Introduction:
When shipping products to another country, recipients must pay additional duties and taxes before delivery.
Governments impose taxes on shipments from other countries for several reasons, including protecting domestic companies from foreign competitors, controlling the flow of certain products, and generating revenue through taxes. Duties and taxes on shipments are necessary legal requirements. We’ve put together this simple guide to help you understand the importance of duties and taxes. It includes definitions, explanations, and best practices for managing this aspect of shipping, allowing you to prepare your business to adhere to trade regulations.
The Basics
Definitions: First, the common terms you’ll come across in shipping, and what they mean.
- Import Duty. A tax imposed by a government on goods from other countries. Increased prices on imported goods make these products less “desirable,” so buyers are encouraged to support the domestic market. You’ll find that import duty percentage varies for each category of goods, while VAT and GST are more consistent. Learn more about the import duty.
- GST. Goods & Services Tax. This tax is charged in stages and reimbursed to everyone except the end buyer. It’s different from VAT because it’s a flat-rate percentage of the total transaction instead of a percentage of value-added.
- VAT. Value Added Tax. This tax is charged to consumers when they buy any good or service. Learn more about VAT.
- Commercial invoice. A required document in international shipping that describes the items in the shipment and their value. Commercial couriers and customs brokers refer to this document to process and clear your package through customs. Learn more about commercial invoices.
- De minimis value. The tax threshold, or the amount where a person begins paying taxes on an item.
What are Incoterms?
Incoterms, short for “International Commercial Terms,” are established by the International Chamber of Commerce (ICC) every decade. The latest edition of these rules dates back to 2010. They specify which party, the sender or the receiver, is responsible for paying duties and taxes. Incoterms offer several benefits, such as:
- Straightforward about the responsibilities of each party.
- Standardized.
- Accepted worldwide.
Incoterms you should know
For B2C companies and traditional eCommerce sellers that are shipping small parcels, the following Incoterms will be applicable to you.
- DDP. Deliver Duty Paid. The seller is responsible for handling the risks and costs of the shipment, including import duty and any other charges related to delivery.
- DDU. Deliver Duty Unpaid. The receiver/customer is responsible for settling all charges for customs to release the shipment and have it delivered.
- You can also find other common freight terms here.
How are duties & taxes calculated?
Valuation methods
To calculate the tax and duty amount for your shipment, you need to multiply the taxable value of your shipment by your destination country’s tax and duty percentage. Keep in mind that duty percentages vary for each category of goods. You can find the percentage for your shipment by using our HS CODE LOOKUP page. The taxable value is generally based on the value of the goods, but it may also include other amounts, depending on the country’s valuation method.
Countries use two primary valuation methods to determine taxable value: FOB and CIF.
- FOB stands for “Free On Board.” In this case, the taxable value is the value of the product. While the definition also includes transportation loading, this only applies to items shipped by sea freight. If your shipment arrives by air freight (which most B2C eCommerce shipping does), the cost of transportation will not be included.
- CIF stands for “Cost, Insurance, and Freight.” In this case, the taxable value includes the item value, cost of insurance (if any), and transportation to the final receiver.
Your duties & tax plan
Preparing for duties & taxes
To ensure a smooth experience when shipping internationally, it’s best to consider the following questions before you start:
What are the duties and taxes for your shipment? Every country has a tax threshold, the amount at which a person begins paying taxes on an item. Duties and taxes may not apply to every international shipment, so it’s best to research the tax thresholds for each country you want to ship to. You can also contact us to get a quick estimate.
Do you need a customs broker for your business? A customs broker is knowledgeable about customs duties, rules, and regulations and will ensure that your shipments clear customs in both the country of origin and the destination country. It is recommended that B2B businesses that require large shipments be sent overseas to work with a customs broker.
If you don’t have a customs broker, we can help you handle duties and taxes. When you create a shipment, our platform assists you in calculating duties and taxes so that you will know exactly how much your shipment will cost.
For businesses that sell worldwide, being transparent about duties and taxes paid to customers is important. Failing to do so can result in a high “cost to serve” from international customers.
By not being clear on how much will be paid and who will pay for it, you run the risk of:
- Spending a lot of time on inquiries from customers.
- Getting cancelled orders because customers refuse to pay at customs.
