To optimize your export pricing strategy, understand the total or “landed” cost of your export shipment to a foreignbuyer. Buyers often ask for this information when negotiating a purchase and you can provide it on a pro forma invoice.
The landed cost is the total price of a product once it has arrived at the buyer’s doorstep.This includes:
- the original price of the product,
- insurance,
- freight,
- tariffs and taxes, and
- other fees.
Download Video: Determine Total Export Price with Foreign Tariffs and Taxes
How to Determine Landed Cost
Determine Foreign Tariffs and Taxes
1. Find the importing country’s Harmonized System (or HS) code for your product. The six digits of your HS code will match the first six digits of your product’s US export classification code, otherwise known as the Schedule B number. If you don’t have it, you can use the HS code search engine in a tariff look-up tool.
2. Then, look up the tariffs and taxes for the country to which you are selling. Choose the best tariff rate for which your product qualifies.
- Tariffs are charges imposed by countries on imported goods. They are organized by HS classification codes and often expressed as a percentage of the product’s value. For example, ball point pens have a 5% tariff rate.
- A duty is the actual amount of money owed due to the tariff. For example, the duty is $100.
The most common tariff categories are:
- “General Rate” – a standard tariff rate applied to countries that are not members of a World Trade Organization (“WTO”) or other agreement.
- “Most Favored Nations” or “MFN” Rate – a tariff rate for WTO signatory countries. This rate may change at any time within certain limits.
- “United States of America Rate” – this tariff rate is agreed upon in a U.S. trade agreement with another country or group of countries to be more advantageous than the MFN rate. It could be as low as 0%, or lowered over time to 0%, if your product meets certain requirements.
3. Determine if other taxes and fees might be imposed.These can includecustoms fees,value added taxes (or VATs), ornational/local sales taxes.
4. Know if you orthe buyer are obligated to pay the duties and taxes.This is often determined by the Incoterm used in the sales contract.You can also discuss payment options with your customs broker or freight forwarder.
When your product reaches a foreign market, the foreign customs authority will assess duties. Taxes and other charges are calculated separately.
Estimating Landed Cost Example
1. Determine what value the foreign tariffs and taxes are based upon. Many use the“CIF” Incoterm value.(CIF is an Incoterm that means Cost, Insurance, and Freight.)
Example:
- The MFN tariff rate is 5% CIF and the U.S. rate (in the case of a free trade agreement) is 0%.
- VAT is 19% (CIF+duty). (Most value-added taxes (“VAT”) are calculated on the CIF+Duty amount.)
2. Figure the shipment’sCIF value, by adding the amounts.
Example:
- (C) Cost (Invoice Value) $10,000
- (I) Insurance $1,000
- (F) Freight (Shipping) $2,500
- = $13,500 (CIF Value)
3. Calculate the tariff.
Example:
- If the product qualifies for the FTA rate under the rules of the trade agreement, the tariff is 0%. (The duty paid is $0. ($13,500 x 0% =$0))
- If not, use the MFN rate, which is 5% CIF.In that case, the duty paid is $675 ($13,500 x 5% = $675).
4. Determine the taxes.
Example:
- For FTA shipments: VAT Paid = ($13,500 CIF + $0 Duty ) x 19% =$2,565
- For non-FTA shipments:VAT Paid = ($13,500 CIF + $675 Duty) x 19% =$2693.25
5. Finally, we can estimate the landed cost. Now you havea complete picture of what the foreign customer will pay for your product.
Example:
For FTA shipments:
$13,500 CIF
+ 0 DUTY
+ 2,565 VAT
= $16,065 LANDED COST
For non-FTA shipments:
$13,500 CIF
+675 DUTY
+2,693.25 VAT
=$16,868.25 LANDED COST
Always refer to these landed costs as “estimated.” Not only can tariffs and taxes change (especially if it’s been a while since you obtained the information), but your customs broker or shipping company may have additional charges.
Tips
Here are some situations where you can minimize, avoid, or defer tariffs and taxes:
- If you are shipping to an FTA country, check if your product is eligible for an FTA rate.
- Small-value express shipments, referred to as having de minimis values, often are exempt from duty or tax.
- Using an ATA Carnet, many countries provide tax relief (such as an exemption or refund) for temporary imports or exports.
- Look into shipping to a free trade zone, where duty may be deferred.
- If the foreign government is your buyer, you may be able to get a tariff reduction (such as for a major procurement project).
Also, periodically review the HS code you are using. Codes can change at any time. The World Customs Organization also requires countries to revise and update their HS codes every five years.
Getting Help
For additional help with product classification and determining tariffs and taxes, talk with your customs broker or freight forwarder.
Your local U.S. Commercial Service office can also assist you.
You can also seek what is called an “advance ruling” from a foreign customs authority. This provides you with their HS code classification and tariff rate. For larger shipments, you can request an estimate of tariff and tax charges. Remember that this information can change. The foreign authority has the final say on your product’s code and applied tariff rate.
