Incoterms for Small Business: DDP, DDU, and What You're Liable For

When you're navigating international trade, understanding Incoterms can mean the difference between a smooth transaction and unexpected costs. These three-letter terms on a commercial invoice dictate who is responsible for various aspects of shipping and delivery. Getting them wrong can lead to significant financial consequences for a small business.

Incoterms are published by the International Chamber of Commerce (ICC) and as of 2026, the current version is Incoterms 2020. They are not legally binding laws but are internationally recognized trade terms that help clarify responsibilities between buyers and sellers. Essentially, they define "who pays for what" during the shipping process.

The 11 Incoterms (2020)

Incoterms are divided into two categories based on the mode of transport: any mode of transport and those specifically for sea and inland waterways.

Any Mode of Transport (7 Terms)

Ex Works (EXW): The seller's responsibility ends when the goods are made available at their premises. The buyer handles the entire shipping process from there.

Free Carrier (FCA): The seller delivers the goods to a carrier at a specified location, after which the buyer takes over.

Carriage Paid To (CPT): The seller covers the transportation costs to a specified destination, but the risk transfers to the buyer once the goods are handed over to the carrier.

Carriage and Insurance Paid To (CIP): Similar to CPT, but the seller also provides insurance up to the destination.

Delivered at Place (DAP): The seller delivers the goods to a specified place, ready for unloading, but without handling import clearance or associated costs.

Delivered at Place Unloaded (DPU): The seller delivers and unloads the goods at the destination, but the buyer handles import clearance.

Delivered Duty Paid (DDP): The seller handles everything, including import clearance and duties, ensuring the buyer has no additional costs upon delivery.

Sea and Inland Waterway Only (4 Terms)

Free Alongside Ship (FAS): The seller delivers the goods alongside a vessel at the port of shipment, and the buyer takes over from there.

Free on Board (FOB): The seller loads the goods onto the vessel, and the buyer assumes responsibility from that point.

Cost and Freight (CFR): The seller pays for transportation to the destination port, but the risk transfers to the buyer once the goods are on board.

Cost, Insurance, and Freight (CIF): Like CFR, but the seller also covers insurance until the goods reach the destination port.

For many small businesses engaging in international shipping, particularly via parcel or air freight, DDP, DAP, and occasionally EXW are the most relevant Incoterms.

DDP: Delivered Duty Paid

DDP represents the highest level of responsibility for the seller. You manage the entire shipping process, from packaging to delivering the product to the buyer's door, including handling all duties and taxes. This leaves the buyer with nothing to do but receive their purchase.

What DDP Means for You (The Seller)

As a seller, DDP means you're responsible for every step of the delivery process:

• Packaging and preparing the goods for shipment.
• Clearing the goods for export.
• Arranging transportation from your facility to the buyer's location.
• Providing cargo insurance (though technically optional, it's often included).
• Managing import clearance and paying any customs duties and taxes.
• Ensuring the goods are delivered directly to the buyer.

Pros and Cons for Small Business

DDP can significantly enhance the customer experience, as it eliminates surprise charges for the buyer and can increase your conversion rates. Customers appreciate the transparency and predictability of knowing their final cost upfront, which can also position your brand as premium.

However, the downside for you as the seller is the financial risk. You must be knowledgeable about import duties and taxes for every destination you ship to, which can vary widely by country and product type. This might also require you to register for VAT/GST in some countries, adding to the complexity and cost of compliance.

The Hidden Costs of DDP

Beyond the obvious duty rates, several hidden costs can impact your bottom line:

• VAT/GST at Import: Countries often charge significant VAT on imported goods, which can dramatically increase the total import cost.
• Customs Broker Fees: Hiring a customs broker to handle import entries can cost between $50 to $200 per shipment.
• Storage/Demurrage Fees: Delays in clearance can lead to costly storage fees if goods are held in a bonded warehouse.
• Compliance Costs: Registering and maintaining compliance with foreign VAT requirements can cost between $1,000 to $5,000 per year per country.
• Currency Risks: Duties are often quoted in local currency, exposing you to fluctuations in exchange rates.
• Product Classification Disputes: Incorrect product classification can result in additional duties and penalties.

DDP Duty Estimation Example

Consider a $200 product shipped from the US to the UK. The costs can quickly add up:

• Product value: $200
• Shipping cost: $35 (via FedEx International Priority)
• Insurance: $5 (optional but recommended)
• Customs value: $240 (product + shipping + insurance)
• UK duty rate (6.5%): $15.60
• UK VAT (20% on value + duty): $51.12
• Total landed cost: $306.72
• Additional cost beyond product + shipping: $66.72 (Duties + VAT)

The $66.72 cost comes directly out of your profit margin. If your initial margin was $80, the duties and VAT could consume over 80% of it.

DAP: Delivered at Place (Formerly DDU)

Under DAP, the seller is responsible for delivering the goods to a specified location, but the buyer handles import clearance and any associated duties and taxes. This term replaced the older DDU (Delivered Duty Unpaid) in 2010.

