Why is DDP not suitable for imports to Germany?

To understand the problem a few details have to be explained

Delivery Duty Paid (DDP)

Incoterms or International Commercial Terms are a series of standard commercial terms published by the International Chamber of Commerce (ICC). DDP is one of these commercial terms and states that the seller is responsible for arranging carriage and delivering the goods at the named place, cleared for import and all applicable taxes and duties paid (e.g. customs duties, import-VAT and excise taxes on imported goods). This means that the seller is responsible for the customs clearance in the EU and for the payment of customs duties and import-VAT.

Indirect representative

European customs law in general does not allow import declarations by companies who are not resident within the EU. At the same time professional representatives like customs agents or logistic companies can only be acting as indirect representative. Indirect representation means that the customs representative shall act in his or her own name but on behalf of another person (Article 18 Unions Customs Code). The problem is that the representative becomes liable for all import duties of his or her customer. The representative has to fulfill all formal requirements of the represented customers such as keeping documents or participating in customs audits. This explains why German customs agents try to avoid indirect representation by all means.

However, if DDP is agreed the seller from outside of the EU is responsible for customs declaration within the EU. This seller has to engage the customs agent within the EU and is liable to all import duties (customs duties, import-VAT etc.). However, in most cases another situation occurs. The German customs agents try to give the impression that he or she is acting as direct representative of the German buyer of the goods. As direct representative, the customs agent would not be liable to import duties of his or her customers. In order to avoid indirect representation the customs agent names the German buyer of the goods as declarant (and therefore as importer) in the customs import declaration although the agent has no order or customs proxy of the German company. In this case the German company become liable to all import duties although the commercial term DDP states exactly the opposite. However, very often the German buyer of imported goods accept this practice and pays the import duties.

The buyer could refuse to pay the import duties by informing the customs authorities that no order or customs proxy was given to the customs agent. If this happens, a customs agent is acting as a representative without power of attorney which makes the agent fully liable to all import duties. However, in reality the German company accepts in most cases the wrong proceedings because it assumes that it is able to deduct or reclaim the import-VAT in its next monthly VAT-return. This is a huge error. To understand the problem we have to look into the German VAT code.

Special rule in VAT law

There is a special rule in VAT law stating that the place of delivery is in Germany if the following applies (§ 3 (8) German VAT code):

• The goods have to be send from a place outside of the EU to Germany.
• The seller has no seat or fixed establishment in the EU.
• The seller or his/her representative is debtor of the import-VAT.

This is exactly the case if a seller from outside of the EU is delivering goods to Germany under the commercial term DDP. Since the place of delivery is in Germany the following consequences emerge:

• The foreign company carries out a delivery which is taxable in Germany.
• It has to show German VAT in its invoice.
• It has to pay German VAT to the tax authorities.
• Consequently it has to register in Germany for VAT purposes and fulfill all formal aspects of German VAT law.
• The German company as receiver of the goods can deduct or reclaim the VAT shown in the invoice of the foreign company.

In general these consequences are ignored by all related parties. The foreign seller may engage a German customs agent to handle import procedures. The customs agent declares the German company as declarant (and therefore as debtor of import duties). The agent does this despite the fact that he/she has no power of attorney by the German company. The customs agent try to avoid the customs liability as indirect representative. In general the German company will accept this behavior and deduct the import-VAT in its next monthly VAT-return. This is standard procedure but it is not in line with German VAT law.

The German customs and tax authorities recently started to investigate DDP-cases. They deny the possibility to deduct the import-VAT by a German company. This means that 19% VAT on all imported goods are due. The argument of German tax authorities is that in situations like this the German company is not the debtor of the import-VAT. Consequently only the foreign company is entitled to deduct the import-VAT. The tax bill for German companies can be economically life-threatening if a tax auditor looks into all cases of the last 3 or 4 years.

Resolution

Whether the opinion of German tax authorities is correct is unclear. So far there are no rulings of German fiscal courts. There are legal arguments challenging the position of German tax authorities. However, as long as the highest German fiscal court has not ruled in this respect, a serious legal uncertainty remains for all German importers who buy goods under the commercial term DDP.

In the future German importers should avoid the term DDP. Instead the partners should use the term Delivery at Place (DAP) or Delivery at Terminal (DAT). They may agree that the foreign seller has to pay all costs of transport, insurance etc. Under this term the German company becomes responsible for customs clearance in the EU. Consequently the German company becomes debtor of customs duties and import-VAT. As such it is entitled to deduct or reclaim the import-VAT.

For the past German companies have not much choice but to get their cases in front of German fiscal courts.

When is DDP the right choice?

There is only one situation where DDP can be the right choice: The foreign company delivers goods to another EU member state via a German harbour or airport. Customs clearance is made in Germany but there is no import-VAT due if the goods will be delivered directly to another EU-member state (intra-community supply). In cases like this it can be suitable to engage as fiscal representative who fulfills all VAT relevant obligations including filing of VAT-returns, delivering invoices and all other formalities. The foreign company can reclaim the import-VAT in full because deliveries to sellers in other EU-member states are tax-free.

Autor: Peter Scheller, Steuerberater, Master of International Taxation, Fachberater für Zölle und Verbrauchsteuern

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