Taxes: The International Merchant's Guide to Selling Globally
Selling your goods and products to a global audience can expand your business’s international reach and reputation, providing you with more exposure on an international level. However, selling globally can cause headaches especially if you’re a first-time merchant selling internationally.
So, what are some duties and taxes you need to pay to ship overseas and can you avoid paying them? What are some products that are harder to ship overseas? Moving on, let’s go through some measures your business can take to successfully sell globally.
This article at a glance:
- What are some duties and taxes I should be aware of?
Knowing the fully landed cost of your shipment, customs/import duties, VAT, GST and sales tax will make your logistics process easier.
- What happens when my shipment reaches the destination country?
Your shipment goes through customs, and if all duties are paid for, it will be released. Remember to always declare your product value and category on your commercial invoice honestly to avoid further costs.
- Can I avoid paying all duties and taxes totally?
No, there is no fast and easy rule with international shipping.
Keep Customs Duties and Local Taxes in Check
Getting your shipment across borders safely is the first stage of international shipping where most businesses fail to cross. Firstly, the high costs of international shipping is a major deterrent.
Take the European Union (EU) for instance — the customs duty and local tax rates may be different in different countries within the EU. You may have imported goods into the Netherlands before, paying a certain customs tax. This time, you want to import into Germany, and expect the same tax rates only to find out that it is different.
Always keep in mind to find out the customs duty and tax in your destination country, to avoid paying less or more. This may make it tough to keep track of costs, when you may need to adjust your product prices according to the country you are selling in because of varying customs duties and tax rates. If you end up paying a lot of duty and tax even before your goods can be sold at your target country, you will need to increase prices for your customers, which can result in poor sales.
What Does A Custom Clearance Process Look Like?
Here’s a brief overview of what your shipment goes through when you ship it internationally.
- When your shipment reaches the destination country, a customs officer will inspect the package. Prepare your paperwork such as commercial invoices, Certificate of Origin, and import licenses.
- The customs officer looks at your commercial invoice to see if the item value matches what you stated on the invoice. Be sure to declare your item value and category honestly. This determines whether duties and taxes apply to your shipment, and who pays for it.
- If the shipment arrives with duties paid, the shipment will be released for domestic delivery.
- If the shipment has duties unpaid, the recipient of the shipment will need to pay for it. Customs will hold the shipment temporarily until the duties are paid off.
Why Do You Need to Pay Duties and Taxes When Running An Exporting Business?
Countries impose taxes on imported goods mainly to protect their own local industries. For example, if rubber is far cheaper in lets say, Thailand, local companies may import rubber from Thailand rather than buy it in their own country. Therefore, governments impose duties on these imported goods to discourage imported goods and push sales for local goods.
So, as an international merchant looking to export your product overseas, it will be a good idea to work with local logistics companies to reduce duties. This can help keep your customs costs as low as possible, potentially increasing sales for your business.
So, what are some of the common customs duties and taxes you need to take note of?
What Are The Customs Duties and Taxes To Take Note As An International Merchant?
1. Fully landed cost of a shipment
The fully landed cost includes the following:
- Price you purchased your product at from a supplier
- Price of international shipment
- Cost of import duties depending on your product type
- Cost of domestic delivery to a warehouse, and from warehouse to different customers
- Price paid for risk reduction
- MIscellaneous overheads
2. Customs duties
You may have heard of ‘import duties’ — they are basically the same thing as customs duties. It refers to the additional cost a country’s government chooses to add to imported goods from another country in a bid to balance out the demand for local goods.
3. Value added tax (VAT)
VAT is a type of consumption tax that is collected on a product at every stage of its production.
Imagine you are selling perfume internationally. Tax is collected when the perfume bottle is produced, then collected again when you manufacture the perfume itself, then again when the bottle cap is screwed on. If the perfume costs $100 and there is a 10% VAT, the consumer pays $110 to the merchant. The merchant then earns $100 and remits $10 to the government.
To put it simply:
VAT (%) = cost of the product — costs of materials used in the product that have already been taxed before
📍 Tip: VAT is not applicable in the United States and certain countries. However, it is most commonly found in the EU.
