Import duties continue to be significant elements in the cost of international trade. However, many companies and businesses continue to pay more taxes than required by law, negatively impacting the cost of downloading and ultimately business profitability. A planned approach to managing customs duty costs would seek to eliminate, reduce, and delay the payment of customs duties.
How to reduce customs duties in your business
There are many ways to reduce customs duties. The amount of royalties paid depends on four “whats.” Managing the impact of any of these “whats” will improve business benefit.
1 What the goods are (i.e. their nature and characteristics) determines the tariff code and therefore the duty rate
2 The origin of the goods (i.e. where they are mined, grown, cultivated, manufactured or further processed NOT where they are shipped from) determines whether preferential, standard or additional duties are paid
3 What is the structure of the transaction (i.e., is it a sale, lease, loan, free of charge, under guarantee or repair agreement), determines the customs value
4 What happens to the goods after they are imported (ie sold, manufactured, repaired and returned, stored and re-exported) determines whether various rebates are available.
How to seize a key opportunity in customs valuation planning
A major underused approach to reducing tariffs is to look at customs valuation. A key provision of US and EU customs law allows customs value to be based on any previous sales of the same goods in a chain of transactions prior to importation. For this reason, it is variously described as the “previous sale,” “previous sale,” or “sales chain” opportunity. They all mean the same thing, i.e. lesser duty!
How does this work? For example, if goods are sold by a manufacturer in the US for $60 to a US export company which, in turn, sells them to an importer in the EU for $100, duty can be paid on a value of $60, providing certain conditions are places. The savings achieved are the difference between the tax on £100 and the tax on $60. Savings of up to 40% on tax costs are possible.
What are the benefits? The main benefit of this approach is to save customs duties by excluding costs and profits attributable to non-manufacturing activities performed in the country of export from the declared customs value at import in the country of destination (US or EU).
The approach also decouples the value of imported goods for customs valuation purposes from their inventory value for corporate income tax purposes. This is good because tax and customs values are often in tension. Revenue authorities tend to favor a low import value (ie more profits to tax), while customs favor a higher import value (more import duties to collect). By using a prior sale approach, the price paid by the importer is no longer relevant for customs. purposes, so that any increase in that price does not cause an increase in the amount of the customs duty.
Who can benefit? Any company or business importing goods into the EU or US can take advantage of the opportunity as long as there has been a previous sale and the exporter is willing to provide the appropriate invoice related to the previous sale. Since this involves disclosure of margins by the exporter, the approach is more attractive to international groups of companies where such disclosure is not an issue and to industries where margins are already widely known. However, exporters can still reap the benefits by importing goods into the US and the EU at their own expense.