- Upset customers who were caught off-guard with unexpected fees.
It’s essential to inform customers about their responsibility for duties and taxes transparently.
Mention that they will be paying duties and taxes on their shipments in the following places:
- Your shipping policy page
- Product pages
- Checkout
- Order confirmation emails
What happens in customs?
When your shipment reaches customs in the destination country, a customs officer will inspect your package and review your documentation. All international shipments must include a commercial invoice, and some shipments with specific restrictions may require additional paperwork.
The customs officer will examine the value and category of the items listed on your commercial invoice. They may also verify the item value on your website or crowdfunding campaign to ensure it matches the information provided on the commercial invoice. It’s important to be accurate and truthful when completing your paperwork. Based on this information, the customs officer will determine if any duties and taxes apply to your shipment.
If the value is above the de minimis threshold (the amount at which duties and taxes will be charged), duties and taxes apply. Next, they will see who will pay the payment (the sender or the recipient).
- If the shipment arrives with duties paid, the sender has handled payment, allowing it to be released for delivery. If the shipment arrives with unpaid duties, the recipient must handle it. Customs will hold the package, and the independent broker appointed by the courier will contact the recipient directly for payment.
- The shipment is released and delivered once duties and taxes are paid.
Duties & Taxes FAQ
Q: My competitors don’t charge their taxes. How can I avoid taxes so I can remain competitive?
A: Not paying taxes is tax evasion, which we don’t encourage. It’s not worth risking your business getting fined. It’s best to know the duties and tax amount that applies to your shipment and be upfront with customers on pricing.
Q. Can I declare my item as a gift to avoid taxes?
A: No. Shipments are cleared through customs based on their origin, item category, and value—not their purpose.
Q: What happens if I under-declare the value of my item?
A: Customs officers can quickly check your business website and other sources to verify if the value listed matches the item’s actual value. Listing a lower value to avoid taxes is tax evasion and is against the law.
Q: When does the receiver pay for duties and taxes?
A: The courier who ships the parcel (or an independent broker that the courier appoints) will contact the receiver directly to collect duties and tax amounts. These amounts usually need to be paid before delivery. The parcel will be held at customs until payment is received.
Q: Is pre-paying duties better or having the customer pay post-sale?
A: In our experience, we recommend pre-paying duties. It’s widespread for customers to be unaware that duties must be paid. If you ship DDU and the customer gets contacted by customs, it’s usually an unwanted surprise, and at worst, they can choose not to pay and return the item. Pre-paying duties and the small additional processing fees the courier charges ensure that your shipment will clear customs and get delivered without customs bothering your customer.
Q; What is the courier handling fee? If you ship DDU, does it apply?
A: The courier handling fee is the fee a courier charges when they process a duty payment to customs on your behalf. These fixed fees can be 3-4 times cheaper than DDU brokerage fees. When you ship DDU, this handling fee doesn’t apply. However, if duties are not pre-paid, your parcel will be sent to an independent broker that can charge whatever fee structure they want. It’s impossible to estimate for the customer what the duty, tax, and fees will be, which makes it riskier.
Q: Why are the tax thresholds different?
A: Tax and duty thresholds, in addition to valuation methods, vary per country. This is why it’s best to find an updated platform that can calculate duties and taxes on your behalf.
Q: I have my own HS code. How do I know your categories are set with the correct HS code?
A: Our platform’s categories incorporate a broad range of HS codes, ensuring your item will be covered correctly.
Additional Resources:
Duties & Taxes Glossary
Everything you need to know to handle duties and taxes like a boss!
CIF: “Cost Insurance and Freight.” An Incoterm that’s only applicable to sea freight. The seller is responsible for paying the costs and freight necessary to bring the goods to the destination port and buying insurance against the risk of loss or damage.
Customs Broker: A customs broker’s job is to understand customs duties, rules, and regulations fully and will know the processes and paperwork needed to ensure your shipments clear customs at both the country of origin and the destination country.
Commercial Invoice: A required international shipping document describing the items in the shipment and their value. Commercial couriers and customs brokers refer to this document to process and clear your package through customs.
FOB: “Free On Board.” For sea freight, the seller is responsible for getting the product on the ship and clearing it for export. The buyer is responsible for insuring the shipment and handling the importation process, including paying for any import duties.
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