Planning and managing customs duties plays an important role in pricing your export product so that it is profitable. First, pay attention to how your product is classified (if you have my book, Chapter 19 covers how to find out how to determine your product classification), because that classification will affect what duties are imposed and thus make or break your chances of exporting it at a profit. Be sure to get your classification in writing from transportation and logistics experts and then check with them later on to see if there is ever a time when you can reduce or defer duties or even have your products cross borders duty-free.
US customs duties vary widely based on where a product is primarily made, the valuation of the goods, and the destination country. The duties raise revenue for the federal government and protect domestic producers. There are three different types of duties: ad valorem, specific, and compound.
- Ad valorem duties are assessed as a percentage of the value of the goods, in the form of either a transaction value or what you would pay in the country of origin. Always try to keep your invoice value at a net sales price. Don’t write up your invoice with commissions or transportation factored into your selling price or you may end up paying a much higher duty!
- Specific duties are assessed on a fixed-basis per-unit price, such as ten cents per kilogram or forty cents per item, regardless of the transaction cost.
- Compound or mixed duties combine the bases of ad valorem and specific duties. For example, a shipment might be assessed at 5 percent of the transaction plus ten cents per unit. This works well on very high-priced items.
Keep in mind that certain countries offer privileges on some imports. Before you export, check with US customs or your local department of commerce to find out the duties for your product and if your product is eligible for any breaks.
You should also inquire with your tax accountant about foreign trade zones (FTZs) and how they might help you reduce or eliminate customs duties. An FTZ is a domestic US site that is considered to be outside the country’s customs territory and is available for use as if it were in a foreign country. A US company can accelerate the process of duty drawbacks or tax rebates in one of these zones or even have a product imported, assembled on site, and reexported without any duties, taxes, or local ad valorem taxes being charged. In addition, there are duty drawbacks, which allow you to recover duties paid to US customs on exported merchandise, but you must perform feasibility studies to determine how this procedure might apply to and benefit your business.
For example, if a product is manufactured in the United States out of imported raw materials and then exported back out of the country, the imported materials used might be eligible for a duty drawback, less 1 percent to cover customs costs. The passages of US Free Trade Agreements enacted in more than twenty countries (i.e., the North American Free Trade Agreement [NAFTA]; the Dominican Republic-Central America-United States Free Trade Agreement [CAFTA-DR]; and the Trans-Pacific Partnership [TPP, in negotiation]) along with bilateral free trade agreements (i.e., Singapore, Australia, Jordan, Israel) have brought about many favorable developments in the area of customs duties as well. Your accountant should keep you posted.
This article has been adapted from Laurel’s latest book, “Exporting: The Definitive Guide to Selling Abroad Profitably” published December 2013 by Apress.
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