Difference Between Duties and Taxes
In customs processes, the terms ‘duties’ and ‘taxes’ are often confused. It is essential to clearly distinguish between these two concepts.
What Are Duties?
Customs duties are specific levies applied to cross-border goods to increase government revenue and protect local industries. These duties are collected by customs authorities.
What Are Taxes?
Taxes are official financial obligations imposed on goods imported into a country. These include various tax types such as anti-dumping duties, trade tariffs, export taxes, and special consumption taxes. Import taxes are generally paid by the importer.
The main difference between duties and taxes is that duties are specific charges applied to particular products or transactions, whereas taxes are general financial obligations applied to all purchasing activities. Both types affect the total import and export costs of the goods.
Calculation of Duties and Taxes
Various factors should be considered when calculating duties and taxes:
- HS Code: This code classifies products and is used by customs authorities to apply the relevant duties and taxes.
- Product Value: The total value of products, including shipping and insurance costs, plays a critical role in calculating customs taxes. It is essential to state the correct value on the commercial invoice.
- Product’s End Use and Origin: The product description on the commercial invoice must match the HS code. This ensures proper classification of the goods.
- International Trade Agreements: Trade agreements between relevant countries may allow certain products to be exempt from customs duties or subject to reduced tariffs.
- Incoterms®: The Incoterms® terms on the commercial invoice specify who will cover the shipping costs.
Evaluation Process by Customs Officials
Customs officials use the information in the commercial invoice and other documents to calculate duties and taxes. Therefore, it is crucial to indicate the correct HS code and product value. Incomplete information may lead to incorrect calculation of duties and taxes.
Calculation of Import Duties
To calculate the import duty, you must first determine the tax rate for the product to be shipped. This rate can be found on the official customs or trade tariff page of the destination country. For example, the tax rate for a woman’s T-shirt sent to the United Kingdom is 12%.
Once this rate is determined, the value of the goods, transportation costs, insurance, and any additional costs are totaled and multiplied by the customs duty rate. This provides the payable customs duty amount.
Calculation of Taxes
Learning the VAT rates of the destination country is essential for tax calculation. For example, the United Kingdom has three different VAT rates: 0%, 5%, and 20%. The standard VAT rate for a woman’s T-shirt is 20%.
VAT is calculated by adding the product value, shipping costs, insurance, import duty, and any other additional costs, then multiplying by the applicable VAT rate of the destination country.
Payment of Duties and Taxes
Typically, duties and taxes must be paid before the goods are cleared by customs in the destination country. Carriers may make payments on your behalf to expedite delivery and then bill these costs to you later.
Considering Other Costs
In international shipments, it is essential to fully understand the total costs. Additional costs that may apply to your shipment include:
- Carrier Fees: The payment for transporting goods. Carriers may often collect duties and taxes within these fees.
- Broker Fees: Customs brokers carry out the necessary processes to clear the goods through customs. Brokers often pay duties and taxes on behalf of the consignee and then invoice the consignee.
- Additional Fees: Special charges may apply for hazardous materials or temporary imports.
- Insurance: It is essential to insure goods in case of loss or damage during transportation.
For more information, you can contact your carrier or visit the customs website of the country where the shipment will be made.