Avoiding Customs Duty: Three Methods
As the proverb goes, nothing is certain but death and taxes. But certain though they both may be, it's still worth investing a bit of time and energy to try and avoid them. Fortunately, government customs authorities have given us a bevvy of ways to minimize import taxes, also known as customs duty. Unfortunately, taking advantage of "preferential tariff regimes" often means finding your way through a regulatory quagmire that can be harder to navigate than the map to the Fountain of Life. In this post we will talk about three different ways you can reduce duty, and give you a roadmap for getting there.
The first way to avoid duty is to take advantage of Free Trade Agreements (FTA)s, which are agreements between two or more countries that lower the tariffs on goods traded between them. The most well-known of these is the United States, Mexico Canada Free Trade Agreement (USMCA).
To take advantage of an FTA preferential tariff regime, you need to know two things: the rules of origin, and the product classification. The rules of origin are the criteria used to determine whether a good is eligible for the preferential tariff. The product classification is used to determine the rate of duty that will be applied to the good.
The rules of origin can be complex, and vary from agreement to agreement. In general, they are designed to ensure that the benefits of the preferential tariff are reserved for goods that are actually produced in the countries that are party to the agreement. For example, the rules of origin for the USMCA give preference to goods that are "100% originating" in USMCA countries. This means that all of the materials used to produce the good must come from USMCA countries, and that the good must be assembled or processed in a USMCA country.
The product classification is used to determine the rate of duty that will apply to the good. The classification is determined by the Harmonized System (HS) code. The HS code is a six-digit code that is used to classify all goods that are traded internationally. The first two digits of the HS code correspond to the chapter of the HS, and the remaining four digits correspond to the specific product within that chapter.
The HS code can be found on the product itself, on the packaging, or in the commercial invoice. If you can't find the HS code, you can use the online HS code look-up tool.
Once you have the HS code, you can look up the tariff rate that applies to the good in the Preferential Tariff Schedule. The Preferential Tariff Schedule lists the rates of duty that apply to goods that are eligible for a preferential tariff.
The Preferential Tariff Schedule can be found on the website of the customs authority of the country that is party to the preferential tariff agreement. For example, the Preferential Tariff Schedule for the USMCA can be found on the website of the Canada Border Services Agency.
The second way to avoid duty is to claim an exemption or a reduction. There are a number of circumstances in which you may be eligible for an exemption from customs duty, or a reduction in the rate of duty that applies to your goods.
For example, you may be eligible for an exemption from customs duty if you are importing goods for your own personal use, or for use as a gift. You may also be eligible for an exemption if you are importing goods for scientific, educational, or religious purposes.
You may also be eligible for a reduction in the rate of customs duty that applies to your goods if they are considered to be "in short supply". Goods that are in short supply are goods that are not produced in sufficient quantities to meet the demand of the market.
To claim an exemption or a reduction, you will need to fill out a customs declaration form. The customs declaration form is a document that you must submit to the customs authority of the country in which you are importing your goods. The declaration form must be filled out completely and accurately, and must be submitted before your goods arrive at the port of entry.
The customs declaration form can be found on the website of the customs authority of the country in which you are importing your goods. For example, the customs declaration form for the United States can be found on the website of the U.S. Customs and Border Protection.
The third way to avoid duty is to claim a preferential tariff rate. A preferential tariff rate is a reduced rate of duty that applies to goods that are imported from certain countries. The preferential tariff rate may be lower than the general rate of duty that applies to all goods, or it may be zero.
To claim a preferential tariff rate, you will need to show that the good you are importing is eligible for the preferential tariff. To do this, you will need to provide a certificate of origin. A certificate of origin is a document that is issued by the chamber of commerce of the country in which the good is produced. The certificate of origin must be filled out completely and accurately, and must be submitted before your goods arrive at the port of entry.
The certificate of origin can sometimes be found on the website of the chamber of commerce of the country in which the good is produced, but more often you will need to work with a technical expert to validate that the certificate is valid for the type of preferential tariff you are hoping to claim.
The key to utilizing these programs is a keen understanding of your goods, including the Bill of Materials (BOM) that serves as "DNA" for the good. The Bill of Materials lists all of the materials, components, and sub-assemblies that are used to produce the good. The Bill of Materials can be used to determine the country of origin of the materials, components, and sub-assemblies, and can be used to determine whether the good is eligible for a preferential tariff.
The Bill of Materials can be found on the product itself, on the packaging, or in the commercial invoice. If you can't find the Bill of Materials, you can use the online product classification tool.
At the end of the day, the best way to avoid paying customs duty - or living a long life, for that matter - is to do your homework, put in the effort and don’t give up. Familiarize yourself with the rules and regulations, and make sure you have all of the required documentation before you ship your goods. If you're still not sure, there are a number of resources available to help you, including the customs authority of the country in which you are importing your goods, technical experts who can help you understand the rules of origin, and software platforms that make it easier to track your product's Bill of Materials and help you build the trade attestations that are needed for preferential duty regimes.
Look no further than KYG.Trade. We provide an open, interoperable, decentralized platform for trade + ESG data, using the new global standard for product compliance attributes, OriginBX. We facilitate secure, permission-based ownership and data sharing down to the individual field level, so you can be sure your data is accurate and up to date. We also facilitate the efficient review of immutable data points by third-party experts or in-house teams, so you can be confident that your goods meet all the necessary compliance requirements. Contact us today to learn more!
