Recently I had a customer contact me regarding increased “duties” that his sales manager reported the company was going to face when shipping into a European country. After further review it turned out there were no increased “duties” but there was a court ruling that value added taxes were going to be increased in a particular country. So what’s the difference and why were they increasing? First we must identify some differences between duties and taxes and then we can discuss reasons why changes might be occurring in either duties or taxes.

Differences Between Duties and Taxes:

1) A duty is a fee that is collected by the Customs authority of the importing or destination country. Duty rates are established by a country or group of countries to impact trade volume of a certain type of product and sometimes from a certain country’s manufacturers. Normal duties are generally calculated as a percentage of the transaction value (sales price, usually) or an amount per unit 10 cents per kilo etc. They are imposed to protect local industries that a country deems important.

In some cases, there are additional duties, called antidumping duties, applied when the importing country receives information that the foreign exporter is “dumping,” or selling at less than fair value (less than the sales price in the home market). Or perhaps a foreign government is providing significant tax incentives to foreign manufacturers given them a cost advantage. When this is identified, the importing country may apply a countervailing duty equal to the amount of the tax subsidy the exporter is receiving. While duties typically apply, your product may also qualify for duty exemption or lesser duties based on trade agreements and the harmonized classification of your product.

2) A tax is an amount collected in order to enable a country to pay for various government services or community needs such as roads. Generally taxes are not imposed to restrain trade however, when calculated against the imported value this impacts the entry of the goods into the marketplace. A value-added tax (VAT) is computed as a percentage of the sales price plus freight and duty. In effect, the (wholesale) importer typically can pass along the cost of the VAT to the (retail) buyer, taking a tax credit related to the sale of the imported merchandise. There are various standard tax exemptions such as an exemption for the importation of medical equipment for handicapped persons. A thorough presentation of taxes and exemptions is beyond the scope of this article.

Duty variance examples: Why do the same imported items receive different amounts of duty charges on different occasions? There are several explanations for this. 1) Different duties may be imposed if there are differing opinions as to the correct tariff number to be applied to the merchandise. For imports into the US, a binding ruling can be obtained to confirm the harmonized classification that should be applied to the merchandise. There are similar administrative proceedings in other countries. 2) When items move informally through Customs with a courier or the mail, the Customs officer may use a standard harmonized classification that he/she uses as a catch-all for the merchandise in question. (It is wise to list the correct harmonized classification for the product on the export invoice.) There may be different interpretations of the appropriate classification and duties at different ports in some cases depending upon the sophistication of the National Customs duty administration. Believe it or not, I am part of a Linkedin group on classification that gets questions from international customs officials of smaller countries.

Tax variances example: Generally all shipments to Europe are subject to VAT. In two countries in particular there has been a liberal extension of tax exemptions to health care products. But a recent ruling by the EU courts has instructed these countries to enforce collection of taxes for all health products except for a narrow subset, such as braces and equipment for the handicapped. Here is a link to an article about imports into Spain as an example of this effort by the European tax authority to bring uniformity into the application of the tax laws.

Conclusions: In today’s world of imports and exports, duties are generally applied differently from taxes. Duties are imposed to control trade and protect certain industries while taxes are generally imposed to pay for government administrative services and infrastructure. It is important to understand what duties and taxes will be imposed upon your products before entering a particular county, since you may qualify for exemptions which could make your product more competitive in the market place. This type of information is usually available on the internet and from customs brokers and/or tax specialists in the importing country.