What DAP Means

For DAP shipments:

• The seller takes care of packaging, export clearance, and transportation to the destination.
• The buyer is responsible for import clearance, paying duties, and taxes.
• Delivery is made to a named location, but the buyer handles unloading.

The Customer Experience Problem

DAP can lead to "duty shock" for customers. Here's how it unfolds:

A customer purchases a $50 item online.

They pay $50 plus $15 for shipping, totaling $65.

Upon arrival at customs, duties and VAT are assessed.

The carrier advances these costs on the buyer's behalf.

Upon delivery, the buyer is surprised with an additional bill for duties, VAT, and an advancement fee.

This unexpected charge often leads to negative reviews and refund requests.

This scenario is common in international e-commerce, where buyers may not anticipate additional charges beyond their initial payment.

DAP vs DDP Comparison for a $100 Sale

• DAP: The buyer pays $100 plus shipping at checkout but faces $25-40 in surprise charges upon delivery. This can lead to lower customer satisfaction and higher return rates.
• DDP: The buyer pays all costs upfront at checkout, resulting in higher customer satisfaction and lower return rates, though the seller assumes the risk of fluctuating duties.

DDU: Is It Dead?

Although DDU was officially replaced by DAP in 2010, the term is still widely used in practice. Shipping labels, carrier systems, and commercial invoices often continue to reference DDU.

• DDU (Old): Superseded but still recognized and used in practice.
• DAP (Current): The preferred term for new contracts, providing more specificity about the delivery point.

For practical purposes, DDU and DAP can be considered synonymous. If you encounter DDU on documents, rest assured that its meaning is understood by industry professionals.

EXW: Ex Works (Minimum Seller Obligation)

EXW places the least responsibility on the seller. The buyer arranges for pickup, export clearance, and all subsequent stages of the shipping process. This term is suitable for specific scenarios:

When EXW Makes Sense for Small Business

• B2B Transactions: Buyers with their own freight forwarders can manage the shipping process.
• Volume Shipping Rates: Buyers with favorable shipping rates can handle logistics more cost-effectively.
• Unfamiliar Destinations: Buyers knowledgeable about local import rules can manage customs clearance.
• Local Pickup: Buyers can collect goods directly from your warehouse or factory.

When EXW Is a Bad Idea

• B2C E-commerce: Consumers are generally unprepared to handle customs clearance.
• Restricted Export Destinations: Sellers remain responsible for export compliance, even under EXW.
• Small International Orders: The logistics costs for buyers may be prohibitive.

Choosing the Right Incoterm for Your Business

Selecting the right Incoterm requires careful consideration of your business model and customer base.

Decision Matrix

• B2C E-commerce, Premium Brand: DDP offers the best customer experience.
• B2C E-commerce, Price-sensitive Market: DAP with a duty calculator at checkout provides transparency.
• B2B, Buyer with Logistics Team: FCA or EXW allows buyers to leverage their logistics capabilities.
• B2B, You Control Shipping: CPT or DAP ensures you manage transit while the buyer handles import clearance.
• High-value Goods, One-off Sale: CIP or DDP minimizes risk.
• Low-margin, High-volume: DAP is ideal to avoid absorbing duties.
• Selling on Amazon/Marketplace: DDP is often required by marketplaces.

Country-Specific Considerations

• Canada: Low complexity due to USMCA benefits.
• UK: Medium complexity with potential VAT registration requirements.
• EU Countries: High complexity, but IOSS can simplify VAT for low-value goods.
• Australia: Medium complexity with GST registration thresholds.
• Brazil: Very high complexity due to intricate import processes.
• India: High complexity with multiple taxes and bureaucratic clearance.
• Japan: Medium complexity, requiring a broker for consumption tax.
• Middle East: Medium-high complexity due to customs duties despite no income tax.

The IOSS Shortcut for EU DDP

The Import One-Stop Shop (IOSS) system simplifies VAT collection for EU shipments under EUR 150. Sellers can collect VAT at checkout, making the sale effectively DDP without complex VAT registrations.

• Value Limit: EUR 150 per consignment.
• Covers: VAT only, not customs duties (minimal for low-value goods).
• Registration: Required in one EU country, covering all 27.
• Filing: Monthly VAT return through the IOSS portal.
• Seller Benefits: No border VAT collection, faster customs clearance.
• Buyer Benefits: No surprise charges, no carrier advancement fees.

Practical Tips

• State the Incoterm Clearly: Always include the Incoterm on your commercial invoice, e.g., "DDP London, UK (Incoterms 2020)."
• Price Accordingly: If offering DDP, incorporate average duty costs into your product pricing.
• Use a Duty Calculator: Services like Zonos, Avalara, or SimplyDuty can estimate duties at checkout, preventing surprises.
• Correct HS Codes: Accurate Harmonized System codes prevent costly duty discrepancies.

Choosing the right Incoterm is crucial for shaping the customer experience in international sales. It influences financial risk, logistical responsibilities, and potential customer satisfaction. Make your choice deliberately to align with your business goals and customer expectations.