Import tax minimisation and planning – A commentary from Gavin Makowski of Makowski Associates

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Import tax minimisation and planning

Import taxes include customs duty and VAT and these represent high costs within international supply chains. They impact EU manufacturers and distributors that source raw materials or finished products from overseas. Even UK/EU suppliers can also be a source of opportunity, should they have previously imported products that are being onward supplied to you.

Countless businesses incorrectly view these to be unavoidable costs of doing business, and they consequently miss opportunities to delay, reduce or eliminate liability.  Others assume that their carrier or customs agent handles these affairs, yet these simply administrate border customs declarations and they rarely possess the foothold to pinpoint savings.

With typical customs duties being 6.5% of imported product value, the savings could be significant as well continuous and cumulative. It may also be possible to recover up to three years of historic payments.

So what is it that international traders should be looking out for?

First, three pillars provide the initial basis for import tax calculations. These are:

(1) Classification

Importers (not carriers or clearing agents) are responsible for assigning a correct 10-digit commodity code. There are complex rules and, frequently, errors when performing this task. Mistakes can lead to tax overpayments, or underpayments and the risk of three years’ of Customs reclaims and civil penalties.

(2) Origin

Origin is not always from whence goods came but rather rely on other complex rules, such as where the last substantial transformation occurred. Customs expect due diligence, particularly if origin confers preferential tax rates.

(3) Valuation

Importers commonly declare value based on their overseas supplier’s invoice. However, there can be allowable deductions and necessary additions, as well as six valuation methods and various other risk areas that require careful review, such as:

–    Buying from overseas under Incoterms Rules 2010 EXW, FCA or FOB

–    The existence of buying or selling commissions, royalties or license fees

–    Trading with related party companies

–    Trading non-commercial value samples or goods which are still valuable

–    Supplying free or reduced cost goods/services to overseas businesses to assist with subsequently imported products

–    Project/milestone payments made at various points covering various activities, but that are all connected to a sometime physical import

Second, once the above is compliant, and assuming that taxes are applicable, various special regimes and opportunities can eliminate or reduce these:

    Competitive environment

Are you importing raw materials that are not produced in sufficient volume or quality within the EU?

    Trade agreements

There are many bilateral and multilateral free and preferential agreements between countries and regions. New ones come into play and sometimes past ones cease. For example, for many years Indian products attracted a preferential zero duty rate. In 2014 taxes leapt to 6.5% with many businesses being unaware until it occurred. One may monitor these both in relation to their business and also what taxes customers may be paying if buying from competitors.

    Re-export activity

Do you or your customer (re)export imported products or goods produced from them?

    Re-import activity

Do you send goods overseas for replacement, reprocessing or use in subsequently imported items?

    Finished product

The nature of EU produced goods may allow elimination or reduction of the taxes due on the imported materials used to produce them.

    Special provisions

Certain industries and specifically recognised products may allow duty to be ‘overridden’.

     Stock holding

If stock is of reasonable value and/or is held for long periods of time, one might consider constructing arrangements for paying import taxes when goods are used rather than when they arrive upon import.

    Deferring import taxes

Many businesses operate a deferment arrangement (or pay a premium to use their carrier’s or clearing agent’s). This delays payment of duty and VAT for an average of 30 days whilst also avoiding border delays. Unfortunately, a financial guarantee must be put in place, although it is often possible to receive a 70 – 100% reduction of this liability.

In conclusion, one should understand the international supply chain in which they operate in order to identify all available efficiencies and trade facilitation techniques.

Gavin Makowski MSc FCILT MCIPS MIEx(Grad) EMLog AIC

Gavin Makowski accumulated 20 years’ experience dealing with matters of international trade operations, international logistics, and customs and trade compliance. He performed various roles within the pharmaceutical and chemical industry prior to moving into consultancy and setting up Makowski Associates. He operates on behalf of and in conjunction with Paradigm Shift Consulting Ltd.

This information is for informational purposes only. We make no representations as to accuracy, completeness, currentness, suitability, or validity and will not be liable for any errors, omissions, or actions taken from its display or use.