What is Customs Duty? And How Is the Tariff Rate Determined?

ForwarderOne receives high volumes of inquiries for import customs duty. This is a very important part of the import process, as the declaration and payment for customs duty, needs to be completed in line with each country’s treaty and law.

What is customs duty?

You may often hear the word ‘customs duty’ on the daily news. Customs duty is defined as tax imposed by the country for imported foreign goods. As the country imposed such as consumption tax and income tax paid by an individual and corporate tax paid by a company, customs duty is just another one of these taxes. Collected customs duty will become funds for the country.

What is the main purpose of imposing customs duty?

However, the main purpose of imposing custom duty is to protect domestic products. If cheaper foreign products are imported and are sold on the market, the domestic product sales will decrease and domestic industry may close. When imported products are imposed customs duty, the sales price for the product will be set higher. It means the customs duty can regulate the competitiveness on the imported goods market.

By the way, custom duty involves trade policy and foreign policy with overseas. For example, due to the foreign affairs, a punitive tariff may be imposed. High customs duty may be imposed for the opponent’s imported product as sanctions. This will make it difficult for the opponent country to enter the product market and this will cause a huge impact to their exporting industry.

The structure of deciding customs duty for import exists in each country in the world including China and USA. The world customs organization(WCO) is engaged in standardization of customs and customs duty processes.

What is HS code?

WCO develops the system of customs duty called HS, which stands for ‘harmonized system’. The HS convention is joined by most of the countries in the world, and they use HS code with six digits numbers to categorize items for import and export. And the customs duty rate is decided for each product. The customs duty rate for each importing country is different.

Some countries add three more digits in the world universal 6 digits of HS code. So in total, they use 9 digits for export and import statistics schedule. Products are categorized on the statistic schedule, and the schedule which outlines each tax rate is called customs duty schedule. Also customs duty is normally imposed on an importer. The classification of the HS code is essential to identify the correct customs duty rate. And this will relate to the amount of payment for an importer.

What are the types of US customs duty rate?

There are different types of US customs duty rate. On the customs tariff schedule, the basic tax rate is outlined for all products.

In addition, there is another tax called provisional tax. This is applied for the products that are imported within a certain time frame.

A preferential rate is used to protect the developing countries industries.

Conventional tax is used between countries with EPA (economic partnership agreement).

How is the customs duty determined?

Customs duty is decided based on the price of CIF on an invoice. CIF price includes the product’s cost, domestic transportation cost, ocean or air freight cost and insurance cost.

In addition to the cost, the origin of the product is also a very important element when customs duty is decided. This means depending on the origin of the product, the applicable tax rate will change. As previously explained, if the origin of the country is a developing country with preferential trade arrangement on customs tariff schedule, they may not be taxed due to preferential tax rate. Or if the product is produced in the country where they have EPA and FTA agreement. They will be able to use conventional duty rate for import customs duty. To apply a preferential customs duty a certificate of origin is required as proof of the origin of the product.

What process is customs duty payment?

First, a cargo, a vessel or an airplane arrives at the importing country, and they will be loaded into a bonded area.

Then, normally when processing import declaration to customs. Customs duty declaration is also submitted.

The importer is responsible for the customs duty payment. However normally customs duty payment request is also made to a freight forwarder or a customs clearance agency, when they request them to process import declaration.

Nowadays, there are some issues that the amount of customs duty, which custom clearance agency has to subsidize is too high. By the way, depending on the term such as DDP, the exporter may be responsible for the customs duty payment. When declaring payment of taxes, the name and the quantity of products, invoice, packing list, shipping document and certificate of origin need to be presented. The customs duty rate is calculated based on CIF price, and the actual duty is decided.

What if the declaration is not correct ?

If the content of declaration is incorrect and if any specific products are not declared, an additional tax on underpayment or an additional tax for no return may be imposed by customs. The content of the declaration must be correct. If you do not declare on purpose, this will be treated as smuggling.

On the other hand, there are cases when the customs duty is exempt. For example, if cargo is reimported and it hasn’t changed its quality and shape, and also, if cargo is exported for repair may be exempt for customs duty as well. If the invoice shows the price of tens of millions of dollars, customs duty will be imposed for millions of dollars. If a preferential tax rate, conventional tax and tax exemption scheme is used, there will be millions of dollars difference for payment.

There are different types and rate for custom duty, such as basic tax rate preferential tax rate. They are related to the law and policies. It is necessary to make correct judgment to identify which declaration is applicable to the specific type. The process includes the declaration for import customs duty, so the import customs duty clearance process needs to be completed with care.

Summary

  • Customs duty is a global tax, which is applied to imported goods to protect the importing countries industry.
  • HS code is used to classify common products and each country has its own import tax rate for goods.
  • There are different customs duty rates such as general tax rate preferential tax rate and conventional tax rate.
  • Customs duty declaration is completed when clearing customs for import or export at customs, and the most important part is the importing country’s customs declaration.
  • Depending on the content, customs duty may be exempt but if there is an error of under reporting, an additional tax may be imposed. This will affect an importer’s cost, so you need to pay extra attention for customs duty.

If you are an E-commerce business operator who import products from foreigns, please talk to us. ForwarderOne will take care of the complicated importing process for you.

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