Are importers paying too much customs duty?

Import duties can range from 0% to over 80% when Anti Dumping Duties apply and unlike VAT they cannot be reclaimed, but they can be reduced. Import duties impact on bottom line profits and many businesses fail to take advantage of opportunities to minimise duty liabilities.

There are some basic issues to address when looking for duty savings and many advisers take their fees as a percentage of duty saved. It could cost a company nothing to implement a duty saving regime that will improve profitability year on year; a perfect win/ win situation.

Businesses moving goods across international borders must comply with the rules and regulations governing customs and international trade. National Customs Authorities are responsible for assessing and collecting customs duties, in the UK the responsibility for collecting principally import duty and import VAT lies with HM Revenue amp; Customs. It is estimated by the World Customs Organisation that worldwide business spends almost US$300 billion in customs duties annually.

Complying with the rules and regulations governing customs and international trade is therefore a fact of life for businesses involved in moving goods across borders. Businesses also face continual changes to customs and international trade rules and regulations and differing applications and interpretations of the same rules by different national authorities.

Customs duty is a tax on imports and the exposure of a business to customs duty can be reduced, depending on the commercial structure of the transaction, by employing legitimate planning techniques that can eliminate, reduce or defer duty.

Surprisingly, management of duty has a low profile in many businesses with directors often unaware of their company’s annual duty bill. Whilst they keep a tight rein on direct taxes and VAT, customs duties are often considered as logistical rather than financial, a view which could be considered perverse as import duty is a ‘sticking tax’ directly affecting a business’s bottom line.

Consequently, import duties are a significant cost to businesses involved with international trade. Yet many businesses are unwittingly paying more duty than required impacting directly on landed costs, margins, competitiveness and ultimately profitability. As businesses strive to improve their margins, increases of even single digit percentages are actively sought and valuable resources deployed to make these improvements. A review of customs duties could provide the savings a company needs and raises the question - why are so many businesses ignoring these potential savings?

Import Duty – What exactly is it?

The amount of duty paid on imported goods depends on four criteria:

• What the goods are - classification.
• Where the goods originated, not where they last came from  – origin.
• The financial structure of the transaction – customs valuation.
• What happens to the goods once imported – customs procedures.

For customs purposes all goods have a tariff classification often referred to as the commodity code. The amount of duty to be paid when these goods are imported varies and depends on the type of goods and their intrinsic characteristics.

The origin of the goods also determines the duty to be paid and the origin is not simply from where goods are shipped. To establish origin you may need to establish where the goods were manufactured, where they were processed, where they were grown or even where they were caught!

Once origin has been established and the goods correctly classified the import duty rate can be determined, some goods being eligible to reduced or preferential rates of duty. Preferential rates of duty exist where there are trading agreements between the EU and the originating trading nation or area.

Import duty is also determined on how goods are bought, the terms of sale. For example, the treatment differs if goods are purchased outright, are brought in under warranty, or are leased. These and other factors can affect the customs value on which duty is applied.

Finally, what happens to the goods once imported can affect the duty that may be payable. Goods undergoing processing or being repaired before re-export may qualify for relief from customs duty.

Achieving duty savings is an attainable goal for all businesses involved in international trade and the following examples explain how these savings can be made in each of the four critical criteria that determine a products import duty liability.

The rate of import duty chargeable is determined by the tariff classification and origin of the goods. Goods being imported can only be classified to one specific commodity code in the Customs Tariff. However, there are over 25,000 tariff codes so ensuring the correct one is used is not straight forward particularly if the goods have unique or unusual characteristics. Many importers rely on their agents to classify goods on their behalf but few confirm the classification is correct or, when changes are made to the specification of the goods, that the agent is aware as the original classification may not apply.

Duty can be levied at specific monetary rates based for example on the weight of the product or on an ‘ad valorem’ rate based on the value of the goods. Duty rates vary enormously and UK importers face ad valorem duties varying from 0 to 23%. For example the rate for certain types of dog food is €498/ tonne whilst the rate for another type of dog food is 9.6% of the customs value.

The above example demonstrates the fine line between one classification and another for the same generic product. In this case the duty treatment depends on the milk product content of the dog food. Understanding the Customs Tariff and ensuring that a product is correctly classified can produce considerable savings. If buyers are aware of the duty impact it begins to influence the type of product they purchase as they are able to calculate the true landed duty paid costs of the product.

It may be possible to work with suppliers and alter the recipe used to produce a legitimate modification of a product, or modify a manufacturing process. This can result in duty savings as the product’s tariff classification changes, This principle applies to many goods.

