The basics of customs duties for multinational organisations

22 November 2023
Customs duties play a pivotal role in shaping the strategies and operations of businesses, affecting their costs, competitiveness and access to international markets.

Also known as import duties or tariffs, customs duties are government-imposed indirect taxes on goods that are manufactured in one country and moved into another. These duties are typically paid by the importer at entry points, such as ports or borders. Businesses can face considerable financial and reputational losses if they do not comply with customs regulations.

This article delves into customs duties, explains customs compliance, and highlights often overlooked obstacles businesses encounter when transporting goods across international borders.

Basics of customs duties

Customs duties are taxes levied by governments on imported goods. These taxes serve several purposes, including regulating trade, protecting domestic industries against cheaper foreign manufacturing and generating revenue. Various factors, such as the type of goods, their origin, and the applicable tariff rates set by the importing country, determine the amount of customs duties. Customs duties can be either specific, meaning a fixed amount per unit, or ad valorem, meaning a percentage of the goods' value.

Vistra’s senior director of international indirect tax advisory services, Andrew Norris, described customs duties as agreed-upon measures between countries to ensure revenue collection on imported goods and/or services. According to Norris, businesses involved in international trade can derive savings by thinking strategically and understanding their tariff options. This entails optimising supply chains to benefit from preferential trade agreements, researching duty drawback programs, and keeping abreast of tariff adjustments to reduce import expenses. By carefully considering these options, businesses can enhance cost-efficiency, maintain global competitiveness and increase overall profitability.

“Customs duties are like any other tax,” Norris said. “If a company follows the rules, it will be compliant. However, with customs duties, there are great opportunities to pay the right tax, but at a lower rate by reviewing individual products to ensure that the optimal tariff is applied.”

Customs compliance

Managing customs duties across different countries is complex. One significant challenge for companies managing customs duties is determining the importer of record (IOR). Accurately identifying the IOR is vital because it is responsible for importing goods into a country.

Locating the IOR is only the initial step. Businesses must also ensure they accurately:

  • Classify their goods
  • Understand applicable customs duty liabilities
  • Comply with the rules of origin for preferential trade agreements
  • Fulfil specific documentation requirements for each country where tariffs apply

Moreover, businesses must prepare for potential audits, integrate customs compliance technologies where required, account for currency fluctuations affecting duty calculations, and stay up-to-date with legal and regulatory changes in all relevant countries.

Businesses that do not comply with customs regulations may face penalties and/or other risks, including delayed shipments, supply chain disruptions, fines and seizure of goods. Continued noncompliance can worsen the situation and result in criminal charges, damaging the company's reputation in the international business community.

Ben Rogerson, a specialist in indirect taxation for Vistra’s international tax advisory team, stressed the importance of customs duties compliance.

“Financial penalties for failures associated with customs duties vary from minor fixed charges to large percentages of any duty underpaid,” Rogerson said, adding that multinationals can lower compliance risks by conducting audits, training employees and communicating with customs authorities. “Often the biggest issue where there has been an error is that it can be much more difficult to amend an import declaration and correct the customs duty position than it can be to, for example, make changes to a tax return.”

Maintaining customs compliance involves multiple steps. In addition to Rogerson’s suggestions, businesses should maintain accurate and consistent records, and use reliable valuation methods.

It is also crucial to stay abreast of changes in customs regulations in all relevant countries and capitalise on preferential trade agreements and advanced customs compliance technology. To help ensure global compliance, companies should establish centralised oversight, perform due diligence on suppliers, and engage with industry associations to learn about best practices and regulatory developments.

According to Rogerson, businesses can simplify their customs compliance processes by using corporate services providers. Indirect tax advisors who specialise in customs advisory services  can assist businesses in understanding their supply chains and pinpointing potential risks and opportunities.

“It is often difficult for those responsible for finance and tax within an organisation to maintain oversight of customs duty liabilities, as logistics and operations staff may manage these,” he said. “Therefore, having a basic comprehension of your organisation's risks, opportunities and specific reliefs can be valuable.”

Common pitfalls for multinational organisations

A common challenge for businesses is correctly classifying goods using Harmonized System (HS) codes. HS codes are an internationally recognised system that employs unique alphanumeric codes to categorise products, streamlining customs procedures and trade facilitation. These codes directly determine customs duties by helping authorities assess the appropriate tariffs for specific goods. However, classifying HS codes can be challenging due to the variety of products and evolving technologies, requiring a nuanced understanding and continuous industry awareness for accuracy.

The value of goods also often poses problems in customs duties. Problems can arise due to discrepancies between declared and actual values. Different interpretations of costs — such as shipping, insurance and other charges — can lead to an inaccurate estimation of the customs’ values and, ultimately, noncompliance. To mitigate these risks and ensure fair and accurate customs assessments, it is imperative to create transparent and standardised valuation methods.

Businesses must also develop and implement sound documentation practices and systems. Maintaining detailed invoices, bills of lading and other relevant documents is necessary to meet international trade regulations. Relying solely on manual processes instead of using secure, centralised technology can lead to lost documents, delays, fines, and customs officials rejecting goods or even seizing them. To minimise risks, it is vital to use technology for efficient documentation management and conduct regular internal audits for accuracy, transparency and compliance with customs duties.

Norris believes businesses should develop a proactive customs duty management strategy and consider working with a corporate services provider to achieve compliance and ensure they are paying the lowest allowable rates.

“When a business needs to move goods internationally, they typically use the services of a logistics provider or import agent,” he said. “These agents will follow the specific instructions given to them by the business, such as, ‘Ship these goods from the US to Australia.’

“However, in most cases, the agent will only perform the requested tasks without going beyond them. This means that they may apply customs tariffs to products in a suboptimal way, resulting in higher costs for the business. To avoid this, the business can opt for a more detailed appraisal of the tariff by a professional adviser, but this would incur additional costs in terms of professional fees. Therefore, each business needs to conduct a rough analysis of the risks, benefits, and value of seeking expert advice from a professional adviser before deciding whether it is worth the additional cost.”