Shipping and importing goods internationally has its share of complications when it comes to tariff and duty rates. Every country has unique import and export laws and regulations, which can differ between countries quite remarkably.
Tariff and duty mistakes mostly occur amongst young companies expanding their reach and shipping capabilities. However, even the most experienced Freight Forwarders and Customs Brokers can easily make expensive tariff and duty mistakes.
Who is responsible for defining goods into a tariff or duty?
Often when issues arise regarding the misidentification of duties, many companies will attempt to pass the responsibility to other transportation providers involved in the shipping process. There are situations where some companies may imply that their services include classifying and calculating the duty for customers. However, these companies are under no obligation to get these estimations right.
If a customer’s shipped goods fail to comply with a country’s standards, they could be the one held liable, not the shipping company who provided the incorrect estimate. Consequently, being aware of the importance of correctly classifying goods can save unnecessary monetary burdens in the future.
Understanding each country’s individual customs laws and costs
A common mistake made by Customs Brokers is assuming consistency between countries when it comes to laws and customs fees. This mistake is a result of misreading documents or failing to research and comply with regulations.
Each new country a Custom Broker ships to results in a new tariff, import tax, and duty obligations. These obligations require companies to comply with different rates, rules and forms. Furthermore, customs methods can be drastically different depending on the border the goods are passing through.
Avalara uses the example of thongs to describe how Custom Brokers cannot assume consistency across countries. Thongs made out of rubber, face duty rates of nine percent in the United States of America compared to 16 per cent in Canada. For leather thongs, the duty rate changes, and in Canada the rate increases to 18 percent, while in the US the same thongs are duty-free.
In addition to this, Customs Brokers must also be wary of outdated information. Rates and taxable products continuously change from year to year. It can be an easy trap to fall into when Custom Brokers or Freight Forwarders use the same old documents for every shipment.
Purposely mis-declaring or undervaluing goods
The mis-declaring or undervaluing of products is not supposed to happen. However, despite it being against Customs Legislation, it has become a common occurrence.
The Importer may deliberately undervalue a shipment (or mis-declare items) to avoid paying higher duty rates. Some Importers may even go as far as always declaring a low estimated value of goods regardless of their true value. This is done with the hope that they may be able to sneak goods in with the label of duty-free or low-value products.
While this tactic is not new, Governments are now more aware and vigilant when it comes to cracking down and reprimanding guilty parties. Authorities have even gone as far as profiling parties. This assists in targeting potentially undervalued shipments for further explanation and evaluation of the goods.
As a result of these actions, Customs Brokers and Freight Forwarders can expect longer customs processing delays, as well as fines and penalties if the goods are mis-declared or undervalued. Additionally, those who have been caught in the act often experience continual investigations into their shipments on following trips. Unfortunately, if some companies are not doing their due-diligence correctly and are caught multiple times, authorities are known to revoke their Import and Export Licence.
Mis-declaring goods can result in parties paying an unnecessary and costly duty
There are also situations where goods have been misidentified, this means the importers have had to pay an unnecessary and expensive duty fee.
For example, a company was importing a yacht. It followed the custom entries provided by the freight forwarder and paid A$540,000+ in duty. Approximately three years later, the same company was importing a similar yacht, however, this time he was using a different customs broker. Upon the second yacht importing, he was exempted from paying duty due to the boat’s size. He then realised this should have been the same scenario with the first yacht.
Although the company sought a refund from the ATO regarding the $540,000+ in duty paid, his claim was declined. The company made a claim against the first freight forwarder arguing the money had been paid in error. The freight forwarder was able to rely on the customs declaration being based on the information originally provided by the client. Finding evidence proving otherwise was difficult to gather after such a long time.
The moral of the story is declaring goods and duties should be done after careful consideration. Failing to correctly declare goods can result in a fine or additional duty being payable in arrears, causing the importer to seek indemnity against the Customs broker for financial loss.
There are also situations where goods have been misidentified, this means the Importers have had to pay an unnecessary and expensive duty fee.
For example, a company (“the Importer”) was importing a yacht. They followed the customs entries provided by the Freight Forwarder and paid A$540,000+ in duty. Approximately three years later, the same company was importing a similar yacht, however, they used a different Freight Forwarder. This time around, the company was exempt from paying duty due to the boat’s size. The company then realised this should have been the same scenario with the first yacht.
Although the company sought a refund from the ATO regarding the $540,000+ in duty paid three years ago, the claim was declined. The company then made a claim against the first Freight Forwarder arguing the money had been paid in error. The first Freight Forwarder was able to rely on the customs declaration being based on the information originally provided at the time. Therefore the company could not find any further evidence that the duty paid three years ago was incorrect, and it was especially hard to gather a case to go forward, given it had been such a long time.
Consequently, declaring goods and duties should be done after careful consideration. Failing to correctly declare goods can result in a fine or additional duty being payable in arrears, causing the Importer to seek indemnity against the Customs Broker or Freight Forwarder for financial loss.
Moral of the story, mistakes can happen (and same with human error), therefore it’s extremely important to have a comprehensive Freight Forwarders Liability Policy. If the Importer was able to prove that the duty paid was incorrect and it was the Freight Forwarders mistake, they would have been liable for the full $540,000+ and any fines and penalties issued by the ATO.