Issues with DDP Transactions with Japanese businesses
DDP (Delivered Duty Paid) is a commonly used trading condition in international trade. This is a convenient contract where “the seller bears all costs including customs duties and consumption tax in the importing country.” However, operating this system without understanding Japan’s tax laws and business practices can lead to unexpected pitfalls.
In particular, when Japanese businesses import goods from overseas under DDP terms, they may face a significant problem of being unable to claim “input tax credit” for consumption tax. This article provides a comprehensive and easy-to-understand explanation covering DDP fundamentals, its relationship with Japanese law, and especially important tax considerations for business-to-business transactions.
DDP is a Commercial Practice, and the Consumption Tax Taxpayer is the Importer
DDP is one of the international trade terms called “Incoterms” established by the International Chamber of Commerce (ICC). This is merely a contractual condition based on agreement between parties and is not a law. While DDP contracts stipulate that the seller bears all costs and risks to the destination, the taxpayer for customs duties and import consumption tax within Japan is determined separately by Japanese laws (Customs Law, Consumption Tax Law, etc.), regardless of this contract.
Therefore, even when trading under DDP terms, it is necessary to clarify who becomes the taxpayer according to Japanese law. This legal taxpayer is practically called the “Importer of Record (IOR)”.
ACP System for Non-Residents (Overseas Businesses) to Become Importers
Under Japanese regulations, overseas businesses without addresses or business offices in Japan cannot, in principle, make import declarations as importers. However, for DDP transactions where sellers need to fulfill tax obligations, the sellers themselves must become the importers. The solution to this problem is the “Attorney for Customs Procedures (ACP)” system.
By utilizing the ACP system, overseas businesses can designate a person with an address in Japan as an ACP, register with customs, and thereby make import declarations and pay taxes as Japanese importers. Appointing an ACP is essential for proper operation of DDP transactions.
When foreign corporations without bases in Japan sell goods in Japan and need to file consumption tax returns, using the ACP system allows these foreign corporations to become importers themselves, making input tax credit for consumption tax possible.
Critical Differences Between DDP and Import-Time Settlement
DDP transactions and trading conditions like DAP with “import-time settlement” differ significantly in tax payment procedures and responsibility allocation. This difference becomes a crucial point that determines tax implications in business-to-business transactions.
DDP: The seller becomes the importer and pays all taxes in advance, so the buyer has no additional costs when receiving goods.
Import-time settlement: The buyer becomes the importer and pays customs duties and consumption tax through carriers when goods arrive in Japan.
The following table summarizes the differences between both approaches:
| Item | DDP (Pre-payment) | Import-time Settlement (DAP) |
|---|---|---|
| Taxpayer | Seller | Buyer |
| Tax Procedure | Seller through ACP | Buyer through carriers |
| Input Tax Credit | Deducted on seller’s consumption tax return | Generally possible by becoming importer |
| Buyer’s Benefit | No additional payment hassle | Can claim consumption tax input tax credit |
Input Tax Credit Considerations for Business-to-Business Transactions
When Japanese businesses import goods for business purposes, the import consumption tax paid is subject to “input tax credit” that can be deducted from domestic consumption tax liability. However, this deduction is generally not available in DDP transactions.
This is because the requirement for input tax credit is “consumption tax paid by the importer themselves,” while in DDP transactions, the seller pays taxes as the importer, so the buyer is not the importer and cannot receive an “import declaration copy” issued under their name. Therefore, Japanese importing businesses wanting to receive consumption tax input tax credit should choose import-time settlement trading conditions like DAP.
What is DDP (Delivered Duty Paid) Trading?
A condition where the seller transports goods to the buyer’s designated location in the buyer’s country and bears all import clearance and import costs including customs duties and consumption tax.
The buyer does not need to worry about import clearance or taxes and simply receives the goods.
What is DAP (Delivered At Place) Trading?
A condition where the seller transports goods to an agreed destination (designated location in the buyer’s country) and delivers them upon arrival.
The seller bears transportation costs and risks for transporting and bringing goods to the destination.
However, import clearance procedures and import costs such as customs duties and consumption tax are the buyer’s responsibility.
DAP is a trading condition where “the seller delivers to the destination, but the buyer handles import procedures and taxes.”
What is ACP (Attorney for Customs Procedures)?
When importers or exporters do not have bases in Japan, there is a system to appoint someone who can handle customs procedures in Japan on their behalf.
An Attorney for Customs Procedures (ACP) is a person residing in Japan who can handle customs procedures, tax payments, inspection attendance, and refund collection as a representative of the actual importer.
Example: When a foreign company sells products in Japan but has no corporation or branch in Japan,
→ Appoint an Attorney for Customs Procedures (ACP) in Japan to handle import declarations and tax payments on their behalf.
Conclusion
DDP transactions offer significant benefits to buyers by allowing them to “receive goods without hassle.” However, because DDP transactions have different “contractual obligations” and “legal obligations,” especially in business-to-business transactions, they carry tax disadvantages where Japanese domestic importing businesses cannot claim consumption tax input tax credit.
Before starting transactions, it is extremely important to confirm that DDP is merely a commercial practice and that appropriate tax payment systems based on Japanese laws (such as ACP appointment) are in place. Please utilize the points explained in this article to ensure smooth transactions with overseas businesses and avoid unexpected tax issues.
