about an alleged new Incoterms® rule of “DDP ex-VAT”.

This was originally discussed shortly after the UK left the EU back in 2021 but seems to have reared its head again recently. Let’s discuss.

Incoterms® rules are published globally by the ICC

First, let’s just remind ourselves that the Incoterms® rules (short for ‘International Commercial Terms’) are published by the International Chamber of Commerce (ICC) globally and have been with us since 1936. Back in 2020, I wrote an article that gives an overview. ‘Incoterms®’, comprise a set of 11 rules used to help us all manage the transportation of goods around the world. Brexit prompted a lot of interest in Incoterms® but, from an Incoterms® point of view, nothing changed with our departure from the EU. Roughly half of the goods traded overseas are traded with the EU so when we left, those shipments suddenly became imports and exports and therefore required the use of Incoterms® rules. Many importers/exporters had got away with no real knowledge of the topic up to this point if they were only trading within the UK and EU.

As mentioned, Incoterms® rules are published by the ICC and, in recent times, have been updated and revised every 10 years. The current version is Incoterms® 2020, which was published towards the end of 2019. The important point here is that the ICC publishes the Incoterms® rules. Nobody can invent a new Incoterms® rule and the only way to vary the rules is by agreement within the sales contract between the seller and buyer of the goods. Therefore, please be very wary of any service by a third party purporting to offer any variance to the ICC rulebook.

Only the ICC (and your contract with your customer or supplier) can vary the rules – and no-one can invent a new one!

What does ‘DDP ex-VAT’ mean?

I do understand why businesses see a purpose for ‘DDP ex-VAT’. Here’s why:

DDP or, to use the name in full, Delivered Duty Paid has the seller of goods taking responsibility for all the export formalities, the cost of carriage and – importantly for this article – the import formalities. Import formalities covers a lot of elements. It covers the procedural processes of the import declaration and any security checks or inspections that might be required. On top of the administrative procedures, it also covers import costs. These may relate to the cost of the import declaration and/or security checks but also importantly covers import duty and taxes. The “taxes” element is what’s important here because it includes import VAT.

As goods cross borders they give rise to both; duty, and import tax/VAT. Sometimes the duty is reduced to zero if a trade agreement exists between the trading countries. But trade agreements don’t help us with import VAT. This is applied to the majority of goods arriving in a country. Some goods are zero-rated or exempt from VAT and some attract different (lower) rates of VAT. The vast majority of imported goods attract import VAT. But there is good news – if you import goods, you can recover import VAT if you are VAT registered. In fact, many countries including the UK have some type of deferral scheme, so it’s never physically paid. Here in the UK, it’s called Postponed VAT Accounting (PVA).

Tell the person carrying out your import declaration that you’d like to use PVA, declare the import on your next VAT return, and no money changes hands. Simples!

This is also true for the goods that you export as well, but the fly in the ointment is that you need to be tax registered in the overseas location to recover the import VAT. Great if your customer pays and they are tax registered locally but not so good if you are the exporter and don’t have local tax registration and still want to send goods DDP.

Is ‘DDP ex-VAT’ the answer?

Now you can see the dilemma – we have exporters in the UK that are perfectly happy to pay for the carriage of goods. Maybe there is no duty to pay because they were made in the UK, and we have a trade agreement with the EU. But there is the thorny matter of the import VAT. The customer (in the EU) doesn’t want to handle the import, so the seller opts for DDP, but the seller needs to realise that the import VAT will still have to be handled. Hence the creation of services that allegedly offer a ‘DDP ex-VAT’ option. The alleged solution is that the seller pays for the carriage, duty (if applicable) and the import declaration but the import VAT is charged to the buyer. This is very easy to do with the advent of schemes such as PVA – all it takes is for the transporter to have the buyer’s VAT number and the import VAT is neatly taken care of by being charged to the buyer’s VAT account.

No, DDP ex-VAT is not a solution, but rather a new problem

There are a couple of reasons why the idea of “DDP ex-VAT” is troublesome. Let me start with the major issue that it could cause, and then a reminder of why this is simply not possible…

Why is DDP ex-VAT a problem?

The major issue is this – someone has to account for the import VAT through their VAT records.

The greatest issue we are seeing with the current crop of “DDP ex-VAT” offerings is that there is no robust way to make sure the buyer understands there is a VAT liability to be accounted for. And the general appeal to DDP is to remove tasks for the buyer. That’s why this is cropping up typically with shipments from the UK to the EU. Our customers in the EU want the holy grail of frictionless trade. They definitely don’t want to pay duties, but they also don’t want to do any paperwork. They don’t want to complete, and pay for, an import declaration or any other record keeping that might be required. That’s what DDP is for – take all the hassle away from your buyers. Therefore, they certainly don’t want to get their accounts department to look out for an import VAT charge and add the appropriate information to the next VAT return. It may appear to provide a smooth shipment and be initially appealing. But imagine how your buyer is going to feel when someone in accounts suddenly finds a list of transactions on their PVA (or local equivalent) statement that all trace back to imports from you. They will definitely not be pleased.

Why is ‘DDP ex-VAT’ is impossible?

If the potential fall-out with your customers is not enough of a deterrent, let’s explore why this simply can’t exist. Firstly, no one can publish an Incoterms® except the ICC. Well-meaning third parties might want to offer a service to meet a need, but they don’t get to name it as a new Incoterms® rule. Secondly, this is almost exclusively a UK-EU issue and Incoterms® rules are global. They do not exist to solve tax (or any other) issue in a specific country or region of the world. In fact, one of their greatest values is that they are globally consistent. If you use any Incoterms® rule, it means the same thing anywhere for all your buyers, thus removing misunderstandings and uncertainty.

And thirdly, it’s not possible to split out elements covered by Incoterms®. The rule book tells us; “The seller must pay ….. duties, taxes and any other costs related to export, transit and import clearance”. No one can vary that rule by saying “all of the above except this, or that element”.

Another factor that makes this troublesome is that handling and management of VAT is a local government issue. Local rules apply and the use (or not) of schemes such a PVA are a matter for local tax authorities and border control. Therefore, it’s simply impossible for a global framework such as Incoterms® to dictate how local tax management will take place.

So how can a business provide DDP ex-VAT?

Is there a solution? Yes, there definitely is. Since Brexit I have worked with several UK exporters whose EU business was in serious jeopardy. Their customers have heard the publicity about the trade agreement but, frankly, don’t care. Duty-free is helpful, they don’t want to do anything so removing duty doesn’t solve the problem if they still have an import declaration to carry out and import VAT to manage. Therefore, UK exporters have found themselves uncompetitive in some scenarios. This has, therefore, given rise to offerings from third parties that solve the problem properly. One notable service is from a global freight forwarder who does successfully shield the EU buyer from any cost or hassle, while also enabling the UK exporter to ship goods without the burden of paying the import VAT. They rightly don’t market their service as ‘DDP ex-VAT’ because it isn’t. It’s a proper DDP service but with the added benefit of the freight forwarder (in partnership with a large accounting firm) acting as the fiscal representative of the seller so that the VAT can be recovered.