How duties and taxes are calculated

Customs authorities collect duties and taxes on goods coming into and out of a country. Find out the difference between duties and taxes, what they’re based on and how they’re calculated.

What’s the difference between duties and taxes?

When it comes to shipping, the terms 'duties' and 'taxes' can be easily confused.So first it's important to understand what they actually mean.

  • What are duties? Customs duties are a type of tax on cross-border goods that are collected by customs as government revenue and to protect local industries.
    • What types of duties are there? Common examples include anti-dumping taxes, trade tariffs, export duties and excise duties. They're mostly in the form of import duties, which apply to goods entering a country.
    • Who pays duties? Most duties are paid by the importer. Export duties are paid by the exporter.

  • What are taxes? They're government fees placed on purchased goods coming into a country (imported). Even though the goods have been purchased abroad, this consumption tax still applies and must be collected by customs when goods enter a country. 
    • What types of taxes are there? Sales tax, value-added tax (VAT) and goods and services tax (GST) are practically the same thing, however the name and rate varies by country. Example tax rates can be 0%, 10%, 20% or more, depending on the country and product. 
    • Who pays taxes? Taxes are usually paid by the importer. 

The key difference between taxes and duties is that duties are a type of tax on goods entering or leaving a country, while taxes are charges placed on almost all purchases. Both contribute to the total import and export costs of a product.

What are duties and taxes based on? 

The amount of duties and taxes you need to pay for a shipment are determined by several factors: 

  • The HS code is used to classify the product type. Customs authorities use this commodity code to quickly understand what is being shipped and to apply relevant taxes, duties and any regulations. 
  • The value of the goods, including freight and insurance fees, help customs to determine the duties and taxes and to clear your shipment. That's why it's essential to state the correct value on the commercial invoice
  • The goods description on the commercial invoice, including the product's end-use and country of manufacture. To make sure the goods are classified correctly, the HS code and goods description should match.
  • International trade agreements between countries can influence the amount of taxes and duties on a shipment. If you're shipping goods between nations that share a trade agreement, then they may be exempt from duties or eligible for a reduced rate.
  • The Incoterms® on the commercial invoice define the agreement between sender and receiver about who pays for shipping costs, including taxes and duties.

How do customs officials assess the duties and taxes?

Customs authorities use the information on your commercial invoice and other relevant documents to determine the duties and taxes. That's why it's essential to include details like the HS code and an accurate goods value on your commercial invoice.

And bear in mind, if you’re missing information, you’re leaving it up to customs to calculate the duties and taxes on your shipment, which may result in you paying more than you should.

How to calculate import duties

First, you need to determine the duty percentage rate on the goods you're shipping. This rate varies depending on the country you're shipping to. 

To find it, visit the customs or trade tariff page on the government website of your destination country. You can usually search for duty rates using an HS code or product description. For example, the duty percentage, or trade tariff, rate on a woman's T-shirt entering the UK from the US is 12%.  

Once you have found the rate, you can calculate the duty on your shipment. To do this add up the value of the goods, freight costs, insurance and any additional costs, then multiply the total by the duty rate. The result is the amount of duty you'll need to pay customs for your shipment.

Some countries use different rate calculation methods so remember to check this on the government website or with your carrier.

How to calculate tax

First, you need to find out the sales tax (VAT) rates of the country you’re shipping to. For example, the UK has three VAT rates: 0%, 5% and 20%, which is the standard rate for most goods and services. In the case of shipping a woman's T-shirt to the UK, it’s 20% because clothing for adults falls under the standard VAT rate.

To calculate the VAT on your shipment, add up the goods value, freight costs, insurance, import duty and any additional costs. Then multiply the total by the destination country's applicable VAT rate. The result is the amount of VAT you'll need to pay customs for your shipment.

When do I need to pay the duties and taxes on a shipment?

You usually have to pay them before your goods are released from customs in the destination country. Your carrier may be able to pay on your behalf to ensure your goods are released quickly – and they’ll invoice you for the charges. It’s worth double-checking if they can do this before shipping.

Other costs to keep in mind

When sending goods internationally it's important to have a complete understanding of a shipment's total costs (also known as landed costs). Other charges that apply to your shipment along the way can include:

  • Carrier fees – The price of shipping your goods from A to B. Carriers can also provide many of the services listed below, so that all duties, taxes and other costs may be charged together with the carrier fees.
  • Broker fees – The cost of using a customs broker to clear goods through customs. Brokers often pay duties and taxes on behalf of the receiver, and then charge them to the receiver combined with their fee. Carriers often provide customs brokers as part of their shipping service.
  • Surcharges and ancillary fees – Additional carrier costs for goods that fall outside standard shipping and handling such as dangerous goods and temporary imports.
  • Insurance – To insure your goods in case of loss or damage while in transit. You can purchase this through your carrier or separately.

To find out more, ask your carrier for advice, or browse the customs website of the country you're shipping to.

Relevant topics