Definition
Customs duty is a tax charged by a country on goods imported into it, usually calculated as a percentage of the goods' customs value according to their HS code and country of origin. It is paid by the importer of record before the goods are released, and may be passed on to the buyer depending on the agreed Incoterm.
Also called: Import duty, Tariff, Duties
Customs duty in practice
Customs value is usually based on the transaction value shown on the commercial invoice, sometimes including freight and insurance to the border. An accurate invoice with a clear description, HS code, origin, and value is the foundation of correct duty.
Import VAT or GST is often charged at the border in addition to duty. Registered businesses can usually reclaim import VAT, but duty is generally a cost.
Under DDP terms, the seller pays duty and must include it in the price. Under most other terms, the buyer pays it on arrival, which can surprise customers who were not told in advance.
Example
A UK buyer imports leather bags with a customs value of 10,000 pounds. At a 3 percent duty rate, duty is 300 pounds, and import VAT is then charged on the value plus duty.
Frequently Asked Questions
Who pays customs duty, the buyer or the seller?
Whoever the Incoterm assigns it to. Under DDP the seller pays; under DAP, FCA, EXW, and most others the buyer does. State the Incoterm on the quote and invoice.
Do services incur customs duty?
No. Customs duty applies to physical goods crossing a border. Cross-border services can still be subject to VAT or GST, often under the reverse charge.
Related terms
- HS code An HS code is a standardized number from the Harmonized System, maintained by the World Customs Organization, that classifies a traded product for customs.
- Incoterms Incoterms are standard three-letter trade terms published by the International Chamber of Commerce that define who pays for shipping, insurance, and customs, and where risk passes from seller to buyer in an international sale.
- Commercial invoice A commercial invoice is the official invoice used for international shipments that customs authorities rely on to assess duties and taxes.
- EORI number An EORI number is an identifier that businesses need to import or export goods into or out of the European Union or the United Kingdom.
- VAT VAT (value added tax) is a consumption tax charged at each stage of the supply chain on the value added, used in the EU, UK, and more than 160 other countries.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.