Almost all cross-border international shipments are subject to duties and taxes, so never shall we neglect the effects of duties and taxes when it comes to calculating and managing shipping costs!
While charges can vary depending on the content, the origin and destination of the shipment, it is palpable that they can complicate the clearance process and add up your bills. Hence, understanding shipping duties and taxes is the most basic yet critical step to place ourselves at the forefront of eCommerce order fulfillment.
In this blog, we will be sharing important information about clearance costs and handy tips to pave the way for you to enjoy a smoother eCommerce shipping process!
Let's start off with a basic overview.
What are duties?
Duties (Customs duties) are taxes imposed on cross-border goods collected by customs to generate revenue and protect local industries. There are many types of taxes, including but are not limited to anti-dumping taxes, trade tariffs, export duties, and excise duties, with most of them in the form of import duties that apply to goods that enter a country.
What are taxes?
Taxes are involuntary fees placed on imported goods and enforced by a government entity to fund government spending, regardless of where the goods are being purchased. Usually paid by the importer, common types of taxes comprise sales tax and value-added tax (VAT), etc. Tax rates can vary between countries and among product types, ranging from 0% to 20% or higher.
What are the similarities and differences between duties and taxes?
Shipping duties and taxes both contribute to the total import and export costs of a product. However, duties are charged explicitly on the goods, whereas taxes are financial charges imposed on individuals or businesses and levied by the government.
Now, beyond the basics – it's essential to dig into taxes, duties, and relevant concepts that relate and affect your eCommerce business.
What are the determinants of the amount of duties and taxes you need to pay?
Shipping duties and taxes are legally required to be settled before your shipment. The charges are calculated based on six factors as follows:
The value of the goods
The values stated on the commercial invoices help customs determine the amount of taxes and duties during the clearance process.
Product description, usage & country of origin
Customs authorities take product details into consideration when it comes to evaluating and calculating the charges. Hence, sellers should include product descriptions, including product usage and country of origin, in the commercial invoices.
Harmonized System (HS) code
The HS code is an international nomenclature for the classification of product types - often used by customs authorities as a reference to understand the shipment content and apply corresponding taxes, duties, and regulations.
International trade agreements
Trade agreements between countries can significantly impact, either positive or negative, the amount of taxes and duties on any cross-border shipments.
Country-specific laws & regulations
The amount of taxes and duties you need to pay is heavily dependent on the laws and regulations at your shipment destination – some countries have very high duties and taxes, and others charge at a lower rate.
The Incoterms are commercial terms introduced by the International Chamber of Commerce (ICC) to clarify sellers' and buyers' responsibilities in any international transaction regarding the tasks, costs, and risks.
About Incoterms: DDU vs. DDP – How to choose?
You may or might have come across the incoterms DDU and DDP when dealing with international logistics. DDU stands for Delivered Duty Unpaid, which indicates that the seller is only responsible for ensuring the delivery of goods, covering shipping expenses and risks during the transportation, and the buyer is liable for the import duties. On the contrary, DDP stands for Delivered Duty Paid, as in the seller is fully responsible for all the risks and charges, including taxes, duties, and import clearance.
There's no such thing as in DDP is better than DDU, or vice versa. Generally speaking, it is crucial to avoid unpleasant surprises to your international customers - they should be clear about their responsibilities and potential charges of duties before placing an eCommerce order.
Customs duty: How does it work?
All dutiable goods are subject to a customs duty. Whether it's a commercial good or merely a gift, a shipment must undergo an import procedure determined by customs in the destination country, with charges calculated based on the country of origin, product value, and quantity.
What is Value-Added Tax (VAT) and Goods and Services Tax (GST)?
A value-added tax (VAT), as known as a goods and services tax (GST) in some countries, is a consumption tax charged on a product whenever a value is assigned at every stage of the supply chain - from manufacturing to the point of sale.
Who is liable to pay VAT/GST?
In most cases, VAT/GST is included in the retail price of a product or service. In other words, the seller charges and collects VAT from the buyer, and then the seller pays VAT to the government. For businesses in the EU that are VAT-registered and fully taxable, they are not liable for the final cost of VAT as the VAT is added to consumer expenditure.
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