How to Reduce Customs Tariff Duties and Taxes

Importers Need to Document Legitimate Trade Deductions

Jun 11, 2009

This analysis includes a practical example that shows importers how to save thousands of dollars in customs tariff duties and taxes.

While some products like medical devices are duty-free and tax-exempt, many imported goods are subject to customs tariff duties, excise levies and other taxes. Those charges are calculated based on the transaction value of an imported shipment.

A shipment’s transaction value is the price paid or payable for imported goods where that amount has been adjusted for additional charges. Many of the 22 standard adjustment charges listed under Subsection 48 (5) of the Canada Customs Act must be added to the face amount found on the exporter’s invoice. As part of the accountability of charges, these additions lead to higher tariff duty and tax charges when a calculation is applied to the increased transaction value.

However, there are adjustment charges that can be subtracted from an import’s invoice total. The importing party must be able to provide sufficient evidence that any deduction is legally part of the price paid or payable for the imported products. Categories for these eligible deductions are described below.

Costs for Assembly, Construction or Technical Support

Raw materials, semi-finished goods and unassembled products all require manual labor or technical support after they are delivered to the importing country. For example, exporters may ship bicycle components instead of fully assembled bicycles to reduce package volume size and therefore save on shipping costs. Reasonable costs that the importer incurs to pay workers to assemble those bicycles are considered eligible deductions from the invoice total from the original shipment. This deduction is also valid for construction, maintenance or technical assistance charges that the importer has to pay after goods are imported.

Freight and Insurance Costs

Transportation costs required to deliver imported products also comprise a valid deduction. A freight deduction can include associated expenses like loading, unloading and handling charges from point of departure to delivery. Insurance premiums for the shipment may also be deducted.

Trade, Volume, Early Payment and Cash Discounts

Typically, the invoiced total is already net of trade discounts, volume discounts or other quantity sales incentives. Early payment discounts and cash discounts have also usually been subtracted. However, customs officials will disregard any discounts that the exporter provides to the importer after the shipment is delivered.

Buying Commissions

Any buying commission or bonus that the exporter pays to the importer must be deducted from the amount payable for the imported products.

Rights to Distribute

Where the importer pays the exporter a fee for the right to distribute the exporter’s products, the amount paid for distribution rights are eligible deductions from the invoice total. In contrast, the importer must ensure that the invoice total includes any royalties, copyright fees, licensing fees and trademark fees.

Advertising and Promotion

The importer can incur expenses to advertise or promote the exporting company. Valid expenditures are eligible for deduction when calculating the transaction value amount on which duties and taxes are based.

Example of Importer Cost Savings

Consider the following example in which bicycles from Taiwan are subject to a 13% tariff, a 10% excise tax and the importing country’s 5% General Sales Tax (GST). An invoice total for 1000 bicycles that cost $100 each is $100,000. Using Canadian calculation methods, this will result in an additional $13,000 in customs duties (13% of $100,000) plus $11,300 in excise taxes (10% of $113,000) plus $6,215 for GST (5% of $124,300). Therefore, the transaction value is $100,000. The importer has to pay an additional $30,415 in duties and taxes.

If the importer has to pay $20 to assemble each bike after delivery, as well as $5,000 for the rights to distribute the product plus $5,000 on advertising and promotion, these eligible deductions amount to $30,000. The transaction value becomes $70,000 ($100,000 minus $30,000) and the importer has to now pay:

This amounts to $21,361 in duties and taxes. By reporting eligible deductions to customs officials, the importer saves $9,055 in importing charges ($30,415 minus $21,361).

This article presents independent insights and comments based on a review of Section 48, Subsection 5 of the Canada Customs Act.

The copyright of the article How to Reduce Customs Tariff Duties and Taxes in International Tariffs is owned by Daniel Workman. Permission to republish How to Reduce Customs Tariff Duties and Taxes in print or online must be granted by the author in writing.