Businesses that import components then assemble them to form finished goods may also be able to minimise their duty liability if they are able to import all components at the same time declared as an ‘unassembled kit’. Presenting components can, under the customs classification rules, result in them being classified as if they were the finished product thereby making duty savings if the duty rate for the ‘assembled’ product is lower than the rate of duty for the individual components. For example, parts used in the assembly of excavators are subject to duty whereas the finished article attracts 0% duty. Thus if the parts are entered correctly and customs rules are complied with the importer will have a lower duty liability.

A much ignored approach to making potential duty savings is considering the customs valuation of imports in particular in instances where the exporter is not the manufacturer of the goods. Strange as it may seem there are a number of ways to value goods for customs duty purposes, it is not always based on the invoice value.

Where an importer is not buying goods directly from the overseas manufacturer and providing there is a verifiable supply chain, EU customs legislation allows the customs value to be based on any earlier sale of the same goods prior to export. Thus, if an importer purchases goods that have been part of a supply chain before import, it may be able to use the value of an earlier sale in that chain as the basis for customs duty thereby excluding from the customs valuation costs not attributable to the manufacture of the goods.

By way of example, an order is placed with an exporter, Chinese Sales Co., (CSCo) for 1000 widgets at $100,000 and CSCo purchases these goods from Chinese Manufacturing Co (CMCo) for $80,000. The goods are then shipped to the importer by CSCo. If the invoice used as the basis of the customs valuation is that from CSCo to the importer then duty will be paid on $100,000. However, if the invoice from CMCo to CSCo is available and the specific customs requirements and regulations are complied with then for customs valuation purposes the widgets can be valued at $80,000 saving duty costs on the $20,000 difference.

Using this methodology, often referred to as ‘prior point of sale’ does not affect the amount actually paid for the goods. This would still be $100,000. What it can do however, is break the link between the value of the goods for direct tax and indirect tax purposes. For Corporation Tax purposes the Revenue preference is for low import values as this results in greater profit to tax. Customs however prefer higher import values as they realise a higher duty yield. This method of customs valuation, using an earlier sales price, means the actual price paid by the importer is no longer relevant for customs duty purposes.

EU legislation allows goods to be imported free of duty when they are, for example, to be further processed, repaired or refurbished before being re-exported. An example would be a business that imports components or materials for manufacturing or process in the UK before being re-exported to customers outside the EU.  A regime known as Inward Processing Relief or IPR enables the import of the components or material free from import duty.

For IPR purposes customs legislation includes in the concept of ‘manufacturing’, various processes including handling, repacking and surprisingly checking goods as well as traditional manufacture.

In order to benefit from IPR it is necessary to obtain authorisation from Customs and, in certain circumstances, this can be granted retrospectively the approval being  back dated by up to one year. Authorisation also imposes certain additional obligations on businesses which when properly implemented can benefit existing processes and
Worthy of mention are two other customs procedures:

The first allows duty relief to be claimed where goods are being re imported into the UK having been exported for further manufacture or processing. This has traditionally happened when textiles are ‘exported’ for cut, make and trim (CMT)into garments, the finished products being re-imported.

The second applies when components are imported for manufacture into a product that will be sold in the EU.  If, rather than components, the finished product had been imported and it would have attracted a lower rate of duty than that imposed on the constituent parts , a regime is available that enables the lower rate of duty to be charged.

Finally, all businesses involved in international trade need to consider cash flow planning. At import all goods are liable to import duty and import VAT. Where goods are subject to duty import VAT currently 17.5% is charged on the customs value plus duty so VAT is charged on the customs duty element. Where goods are imported free of duty import VAT is charged at the full rate on the customs value only.

For regular importers import duty and import VAT payments are made using a deferment account, which can provide a cash-flow advantage of up to one month depending on what date during the month goods are entered. By implementing a customs warehouse, which would initially require Customs authorisation, an importer can realise further cash-flow advantages.

Customs warehouses can be either an actual building or a virtual system. They enable importers to defer the import duty and import VAT point until goods are moved from the warehouse into free circulation with actual payment being further delayed until the fourth day of the month following that in which the goods were released.

Import duty and import VAT are significant elements in the costs incurred in international trade and many companies pay more import duty than necessary thereby increasing costs and ultimately adversely impacting on business profitability.

Businesses are consistently being pressured to reduce costs and are often unaware that considerable legitimate savings can be made by a constructive approach to customs planning utilising methodologies like those described here.

These are only a few of the potential opportunities available to reduce import duty liabilities or improve cash flow by delaying when import duty and import VAT payments are made. There is no doubt that companies adopting a planned approach to managing import duties can gain a competitive advantage whilst positively influencing business profitability.