By Anne van de Heetkamp
Decision making with regard to total landed costs is no longer a matter of finding the cheapest manufacturing location. At best, the manufacturer knows two things before manufacturing commitments are made: what product will be sold and where it will be sold. A wide variety of cost factors are then considered before final decisions and commitment towards factory space, suppliers, labor and financial resources are made. Even before the commitment to a production location, the manufacturer has to realize that costs incurred after production have an effect on the manufacturing decision. Two crucial elements of total landed costs are incurred only after the product leaves the plant: transportation costs and import duties.
Historically, the customs duties element has been a necessary evil in the landed costs equation. But with global business paying closer attention to all landed costs components, and the import duties representing an opportunity to save costs, the insight into total landed costs serves multiple purposes. By gaining insight into the applicable customs duties, the manufacturer/seller can improve resource allocations; if the customs duty analysis is executed properly, the benefits include more competitive pricing. Also, the buyer will ultimately benefit from the enhanced transparency. In a less traditional setting such as B2C Web-based commerce, the buyer used to be surprised when requested to pay for customs duties. With new checkout tools available, the buyer is informed prior to purchase on total landed costs, which results in fewer abandoned shipments and higher customer satisfaction.
Components of Customs Duties
Where transportation costs are typically based on a combination of mode of transportation, volume, weight, trade lane and negotiation skills, the import duties are the result of more complex and sometimes unknown variables. Import duties are in most cases based on the formula "duty rate x customs value."
The basis for the customs value in most cases is the transaction value or another "at arm's length" price (this can be the transfer price, for example). In addition, most countries require freight and insurance to be included in the customs value, as well as any other conditions for the sale (like royalties) or provisions that were made in order to manufacture the goods. For example, the value of raw materials or moulds needed for production that were furbished to the manufacturer but are not accounted for in the transaction value will have to be added to get to the customs value.
With regular import duty rates ranging between 0 percent and 50 percent (averaging 9 percent), and preferential rates being significantly lower (usually between 50 percent and 100 percent reduction after a free trade agreement, or FTA, is in full force), it is vital to determine prior to shipment — and, where possible, prior to production — what these rates are going to be, since they can ruin or define market success. The applied duty rate is associated with:
- The Harmonized System (HS) code;
- The trade lane;
- The determination whether or not the product qualifies for preferential treatment.
About the Author Anne van de Heetkamp TradeBeam, Inc.