How to Calculate Customs Duty?

Trading internationally can be expensive in more ways than one. Not only do consumers and businesses need to contend with international shipping charges and potentially costly currency conversions, but they must also navigate different import duties and taxes, such as customs duties.

In this guide, Stenn explains what customs duty is, provides an accurate method for calculating fees, and looks at the intricacies of the different charges associated with customs duty.

What Is Customs Duty?

Customs duty (or import duty) is a tax that importers must pay on certain goods, to bring them across a country's borders. The customs duty charge is usually based on a percentage of the item's overall price.

The reason customs duty exists is to protect local industries by increasing the price of imported goods to encourage people to spend money in local markets instead. This protects domestic companies from direct foreign competitors and helps keep money inside the country's economy.

Types of import tariffs include anti-dumping taxes and tariffs imposed on foreign goods that are well below the market value of identical products within the country.

Trade tariffs raise the price of imported goods to encourage citizens of a country to buy locally. There are also export duties - charged in the country goods are exported from - and excise duties, which are indirect taxes affixed to the sale of an individual product such as energy, tobacco, or alcohol.

For example, if a beverage provider exports its drinks to another country, an import tax would be applied in the importing country to protect domestic providers and give the local economy an advantage.

Key Types of Customs Duty:

Below are some of the key types of customs duties that can be found in most countries across the world:

Basic Customs Duty: Basic customs duty is the baseline charge of imported goods. When any goods are traded internationally, a customs duty will apply, which is usually an additional charge equivalent to a percentage of the good's overall price based on its customs duty calculation. Only Fair Trade or GSP products receive lower tariffs or none at all. These are also known as 'preferential tariffs'.
Countervailing Duty: Countervailing duty is a tariff on goods that have received countervailing (offsetting) subsidies in either the original or exporting country. An example of a countervailing subsidy would be when a foreign government provides financial aid to a company. In France, the government may provide financial aid to a steak company, but when those steaks are imported into the US, they are subject to countervailing duties because of that financial backing. It's possible that countervailing duties and anti-dumping duties can be applied to a product at the same time.
Protective Duty: This duty tariff relates to the import of goods from foreign companies that are direct competitors to local brands. This is done to protect local businesses from being outsold by foreign brands. An example would be a German chili sauce brand having taxes imposed on it to protect a local US brand from an outside competitor.
Anti-Dumping Duty: Anti-dumping duties are taxes that affect goods to compensate for the difference between the export price and their normal value. They're often imposed on suspiciously cost-effective products. For example, if a brand of foreign bubble gum was almost 50% lower in price than those in a domestic market, an anti-dumping duty tax may be imposed.
Safeguard Duty: Safeguard duty is the closest to an 'emergency' form of tariff that a domestic economy can have. It is imposed on goods and products available at wildly lower prices that are predicted to have a damaging effect on the domestic economy. Goods from developing countries are usually exempt from this duty, and safeguard duty is only payable after a certain amount of goods have been imported.

How to Calculate Import Duty Taxes?

Now that the various types of import duty tariffs are clearly defined, we'll take a look at how they are calculated. For this example, we'll be looking specifically at US import duty taxes and using commercial cargo valued at $6,000.

Step 1: Firstly, it's important to determine the import rate for a specific product. In this case, the product will be $6,000 worth of lightbulbs from South Korea. A user can find specific product rates by searching their HSN code online.
Step 2: Next, it's essential to check if there are any trade agreements between the US and South Korea. Let's say there is a 10% import duty rate.
Step 3: Multiply the duty rate by the value of the cargo. The formula will look something like 10% x $6,000 = $600. The import duty for this shipment of products would be $600.

Five Ways That Duty Rates Are Calculated

There are five main ways in which duty rates are calculated. Below is an explanation of each of these methods:

Ad Valorem Duty: This type of import tariff ignores the physical size, weight and quantity of the imported products, and instead focuses on the percentage value of the goods being imported based on their assessed value.
Specific Duty: This type of tariff is based on a flat rate per unit or quantity of the imported product instead of its average market value.
Mixed Duties: This type of tariff is based in part on ad valorem duty and specific duty, using both methods to calculate the desired import duties, with a figure demonstrating the highest and lowest tariff rate an importer of this product must pay.
Compound Duties: While mixed duty tariffs switch between specific and ad valorem tariff methodologies, a compound tariff is comprised of both, and by using both tariffs, comes to an overall figure.
Rate Quotas: This type of tariff involves two tiers that increase by import scale. For example, the lesser the import, the lower the rate.

What Factors Can Affect Customs Duty?

Several important factors can affect the customs duties affixed to a particular set of imported goods.

These factors include the availability of local competition, the scale of local competition, the average prices associated with a product and how far below the average market value of goods the imported products are.

There are also political factors that can contribute to customs duties, including any trade agreements between importing and exporting countries or whether heavy economic sanctions exist.

This must be a key consideration for exporters. Customs duties can create additional challenges for those already navigating the common issues with working capital that can arise in international trade - including delayed payment terms.

Not only should exporters factor potential customs fees into any trade agreements but also ensure they have the working capital to facilitate these agreements without risking bad debt.

Support for Businesses Trading Internationally

Are you a business that deals with international trade, regularly exporting or importing goods and facing various customs duty fees? Are you looking for immediate access to capital to grow and expand your business? Simply submit your unpaid invoices for an instant cash flow boost.

Apply for financing with Stenn today or find out about the other financing options available to your business in our Resource Hub - including related guides to:

About the Authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

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