Are you paying too much tax on imports and exports?

With the possibility of high rates of Customs duty and the standard rate of VAT in EU countries around the 20% mark, it’s never been more important to ensure that you are importing and exporting goods in the most tax-efficient way. Here’s what you should be aware of and, perhaps, some unexpected ways to reduce your tax burden.

Don’t let an incorrect classification or valuation bump up costs

If you move goods across international borders, you will have to deal with the VAT and Customs duty rules of the countries concerned. That can be both complex and costly.

Every movement of goods arriving into or leaving the EU must be cleared through Customs with the appropriate documents, and must be classified and valued for Customs and VAT purposes. Any liability for Customs duty and VAT becomes due when goods first enter the EU. However, unlike duty, VAT may also be due each time the goods are traded within the EU.

One thing to be aware of is that goods may attract a higher rate of duty than is necessary if they are incorrectly classified. In order to classify your goods, you’ll need to be able to describe them accurately. For example, manufactured items can be made up of several parts, and that can make the process more difficult. Similarly, if you’re trading in foodstuffs or domestic products, you need to know what they contain before you consult the tariff. This will help make your classification as accurate as possible.

The second thing to bear in mind is that, even if you get the tariff classification code right, an incorrect valuation can lead to an over or underpayment of Customs duty and VAT. Where underpayments are made, penalties can be imposed.

Beware that the terms of trade can affect who pays the tax

Even where goods are only moving within the EU, the cross-border movement will have tax implications in the country of export and arrival.

International commercial terms of trade (aka Incoterms) will place different burdens and obligations on the buyer and the seller, and will determine when the ownership of the goods changes.

However, even where the terms of trade are clear – such as with ex works – problems can still arise with a VAT-free sale from a supplier in one country to a business purchaser in another. For example, the recent case of Euro Tyre Holding BV involved a simple import/export deal that turned into a legal headache over whether goods collected by an overseas customer could still be supplied VAT-free.

Remember, Customs duty can’t be reclaimed

Unlike VAT, you cannot reclaim Customs duty, so any liability that arises will directly affect your profits. It therefore pays to know you have the right procedures in place and how you can save money.

The good news is…

… that reliefs are available, and depending on the nature of the goods, their intended use, or their final destination, it is possible to reduce or remove the tax liability. The following examples offer some ideas of how importers and exporters can minimise their tax bill:

  • Ensure you have the correct classification: A large snack product manufacturer was able to re-classify its product and reduce the amount of duty payable because of the sugar content.
  • Use the correct value: By reviewing the component costs of your product, it may be possible to exclude some items and secure a lower valuation for Customs purposes.
  • Improve traceability: A relief from duty can be claimed on goods moving to or from the EU for processing. By improving the traceability of such goods through better record keeping, a duty liability can be substantially reduced.
  • Use reliefs and valuation methods together: For example, the use of a ‘first sale’ valuation method and low value consignment relief for goods despatched directly to EU consumers can reduce the amount of duty and VAT payable. 
  • Defer payment: Where VAT and/or duty is due, it may be possible to defer the time that it has to be paid. For example, the use of a duty deferment account defers the payment by up to 45 days. If the goods are put into a Customs warehouse, the tax and duty only becomes due when they are released.

So whether you import or export goods, savings are possible. You should review your international supply chain procedures on a regular basis to ensure that they remain fully compliant and are maximising use of all available reliefs and cash flow opportunities. As always, if you have any further questions on this, please get in touch.

Image: © L2F1/Flickr

Gary Woods is a Senior VAT Manager at Grant Thornton. For further advice on VAT, contact the VAT specialist in your local Grant Thornton office.