Stricter approach to duty recovery for DDP transactions
 
The recent ACN issued by Customs in respect of DDP transactions raises a number of important issues.  The foremost issue is that Customs is likely to pursue an Australian consignee of goods in respect of any underpaid duty even where that consignee did not lodge the import declaration or was otherwise responsible for the circumstances that led to the underpayment of duty.  While this is inherently unfair, it is a good insight into the aggressive approach being taken by Customs.  We note this ACN does not represent mere words by Customs, we have been involved in a case where Customs has in fact sought underpaid duty from a purchaser under a DDP transaction.
 
The ACN also highlights the risks associated with transacting on a Delivered Duty Paid (DDP) basis.  DDP is not an uncommon term of trade and is often used where a purchaser wants certainty as to the landed cost of the good.  It achieves this by agreeing on an all-inclusive price for the goods to be delivered to a nominated location in the country of import.  The supplier assumes the responsibility for import customs clearance and payment of customs duty and GST.  If the parties act in accordance with the term DDP, the supplier will in fact lodge the import declaration, pay the relevant taxes and arrange domestic delivery of the goods.  It has traditionally been Customs approach that in these circumstances it will treat the supplier as the "owner" for the purposes of the Customs Act, including payment of any underpaid duty.
 
The ACN sets out that this position has changed and Customs will seek payment from any entity that comes within the extremely wide definition of "owner" within the Customs Act.  That definition includes consignees, actual owners of the goods or any person that has any control over the goods.  In most cases, an Australian purchaser under a DDP transaction will fall within the definition of "owner".
 
Relevant issues when considering the appropriate trading term

·        Selecting DDP terms will not necessary control the risks associated with payment of duty.  Rather, it may mean that from the perspective of Customs the purchaser remains fully liable for duty.  However, that purchaser has no control over the information provided to Customs.

·        Where DDP terms are agreed and Customs seeks payment from the purchaser, the purchaser generally will have a contractual right to seek an indemnity from the supplier.

·        Whichever party lodges the import declaration will be treated by the ATO as being responsible for payment of GST.  For Australian importers this is generally a neutral cost as a credit can be claimed.  However, for unregistered foreign suppliers who lodge import declarations under DDP terms, a GST credit may not be available.

·        In addition to the GST payable on the taxable importation, where a foreign supplier makes delivery of the goods within Australia, an additional taxable supply occurs.  This means a second amount of GST is payable.  Again, this is a significant issue if the foreign supplier is not registered for GST purposes.

·        It is important that the procurement team are fully aware of the cost implications of nominating particular Incoterms.  For instance, DDP terms that are 5% higher than CIF terms may seem equal, however, this will not be the case if the goods could be entered duty free or Customs seeks payment of duty from the purchaser.

·        Brokers should confirm that the Incoterm listed on an invoice is the term to which the parties have agreed and the terms on which the invoice price is set.  It is very common for an invoice to list FOB terms when in fact the supplier has freight, insurance or clearance obligations.  Not identifying the correct Incoterm will mean that the customs value may be incorrectly stated as the invoice price may be inclusive of freight, insurance and clearance costs.

·        A broker should also question any time their Australian client requests that they lodge an import entry in respect of an import where the invoice terms are DDP. 

Ultimately, we recommend that caution be taken before agreeing to DDP terms.  We only recommend such terms be adopted where the purchaser has a long standing relationship with the supplier, the supplier provides an indemnity in respect of any claims against the purchaser by Customs and you are confident that the supplier has the capacity and willingness to respond appropriately to any claim by Customs regarding an underpayment of duty.
 
If Customs does seek payment from you
If there is an underpayment of duty under a DDP transaction and Customs seeks payment from you it is not a given that you should be required to pay.  It is true that the definition of owner is wide.  However, you still must fit within that definition.  There are a number of cases that suggest that due to its extremely wide nature, the definition of "owner" in the Customs Act  should be applied according to the circumstances of the particular case.  Where a purchaser has played no role in the circumstances that led to the underpayment of duty, it will be an interesting test case that considers whether the intention of the Customs Act was to make that purchaser liable for the underpaid duty.
 
Russell Wiese and Lynne Grant