How to minimise taxes when shipping overseas
A major pain point for SMEs selling goods is logistics. In particular, the high costs associated with international shipping. Whether you’re shipping something to a neighbouring country or across oceans, there are many vendors and processes in between that factor into the fully landed cost of a shipment.
To add even more complexity, customs duty and local taxes differ widely between countries. This makes it challenging to keep track of costs. And it also makes it difficult to keep rates low enough to entice customers.
There isn’t a foolproof way to eliminate taxes while shipping overseas. However, there are certain measures your business can take to minimise these additional costs.
Understanding customs duty and taxes for cross-border eCommerce
There are various reasons countries impose taxes on imported goods. The most common reason being to protect their local economies or to increase revenues.
Cross-border shipments may be subject to customs duties, VAT, GST, and local taxes, potentially making international customers think twice before buying from an overseas online merchant.
A crash course on duty and tax
Here are the common types of taxes a business can encounter when shipping internationally:
Customs duties: Also known as “import duties”, these are taxes that a country’s government adds to goods from other countries. Think of it as a tax at the national level, and on certain categories of goods (depending on the local economy).
Next, there are consumption taxes imposed on a local level, which apply to most goods regardless of category. The different variants include:
VAT: “Value added tax” is based on the idea that a good becomes more valuable as it goes through production. The tax is charged at each stage of the production chain, and is based on the percentage of value added. VAT is common in EU countries.
GST: A “goods and services tax” is similar to VAT in that it is also applied at each production stage, but as a flat rate percentage of the total transaction. Major markets with GST include Australia, Canada, India, New Zealand, and Singapore, to name a few.
Sales Tax: Commonly found in the United States. This is a one-time tax that is determined by state and local governments, and charged at checkout. Currently, the only states that do not charge a sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
How free ports minimise customs duty
One thing to consider is whether importing and exporting your goods from a free port or free trade zone (FTZ) is possible.
Free ports are specially designated areas in a country where customs regulations are less strict, or in some cases, do not apply. This makes international trade opportunities easier through streamlined customs paperwork and less bureaucracy.
A free trade zone (FTZ) is a specific type of port that can offer services such as warehousing, repackaging, relabeling, and manufacturing. This type of environment can cut costs because in certain circumstances, the finished products themselves have lower import duties compared to the separate components that make a product.
As FTZs are located near a country’s port of entry, it may be beneficial for some companies to accept raw materials and manufacture products there. That way, they can take advantage of the lower duty rate of their finished product once imported to their country of choice.
Major free ports around the world include Hong Kong, Singapore, and Dubai. They are leading commercial gateways to fast-growing regions such as China, Southeast Asia, and the Middle East, respectively.
To learn more about free ports in your country of choice, or to discover potential trade agreements that could be beneficial to your business, government websites such as trade.gov for the US, the Hong Kong Trade Development Council, and Singapore Customs are a good place to start.
The challenge of low duty thresholds
Utilising free ports can help cut shipping costs, especially if you’re shipping to customers who live in countries with high duty thresholds. For example, the US has a generous duty threshold of $800 USD for imported goods, giving American consumers easy access to affordable overseas brands without additional costs.
But despite choosing to import, manufacture, or export your products from a free port, certain countries may still be expensive to ship to if they have protectionist policies in place.
Canada is a good example of this. With a duty threshold of $20 CAD, any imported item above this value is subject to a 5% GST. If your product falls under the “health & beauty” or “fashion” categories, you can expect to pay additional import duty at a rate of 18% on top of the GST. Add in import processing fees from carriers, and you begin to see why Canadians are reluctant to participate in cross-border trading.
Other countries with low duty thresholds include China ($0 USD with 13% VAT), Brazil ($0 USD with 19% VAT), and Argentina ($0 USD with 21% VAT).
If you have a large customer base in a country with low duty thresholds, it may make sense for you to work with a customs broker to import your goods to the country in bulk. This allows you to pay for the duties on behalf of your customers, while at the same time, shortening the distance for delivery. In turn this will lower shipping costs.
Effective ways to handle customs duty
Figuring out how much tax to collect and confidently communicating this to customers can be taxing (pun intended)! The following suggestions can help your business reduce the friction associated with calculating and maintaining customs duty figures.
Use a tax compliance software
E-commerce businesses that are serious about saving time and getting tax amounts right the first time should consider investing in reliable tax automation tools. AvaTax Cross-Border by Avalara calculates customs duties and import taxes at checkout. Quaderno calculates sales tax, VAT, and GST, while TaxJar mainly focuses on US sales taxes.
Pre-pay duties for cross-border shipments
You can work with your shipping partner to lower processing costs associated with import duty and taxes. Major carriers such as UPS and FedEx offer a service to ship DDP, or Delivered Duty Paid.
This service allows the carrier to process the duty payment to customs when your shipment arrives in the destination country. While carriers will charge an additional fee for this, the benefit is that it is at a fixed price.
That being said, you may be wondering how this saves money. The alternative is to send your shipments DDU (Delivered Duty Unpaid). If duties apply to your shipment, the customs department will assign a third-party broker to collect the fees. These broker fees can vary, and can be a lot higher than what a major carrier would charge.
If you are unable to tell your customers what their final landed cost is, you run the risk of being incompetent. You could also potentially lose the sale if the customer refuses to pay the high, unforeseen costs.
Address customs payment expectations early
Actively communicate what the customer will be responsible for payment-wise, as managing these expectations is half the battle. You can explain in detail your tax and duty policies on your shipping page, while keeping it short and sweet on product pages, store checkout, and email confirmations.
Avoid under declaring shipments
After reading all of this, you may be thinking, “Setting up in a free trade zone, engaging with a customs broker, and building out operations in overseas markets is way too much for me to handle. What’s stopping me from just lying on my customs forms?”
Well – there are a sufficient amount of reasons why this is not a good idea.
First of all, you would most likely be breaking one of the highest laws in the country you’re shipping to. And the penalties are severe. You risk getting jail time or hefty fines that could ultimately bankrupt your business.
Additionally, customs departments screen every package that arrives and are cracking down on this practice. Their systems are advanced enough to find suspicious shipments out of the millions that are processed daily. Also, it’s not hard for someone to research your company online. Officers can access your business website and social media handles to confirm the pricing of your items.
Minimising taxes reduces friction and increases conversions
A wise man once said, “In this world nothing can be… certain, except death and taxes.” Fully landed shipping costs can be a tough pill to swallow for your international customers. This is especially true if they live in a country with protectionist policies.
However, proactively working to minimise these taxes will help your business remain competitive. You can do this by being strategic about where you decide to fulfill, or paying fixed additional fees to your shipping partner to ensure shipments are processed efficiently at customs without any egregious fees and delays.
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