How to calculate duties and taxes when Shipping Internationally
One of the more complicated aspects of international shipping is having to deal with taxes. Regardless of where or what you are shipping, taxes will always be a point of consideration and in all honesty something that shouldn’t be taken lightly.
In this post, we are going to go into detail about tax-related information you need to know for international shipping. Let’s start with the basics.
What’s important to note is that an import duty, unlike a sales duty, varies considerably on a category by category basis. A sales duty, on the other hand, to some extent can be standardized.
Next thing to note is that each country has its own specific import duty tax which it applies for each HS code (Harmonized System Codes).
If you didn’t already know, Taxes are compulsory financial obligations levied by the government on income, goods, and activities. What is known as an Indirect Tax are taxes charged on goods or services.
Here are common taxes on goods:
· Import Duty
· VAT (Value Added Tax)
· GST (Goods and Services Tax)
Alright, let’s go into a bit more detail on each type of tax
A Sales Tax is a ‘direct consumption’ tax imposed on the sale of goods or a service by the local government or state. The sales tax is collected by the seller from the end consumer when a purchase is made.
A value-added tax, or VAT, is an ‘indirect consumption’ tax on the consumption of goods and services. Unlike a sales tax, it is levied at each stage of the supply chain from the production stage to the end, and is ultimately charged in full at the final stage of sale.
Now what often causes some confusion for our customers is the difference between VAT and GST. Some countries will use GST in place of VAT, however they are generally treated the same. They are similar in the sense that they both share the same mechanism of being imposed on at each stage of the supply chain.
GST Tax, or a goods and services tax, is an ‘indirect consumption’ tax on the manufacturing, sale and consumption of goods as well as service on the national level.
Try out this calculation to see how much sales tax needs to be paid.
Sales tax amount to be paid = sales tax % x (CIF value + duty)
So the gist of it is that there are a number of kinds of taxes that need to be considered whether you ship internationally or not, but why?
Well the simple answer is that imports need to be declared to local customs authorities so that duties and taxes can be assessed. An import duty is a tax that the importer has to pay to bring foreign goods into his or her country.
So when does this tax have to be paid?
After the item is shipped, duties and taxes are due at the time of declaration at the local customs at the country of destination. They must be paid and cleared before the package can be delivered to the recipient.
Now that you have a better sense of what these taxes are and what they mean, let’s look into calculating them.
There are two main valuation methods (also known as Incoterms):
1) CIF Price Calculation (Cost, Insurance and Freight)
CIF = Total cost of a product right up to delivery
Duty = duty % x (product price + cost of shipping + cost of insurance)
CIF is a pricing term that means the cost of the goods, insurance and freight (shipping charge) are included in the quoted price.
2) FOB (Free on Board)Duty = duty % x product price
FOB value is the price paid for the goods plus the cost of transportation, loading, unloading, handling, insurance, and associated costs incidental to delivery of the goods at the port or place of export in the country of export.
Example Import-Export Cost Calculation:
1) Calculating the customs value
The customs value in USA is FOB:
$800 - Product price
2) Calculate the import taxes
Sales tax = $800 x 8% = $64
Import duty = $800 x 4.4% = $35.20
3) Calculate Merchandise Processing Fee
(also called Courier Handling fee)
Imports by courier of a value under $2,500 pay a MPF of $1
4) Total calculation of import duty and taxes (landed cost formula)
+ $64 + $35.20 + $ 1.00 -----------------
The total landed cost equals $1,110.20
Are we done?? Not quite.
Can there be other extra charges in my shipping costs?
Yes, in fact there most likely will be! Hooray!!
Other common taxes charged by customs include:
• Excise duty (usually levied on alcohol, tobacco and fuel products)
• Consumption tax on luxury goods
• Environmental tax
• Clearance/entry fees
Courier Handling fees may include:
• Customs clearance fee, or customs handling fee for processing the import declaration
• Advancement fee for paying the duty and VAT on behalf of the recipient
• Airline handling fee for loading and unloading the goods
• Security fee for screening or x-raying the goods
Finally let’s look at De Minimis rules, and what they mean.
The Duty or Tax Free Amount known as ‘de minimis value’ is a country-specific value below which duty and tax is exempted.
Now the de minimis value is typically different for duties and taxes.
Some countries also use a simplified process for customs clearance, based on imports being below the de minimis value.
Below is a table of de minimis values for common shipping destinations.
Country De minimis value
USA USD 800
UK GBP 15
China RMB 50
Australia AUD 1,000
Canada USD 15
Dubai AED 1,000
Singapore SGD 400
Indonesia USD 50
Japan JPY 10,000 (CIF value) or JPY 100 (Duty and consumption tax)
What to make of all this?
There’s a lot to take into consideration. Taxes, while complicated, when done right can save you time and money. One of the major reasons SMEs use Easyship is because we provide full visibility on a lot of the items aforementioned and make sure you know at every stage in the process what you’re being charged for.
Want to read more? We've prepared a comprehensive guide which should answer all your questions to give you the confidence to sell globally while maintaining a high quality of service.