Trading internationally can be expensive in more ways than one. Not only do consumers and businesses need to contend with international shipping charges and potentially costly currency conversions, but they must also navigate different import duties and taxes, such as customs duties.
In this guide, Stenn explains what customs duty is, provides an accurate method for calculating fees, and looks at the intricacies of the different charges associated with customs duty.
Customs duty (or import duty) is a tax that importers must pay on certain goods, to bring them across a country’s borders. The customs duty charge is usually based on a percentage of the item’s overall price.
The reason customs duty exists is to protect local industries by increasing the price of imported goods to encourage people to spend money in local markets instead. This protects domestic companies from direct foreign competitors and helps keep money inside the country’s economy.
Types of import tariffs include anti-dumping taxes and tariffs imposed on foreign goods that are well below the market value of identical products within the country.
Trade tariffs raise the price of imported goods to encourage citizens of a country to buy locally. There are also export duties – charged in the country goods are exported from – and excise duties, which are indirect taxes affixed to the sale of an individual product such as energy, tobacco, or alcohol.
For example, if a beverage provider exports its drinks to another country, an import tax would be applied in the importing country to protect domestic providers and give the local economy an advantage.
Below are some of the key types of customs duties that can be found in most countries across the world:
Now that the various types of import duty tariffs are clearly defined, we’ll take a look at how they are calculated. For this example, we’ll be looking specifically at US import duty taxes and using commercial cargo valued at $6,000.
There are five main ways in which duty rates are calculated. Below is an explanation of each of these methods:
Several important factors can affect the customs duties affixed to a particular set of imported goods.
These factors include the availability of local competition, the scale of local competition, the average prices associated with a product and how far below the average market value of goods the imported products are.
There are also political factors that can contribute to customs duties, including any trade agreements between importing and exporting countries or whether heavy economic sanctions exist.
This must be a key consideration for exporters. Customs duties can create additional challenges for those already navigating the common issues with working capital that can arise in international trade - including delayed payment terms.
Not only should exporters factor potential customs fees into any trade agreements but also ensure they have the working capital to facilitate these agreements without risking bad debt.
Are you a business that deals with international trade, regularly exporting or importing goods and facing various customs duty fees? Are you looking for immediate access to capital to grow and expand your business? Simply submit your unpaid invoices for an instant cash flow boost.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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