For most international shippers, the terms of sales seem clear initially: After payment, the goods ship, and the buyer pays any applicable duty and taxes. Sounds simple, right? However, ignoring the complexities of Incoterms® for international shipping can lead to unexpected costs and stuck customs.
Note: Incoterms® is a registered trademark of the ICC. In this post, we also refer to "shipping terms" and "conditions of sale" to convey the same concepts.
Shipping Terms Explained
Shipping terms are the backbone of global trade. While confusing at first, understanding how they work is mandatory for purchasers and sellers to clarify obligations. Who pays for insurance? Who clears customs? Let's break it down.
Key Comparison: DDP vs. DAP (DDU)
The most common confusion in shipping is the difference between Delivery Duty Paid and Delivery Duty Unpaid. Here is the fast definition:
| Feature | DDP (Delivered Duty Paid) | DAP (Delivered at Place) / DDU |
|---|---|---|
| Customs Duties | Paid by the Seller | Paid by the Buyer |
| Import Taxes (VAT/GST) | Paid by the Seller | Paid by the Buyer |
| Best For | Customer experience (no surprise fees) | B2B shipments where buyer claims tax back |
Note on DDU: "Delivery Duty Unpaid" was officially retired in 2010 and replaced by DAP. However, DDU is still widely used in the industry to describe the same process.
Need help navigating these terms? Contact our team for an initial consultation.
Quick Glossary: Common Shipping Terms Defined
Click on a term below to see the simple definition.
EXW (Ex Works) / DDU
Often referred to as Delivery Duty Unpaid, EXW is the default method for FedEx, UPS, and DHL. The seller makes the goods available at their premises. The buyer is responsible for all shipping costs, insurance, and import fees. This imposes the minimum obligation on the seller.
FOB (Free on Board)
Used primarily for sea freight. The seller delivers the goods to the vessel. The risk of loss or damage passes to the buyer once the products are on board the vessel. The purchaser bears all costs from that moment onward.
FCA (Free Carrier)
The seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another designated place. The risk passes to the buyer at that specific point.
CPT (Carriage Paid To)
The seller pays for the carriage of the goods to the named destination. However, the risk transfers to the buyer as soon as the goods are handed to the first carrier. The seller must clear goods for export, but not import.
CIP (Carriage and Insurance Paid To)
Similar to CPT, but the seller must also contract for insurance coverage against the buyer’s risk of loss or damage during carriage. Under Incoterms 2020, a higher level of insurance is often required compared to previous years.
DAT (Delivered At Terminal)
The seller delivers when the goods are unloaded from the transport vehicle and placed at the buyer's disposal at a named terminal (wharf, warehouse, etc.). The seller bears all risks involved in bringing the goods to and unloading them at the terminal.
DDP (Delivered Duty Paid)
This places the maximum obligation on the seller. The seller pays for shipping, insurance, and all import duties and taxes. The buyer simply receives the package. Note: VAT cannot always be reclaimed by the seller in this scenario.
Why Terms of Sale Matter
Terms of sale communicate a binding agreement. They outline responsibilities regarding the delivery of products. While not legally required to quote terms when selling internationally, doing so clarifies responsibilities and avoids costly misunderstandings caused by language barriers.
What is NOT included?
Incoterms define logistics responsibilities. They do not define payment terms (when the money is transferred), transfer of title (ownership), or protection against fraud/defective goods.
Understanding CIF: Value vs. Term
Cost, Insurance, and Freight (CIF) is a specific Incoterm used for sea transport. However, "CIF Value" is also a method of valuation used by customs.
- The Term: Seller pays costs and freight to the destination port and provides minimum insurance.
- The Value: Customs often calculate duty based on the CIF value (Cost of goods + Insurance + Freight), even if you used a different shipping term.
We recommend itemizing these costs on the commercial invoice to avoid overpaying duties.
DDP vs. DAP: The Import Tax Complication
While DDP (Delivered Duty Paid) provides a smoother customer experience for e-commerce, it has a hidden drawback regarding VAT (Value Added Tax).
Many countries apply a VAT of 10%-20% on imports. If you ship DDP:
- The seller pays the VAT.
- Since the seller is not a registered business in the destination country, they often cannot claim this tax back.
- If you ship DAP (Delivered at Place), the buyer pays the VAT but, if they are a business, they can usually claim it back as an input tax credit.
For B2C (Business to Consumer) online orders, DDP is usually preferred to prevent the customer from refusing the package due to unexpected fees.
What are the default Shipping Terms for parcels?
If you do not specify a term on your invoice, the default for carriers like FedEx, UPS, and DHL is DAP (formerly DDU). This means:
- The seller pays the shipping.
- The receiver is billed for duties, taxes, and carrier disbursement fees.
If the invoice does not include shipping terms, the import fees are automatically charged to the importer/receiver.
Incoterms 2020 Rules: Where to learn more
The International Chamber of Commerce (ICC) updates these rules every ten years. While Jet Worldwide supports your logistics, legally binding definitions should always be referenced directly from the ICC, especially for high-value contracts.
The more you ship, the more you need to know.
Large transactions and complex logistics require clear written communication. Ensure your Bill of Lading (BOL) and Commercial Invoices explicitly state the agreed Incoterm.
Ready to Ship Smarter?
Contact Jet Worldwide for support with international logistics and customs.
Additional International Shipping Resources
- Fees: Common Canadian Import Fees to Consider
- Valuation: Verify the correct declared value
- Savings: Benefit from Canada Free Trade Agreements
- Classification: Useful information on HS Codes