4. Goods and services tax (GST)
Another consumption tax, GST, is somewhat similar to VAT. The customer pays the GST, and the amount is then remitted to the government by the merchant. Some countries that impose GST are: Canada, Singapore, the UK, Vietnam, Nigeria, South Korea and India.
5. Sales tax
Also a consumption tax imposed by the government, this tax amount is paid by the consumer at the point of sale. It is also remitted to the government through the merchant. Sales tax is most commonly found in the United States with the exception of certain states.
Can You Avoid Paying Import Tax, Custom Fees and Duties?
Well, the answer is no. Nonetheless, you’ll be relieved to know that there are some ways you can minimize the amount you have to pay.
A product’s cost price, international shipment costs, import duties and domestic deliveries within the destination country — these are the fees you must be prepared to pay when shipping internationally.
How to Minimize Taxes When Shipping Overseas
Whilst you cannot totally avoid paying taxes, here are some legitimate ways to reduce your tax burden.
Countries with free or reduced customs duty rates
Check if your destination country has a trade agreement with the country you are shipping your product from. Let’s take the United States for example.
- Generalized System of Preferences (GSP)
Under the GSP, certain designated beneficiary developing countries are eligible to conditionally free or reduced customs duty rates. Here’s how the GSP will reduce duties on certain types of products when imported from the included countries.
- Caribbean Basin Initiative (CBI), Caribbean Basin Trade Partnership Act, Andean Trade Preference Act and the Andean Trade Promotion and Drug Eradication Act
Certain products from Caribbean and Andean countries are exempt from duty.
- African Growth and Opportunity Act
Certain products from a few chosen sub-Saharan African countries are exempt from duty.
- U.S. free trade agreements
Certain products from Israel, Jordan, Chile and Singapore may also enter the US duty free or at a reduced rate.
Countries that have a free port or free trade zone (FTZ)
If you’ve never heard of free ports, it simply means designated areas in a country that do not impose or are less strict with customs regulations. Some common countries include Singapore, Hong Kong and Dubai, which also happen to be gateways to Southeast Asia and the Middle East.
Free trade zones (FTZs) are ports that offer warehousing, repackaging, relabeling and manufacturing services. How does FTZ minimise your customs duty then?
When shipping components of a product separately, customs duty will apply to each individual component. On the other hand, if you manufacture the finished product at the FTZ, customs duty may be lower as compared to shipping the components individually.
Let’s use keychains as an example. A keychain can be made up of a plastic, fabric, wood or rubber for the main design, with a metal hook. Shipping the components individually will impose taxes on the plastic, fabric, wood or rubber. However, if you manufacture the finished key chain at the FTZ near your destination country’s port of entry, you can make sure of the lower duty rate of the finished product.
Can You Ship Electronics Internationally?
The answer is: most probably not, you will have to check the regulations in your destination country.
One of the main reasons is lithium ion batteries, most commonly found in laptops and smartphones. Certain countries allow shipments of these products when the lithium battery is already installed inside the product, but not when the battery is loose.
Here are some tips to ship electronics internationally, provided the country allows for electronics shipments.
- Do not remove the lithium batteries from the product
- Fill out custom forms as accurately as possible
- Tape securely over the on/off button so that it does not turn on during transit
- Double bubble-wrap the device
Some Common Mistakes SMEs Make When Selling Globally, and How To Avoid Them
- Do not assume that duty rates are consistent across different countries, even in neighboring countries
- Not doing due research and using outdated tax rates, as rates and taxable products change all the time
- Not properly filing and keeping paperwork and documentation
- Not confirming on goods that are regulated in that particular country (For example, gum is banned in Singapore)
- Failure to calculate the fully landed cost of a shipment
- Undervaluing shipments of goods or misdeclaring the item type to avoid paying higher duty rates
Now That You Are Clear About Taxes Involved, How Do You Handle Foreign Payments?
Payment of customs duty and taxes may be paid for by you, the exporter, and you may be required to make payment in the destination country’s currency.
At Silverbird, we help you with paying your suppliers and receiving money from customers easily with low FOREX rates and fast payments. If you wish to sell to Europe, we’ll assist you in opening an European account at 0 commission, so that you can focus on handling your exporting business.
Author: Silverbird Content Team
Illustration: Irina Lisogor