If you’re new to the import-export space, you might be confused about the terminology surrounding taxes and fees. What’s the difference between duties, tariffs, and taxes? One thing people don’t know is that the terms duty and tariff are often used interchangeably to refer to a kind of tax that applies to importing and exporting.
In Gone With the Wind, Margaret Mitchell wrote, “Death, taxes, and childbirth! There’s never any convenient time for any of them.” Nevertheless, taxes are a key part of the import-export process and must be paid according to the regulations of the countries of your supply chain.
To run your import-export business successfully, you need to be aware of the duties/tariffs that apply to your products. Failing to have an adequate understanding of this component of importing/exporting could result in surprise fees and legal problems.
What is a tax?
A tax is simply a charge imposed by the government for public purposes. You’re probably familiar with income tax…and you’ve probably complained about it from time to time. Every national government has its own way of imposing taxes.
If you’re an American who lives in a state that’s not Alaska, Delaware, Montana, New Hampshire, or Oregon, you’re used to paying a price that’s different from the price tag. This is because of sales tax. Canadians are also used to this phenomenon. Visitors from other countries, however, are often surprised to find that they must pay more than the price on the menu or item.
What is a duty?
A duty is a type of tax that is levied on imports or exports, meaning it applies to products that are transported between two or more countries. As previously stated, duty and tariff are often used interchangeably.
Duties are typically used by governments to create revenue or to protect domestic industries. For example, if the US were to place a high duty on Dutch potatoes, American potato farmers would have a better chance of selling their potatoes domestically. This could create some hard feelings between the US and the Netherlands. That’s why duties can often play into politics.
Keep in mind that you may not need to pay tariffs if there is a relevant free trade agreement (FTA). It’s helpful to check whether your country and the country you’re importing from have an FTA between them. If you’re importing to Canada, you’ll still need to pay Goods and Services Tax (GST) even if there is an FTA in place.
The two main types of tariffs
There are basically two types of tariffs: import duties and export duties.
Export duties are relatively rare and are usually levied by developing countries that produce raw materials rather than advanced industrial countries. For example, over 20% of Kazakhstan’s tax revenue comes from export duties.
Some countries choose to place export taxes on a particular product in order to take advantage of their monopoly on that product and generate more revenue. This puts a heavy burden on foreign consumers and often drives importing countries to search for new supply sources.
If you are an importer, it’s wise to check whether the country you are importing from charges export tariffs. You’ll want to factor them into your pricing. Neither the US nor Canada levies export taxes. In fact, the US Constitution forbids it.
Import duties are the most common type of tariff. Most countries have instituted them. Of course, a free trade agreement (FTA) may waive or reduce the import duties. There are two main ways that import duties are collected: specific and ad valorem.
A specific duty is calculated based on the weight, length, or mass of the goods. For example, you might be charged $3.00 per pound or $5.00 per meter. This is the easiest way to calculate import duties because the value of the goods is already assumed.
An ad valorem duty, on the other hand, is a percentage of the total value of the goods. Perhaps you would pay 5% of your import value. This is where things get a bit trickier because authorities need to determine whether the goods have been valued properly.
How to figure out which tariff to pay
Determining which tariff to pay is something you should do early on. Because each country has different tariff guidelines, it’s important to be aware of tariff rates when building your supply chain. Follow these three steps to get a good estimate of what you will owe.
- Find the HS code that classifies your goods
First, you need to determine the specific Harmonized System (HS) code that applies to your products. HS codes are used by most countries to classify goods throughout the import export process. Most of the time, you’re looking for a six-digit HS code, but sometimes it can be more than six digits.
The best way to find your HS code is by using this HS Code Finder. The US has a unique system for exporters that involves Schedule B codes. If you are exporting from the US, check which Schedule B code applies to your goods here. Keep in mind that Schedule B codes are specifically for exporting from the US, and imports to the US usually require an HS code instead.
- Check if there is a free trade agreement that affects your shipments
As mentioned above, free trade agreements (FTAs) between two countries generally specify that tariffs are reduced or nonexistent. FTAs also tend to make the customs process easier by not requiring as much paperwork. One of the most well-known FTAs is the Canada-United States-Mexico Agreement (CUSMA), which facilitates trade between these three countries by getting rid of most tariffs.
If you are importing to the US or exporting from the US, check if the country you’re trading with is one of the 20 countries that have FTAs with the US. Canada has free trade agreements with 51 countries, all of which can be found here.
- Verify the tariff rate that applies to your products
The last step is figuring out which tariff rate applies to your goods. In order to do this, you need to have the HS code or Schedule B code for your products on hand. Make sure you have a detailed description of your products to confirm that the code is accurate.
The International Trade Administration offers an FTA Tariff Tool for those importing or exporting from the US to a country that has an FTA with the US. For those importing or exporting from Canada, check out the list of tariffs on the Canada Border Services Agency (CBSA) website.
Navigating the complex details of tariffs can be challenging. You need an experienced partner who understands the import tax variations between countries and knows how to calculate tariffs properly. That’s where BorderBuddy comes in. We’re equipped to help your import-export business succeed. Give us a call today.