Any business seeking to transport products from overseas will inevitably encounter import taxes and customs clearance processes. These elements can constitute a substantial portion of your overall financial expenses. Therefore, gaining a thorough understanding of how import taxes and customs fees function is crucial for assessing their impact on your business operations.
In this article, we will delve into the intricacies of import taxes, exploring their definition, the various types you may encounter, common industry terminology and acronyms, as well as methods for calculating your import taxes.
What exactly are import taxes?
Import taxes, also known as customs duties, tariffs, import duties, or import tariffs, are taxes levied on imported goods (and sometimes exported goods) by a country’s customs authorities. These taxes serve two primary purposes: generating additional revenue for the government and providing an advantage to domestic products that are not subject to import duties.
What are the different types of import taxes?
There are different types of import taxes which can vary from country to country. Having a basic understanding of these variations can help you better navigate the labyrinth that is import taxes.
- Value-Added Tax (VAT): is a fee collected at each stage of the production and distribution process. It is commonly applied to imported goods, calculated primarily based on the product’s Cost, Insurance, and Freight (CIF) value. These values are essential considerations for your pricing and shipping strategy.
- Goods and Services Tax (GST): is a fee enforced by many countries on the sale of imported goods and services. It is typically charged at a single rate. Companies involved in importing or exporting goods to countries that implement GST should consider this when devising their shipping cost strategy.
- Excise Tax: is a levy imposed on high-volume daily consumable products like alcohol, tobacco, and petroleum, as well as certain non-essential or luxury items such as electronic equipment and cosmetics. Its primary objectives are to ensure a continuous revenue stream for the state and to discourage the consumption of certain harmful products.
- Customs Duty: is a fee calculated as a percentage of the value of goods imported into a country. This fee varies depending on the country and the specific product. For example, items such as meat, fish, tea, certain textile products, and certain firearm goods may be subject to either a percentage-based calculation or a fixed rate per unit. The specific duty rates are determined by local customs regulations.
- Tariffs: are fees imposed on imported goods with the intention of protecting domestic growers or manufacturers. The aim of tariffs on imported goods is to reduce their competitiveness in the local market. These tariffs are typically calculated as a fixed percentage of the value of the imported goods.
What are terms and acronyms associated with import taxes?
Many variables influence the amount payable in import taxes, often referred to by industry experts using acronyms. For first-time importers or businesses exploring the process, these acronyms can seem daunting. Therefore, gaining a basic understanding of these acronyms is essential to grasp the full spectrum of costs associated with customs fees.
- Harmonized System Code (HS Code): is a standardized numerical method used for classifying traded products. Developed and maintained by the World Customs Organization (WCO), it serves as a crucial tool for customs authorities to identify products accurately when assessing duties and taxes. Additionally, governments and customs authorities utilize HS Codes for gathering import statistics.
- International Commercial Terms (Incoterms): comprises of a defined list of commercial terms utilized in international transactions. They play a crucial role in determining the allocation of financial responsibilities between the buyer and seller regarding freight, insurance, and import duties or taxes.
- Import Duty: refers to the tax paid by the importer to bring goods into their country of origin.
- Delivered Duty Paid (DDP): is an agreement in which the seller takes responsibility for delivering the goods to an agreed-upon location, covering all necessary duties and taxes. After delivery, the buyer assumes full responsibility for the goods.
- Tariff: is a specific type of import tax imposed on a particular category of goods. It is designed to regulate trade by either increasing the cost of imported goods or protecting domestic industries from foreign competition.
- Customs Value: refers to the total value of imported goods, encompassing the product value, freight, and insurance costs in its calculation. This value serves as the basis for calculating customs duty.
- Regulations, Advisory, Guidelines, and Standards (RAGS): encompass the governing rules, advisories, guidelines, and standards related to import and export activities. These include directives covering import taxes, safety protocols, environmental regulations, product quality norms, among others. It is essential for importers and exporters to be familiar with RAGS to ensure compliance with international trade norms.
- Export Oriented Units (EOU): are organizations specializing in exporting their entire production. They are prevalent in countries where governments aim for export-led growth. EOUs enjoy various tax benefits, including exemptions from import duties on specific product types.
How you can calculate your import tax.
Understanding how to calculate import taxes is crucial for businesses seeking to expand their international reach while maintaining profitability. Import taxes and freight costs should be factored into the development and planning phases of your pricing strategy.
Moreover, knowledge of the import fees your business may incur can inform decisions regarding which countries to trade with. It’s important to note that the cost depends on the type of product being imported and the target market within the country, as additional costs may need to be considered in your pricing strategy.
- Determine the customs value of your goods: To determine the customs value of your goods, consider the total cost that will be taxed by customs authorities. This includes the product’s transaction value, which encompasses the price paid for the product, packaging, licensing, commissions, and the value of any assists. These costs serve as the basis for computation.
- Identify the products HS code: Identifying the HS code associated with your product allows you to determine the percentage of duty that will be charged. Incorrect classification can lead to steep fines and customs delays.
- Calculate the duty to be paid: After determining the customs value and identifying the correct corresponding HS code, you can calculate the duty associated with your product. This involves applying the rate given by the HS code to the customs value.
- Calculate the VAT or GST: Value Added Tax (VAT) and Goods and Services Tax (GST) rates differ between countries. After calculating the duty, it is added to the initial value of the goods. The combined total is then multiplied by the VAT or GST rate applicable in the destination country to ascertain the total VAT or GST. It’s important to note that VAT or GST is not levied on the original value of the goods but rather on the final value inclusive of the duty.
Example of how to calculate VAT in South Africa
According to an article on SARS
The VAT rate in South Africa is currently 15%.
To calculate VAT on imported goods, the ATV (added tax value) needs to be determined first. This is done as follows: [(Customs Value + 10% thereof) + (any non-rebated duties levied on the goods)] x 15% = [ATV] x 15% = VAT payable
The 10% mark-up on the customs value in this calculation is applicable when goods are imported from a country outside the Customs Union. Therefore, if goods have their origin in any of the BLNS countries (Botswana, Lesotho, Namibia, or Swaziland), the 10% will not be added to the calculation.
When goods are exported to any of the BLNS countries, the same applies (no mark-up on the customs value to determine ATV).
How can you use Free Trade Agreements to lower import taxes?
FTAs are specifically crafted to facilitate trade between countries by removing import barriers. This streamlined process not only makes importing and exporting goods easier but also more cost-effective. When utilized correctly, FTAs serve as powerful tools for optimizing your international shipping strategy.
What are the benefits of using FTAs?
- FTAs can lead to reduced import fees by lowering or waiving duty fees.
- FTAs offer importers a competitive advantage in the local market by reducing costs and enabling them to offer competitive pricing.
- FTAs open doors to new markets that were previously economically unfeasible to enter, expanding opportunities for businesses to grow and thrive.
Conclusion
Navigating the complexities of international cargo transportation can be daunting, especially for businesses just starting out. Therefore, it’s crucial to consider partnering with a trusted customs clearing and freight forwarding company or 3PL. Contact M6T today at our Durban or Johannesburg branch to begin your import journey with a reliable 3PL partner you can trust.
