Import Duty and Tax Explained

Introduction

When shipping products internationally, recipients must pay additional duties and taxes before delivery. Governments impose these taxes for various reasons, including protecting domestic companies from foreign competitors, controlling product flow, and generating revenue. Understanding the importance of duties and taxes is crucial for compliance with trade regulations. This guide provides definitions, explanations, and best practices for managing shipping duties and taxes.

Shipping Products

The Basics

Definitions

  • Import Duty: A tax imposed by a government on goods from other countries. The percentage varies by category, while VAT and GST are more consistent.
  • GST (Goods & Services Tax): A tax charged in stages and reimbursed to everyone except the end buyer, calculated as a flat-rate percentage of the total transaction.
  • VAT (Value Added Tax): Charged to consumers when purchasing goods or services.
  • Commercial Invoice: A required document in international shipping that describes the shipment items and their value, used by couriers and customs brokers to process packages.
  • De Minimis Value: The tax threshold at which a person begins to pay taxes on an item.
Incoterms Guide

What are Incoterms?

Incoterms (International Commercial Terms) are rules established by the International Chamber of Commerce that clarify responsibilities regarding duties and taxes. The latest edition dates back to 2010 and provides benefits such as:

  • Clear responsibilities for each party.
  • Standardized terms.
  • Worldwide acceptance.

Incoterms You Should Know

  • DDP (Delivery Duty Paid): The seller covers all risks and costs, including import duties and delivery charges.
  • DDU (Delivery Duty Unpaid): The receiver is responsible for customs charges to release the shipment.

Learn more about common freight terms here.

Accountant

How are Duties & Taxes Calculated?

Valuation Methods

To calculate duties and taxes, multiply the taxable value of your shipment by the destination country’s duty percentage. This percentage varies by goods category and can be found using our HS CODE LOOKUP.

Countries use two primary valuation methods:

  • FOB (Free On Board): Taxable value is the product’s value, excluding transportation costs for air freight.
  • CIF (Cost, Insurance, and Freight): Taxable value includes the item value, cost of insurance, and transportation to the final destination.

Your Duties & Tax Plan

Preparing for Duties & Taxes

Consider these questions for a smooth shipping experience:

  1. What are the duties and taxes for your shipment? Research the tax thresholds for each country.
  2. Do you need a customs broker? A customs broker ensures your shipments clear customs efficiently.

By being transparent about duties and taxes, you can reduce inquiries and avoid customer frustration.

Informing Customers

Clearly mention that customers will pay duties and taxes on their shipments in:

  • Your shipping policy page
  • Product pages
  • Checkout
  • Order confirmation emails
Customs Clearance

What Happens in Customs?

Upon reaching customs, a customs officer will inspect your package and review the commercial invoice. If the value exceeds the de minimis threshold, duties and taxes apply, and the customs officer will determine who is responsible for payment.

  1. If duties are paid by the sender, the shipment is released for delivery.
  2. If duties are unpaid, the recipient must settle the charges before delivery.

Duties & Taxes FAQ

Q: My competitors don’t charge taxes. How can I avoid taxes?
A: Avoiding taxes is illegal. Be upfront with customers about costs.

Q: Can I declare my item as a gift to avoid taxes?
A: No, customs regulations are based on item value and category, not purpose.

Q: What if I under-declare the value of my item?
A: Under-declaring is illegal and could result in penalties.

Q: When does the receiver pay duties and taxes?
A: The courier or broker will contact the receiver directly for payment.

Q: Is pre-paying duties better than having the customer pay post-sale?
A: Pre-paying duties is generally recommended to avoid surprises for customers.

Q: What is the courier handling fee?
A: This fee applies when a courier processes a duty payment on your behalf.

Q: Why are tax thresholds different?
A: Tax thresholds vary by country, making it essential to use an updated platform for calculations.

Additional Resources

Duties & Taxes Glossary

  • CIF: Costs associated with sea freight, including insurance.
  • Customs Broker: An expert in customs regulations ensuring smooth clearance.
  • Commercial Invoice: Essential for international shipping, detailing shipment items.
  • FOB: Responsibilities of seller and buyer in sea freight shipments.
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