How Import Duty Is Calculated: Customs Value on a CIF or FOB Basis by Country

Customs value: the base for the duty

An ad valorem duty is a percentage of the customs value, so two numbers decide it: the duty rate, which comes from the HS code, the origin of the goods and any trade agreement, and the customs value. Under the WTO Customs Valuation Agreement, which almost all trading countries apply, the first method is the transaction value: the price actually paid or payable when the goods are sold for export to the importing country, with certain costs added if they are not in the price. Only if there is no usable transaction value does customs move on to the other methods in order: identical goods, similar goods, a value worked back from the resale price in the importing country, a computed cost-based value, and finally a reasonable method consistent with the Agreement.

The Agreement lets each country decide whether the cost of transporting the goods to the port or place of importation, the related loading and handling charges, and the cost of insurance are part of the customs value. That is the difference between a CIF basis and an FOB basis.

CIF or FOB basis: what each country adds

• European Union (CIF basis): under Article 71(1)(e) of the Union Customs Code, the cost of transport and insurance and the loading and handling charges up to the place where the goods are brought into the EU customs territory are added to the price. Transport after that point is not part of the customs value if it is shown separately (Article 72).
• United Kingdom (CIF basis): HMRC guidance says to include delivery costs up to the place of introduction into the UK, such as the UK port of importation for sea freight, including inland transport in the country of export, insurance in transit, loading and handling, and container and terminal charges up to that place. UK transport, terminal costs and demurrage after arrival can be left out if charged and shown separately.
• Japan (CIF basis): Japan Customs adds the cost of transport, insurance and other expenses associated with transporting the goods to the port of importation, to the extent they are not already in the price.
• United States (FOB basis): the price actually paid or payable excludes costs, charges or expenses for transportation, insurance and related services incident to the international shipment from the country of exportation to the place of importation in the United States (19 U.S.C. 1401a(b)(4)(A)).
• Canada (FOB basis): CBSA Memorandum D13-3-3 states that transportation costs from the place of direct shipment to Canada are not included in the value for duty.
• Australia (FOB basis): the Australian Border Force says the customs value does not include freight and insurance from the place of export to Australia; those costs are added, with the duty, to work out the value for GST.
• Other countries: check the importing country's customs authority or ask a customs broker there before you quote a landed cost.

How to calculate the duty: an example

The figures below are for illustration only; the real duty rate depends on the HS code, the origin and any preference.

• Invoice: 1,000 units at USD 10, FOB Shanghai, so USD 10,000. Sea freight to the port of importation costs USD 1,200 and cargo insurance USD 30. The duty rate is 5%.
• EU, UK or Japan (CIF basis): customs value = 10,000 + 1,200 + 30 = USD 11,230. Duty = 5% × 11,230 = USD 561.50.
• United States, Canada or Australia (FOB basis): customs value = USD 10,000. Duty = 5% × 10,000 = USD 500.
• EU import VAT at an example rate of 20%: the base is the customs value plus the duty, plus transport to the first place of destination in the EU if it is not already included: 11,230 + 561.50 = USD 11,791.50. VAT = 20% × 11,791.50 = USD 2,358.30.
• Customs converts the values into its own currency at the official exchange rate, and some countries add fees such as processing charges. Triplicate's landed cost calculator adds freight, insurance, duty, VAT and fees per unit.

Import VAT and GST are charged on a larger base

In the EU, the taxable amount for import VAT is the customs value plus taxes, duties, levies and other charges due by reason of importation (except the VAT itself) and incidental expenses such as commission, packing, transport and insurance up to the first place of destination in the importing Member State (VAT Directive Article 86). So a buyer pays VAT on the duty as well. In Australia, the customs value is combined with the customs duty, international transport and insurance and, where it applies, wine equalisation tax to give the value of the taxable importation on which GST is charged. Importers registered for VAT or GST can usually reclaim the import tax, but the duty is a cost.

What the Incoterms rule on the invoice changes

The Incoterms rule does not change how customs values the goods, but it changes which costs are already in the invoice price, and so what has to be added or taken out:

• EXW, FCA or FOB price into a CIF-basis country such as the EU: the importer declares the freight and insurance to the border on top of the invoice price, and under EXW also the transport to the port of export.
• CFR, CIF, CPT or CIP price into an FOB-basis country such as the US: the international freight and insurance in the price are not dutiable, so show them separately on the commercial invoice and keep the freight invoice as evidence.
• DAP or DDP price: transport after arrival, and under DDP the import duties and taxes included in the price, are not part of the customs value in the EU (UCC Article 72) when shown separately. Itemise them on the invoice.
• Whatever the rule, list the goods value, freight, insurance and other charges as separate lines. A customs broker can then declare the right value in every country.