Product Sourcing: China: Shipping and Taxes

Logistical Support

So, you’ve found a good supplier and you’re going to import some products. How are you going to get them from the Chinese supplier’s warehouse to your door? If you are importing from China, your goods will come to you either by air or sea. Air shipments could be express post, courier delivery, or air-freight-containers. By sea it could be “snail” post, or container shipping.

Air shipping is fast but expensive, whereas sea shipping is always the cheaper, slower option.

You will know for your business how important – or unimportant – time is.

You may think your goods aren’t time critical so they can go by sea, but what about price fluctuations and local fixed costs during the month-long voyage? Or you may be opting for fast air delivery when actually your profit margin could be better with a slightly longer delivery time by sea.

Overall you should look at different options for each different importing project… and always view the shipping quotes you receive as they are open to negotiation!

One of the reasons shipping costs are always open to a bit of bargaining is because there are so many variables, premiums, and concessions that can be factored in.

Here are some pointers so at least you can think about the basics. These are the delivery stages that you need to be aware of because each will involve some costs which will affect your goods’ prices:

  • Warehouse storage in China
  • Packing in China
  • Loading and inland freight in China
  • Terminal charges in the port or airport
  • Loading and freight by air or sea
  • Unloading charges and documentation fees (not including anything to do with tax!!)
  • Possible additional storage en route to you
  • Inland freight & delivery to goods’ destination

When you look at the delivery process you’ll see it’s not just one simple step. It involves a lot of different people working together as your goods change hands and get closer to their destination. Because of the complexity of delivery your costs will increase the more stages are your responsibility. So making sure your price quotes are right, e.g. in your Proforma Invoice from a supplier, is a crucial business judgment.

Shipping and Incoterms

When you get a price quote from a supplier, you’ll need to find out just how much of the journey they are paying for, and at what stage the shipping becomes your responsibility. Familiarize yourself with the following terms:

•  EXW ( Ex-works )
This means the price quote is just for the goods, at the point of origin such as the factory. No shipping costs are factored in at all.

•  FOB [+ name of local port]
Free on board.
This means the price is for the goods delivered onto the container ship.

•  CIF [+ name of destination country port]
Cost, Insurance, and Freight.
Here the seller of the goods pays for them to be shipped to your country. Your price is for the goods plus the international carriage. (Typically CIF is for non-container shipments, and CIP Carriage and Insurance Paid to… is the equivalent for containers.)

•  DDU [+location]
Delivered duty unpaid.
The goods price covers their international delivery to a certain place, but does not include any unloading costs, clearance costs, or import taxes. (More about that later.)

It is not necessarily the best option to try to get your supplier to take responsibility for the shipping all the way down the line. They will simply pass on these costs to you in the invoice total, and you could be getting a better deal by arranging all the steps yourself with a forwarder or shipping agent.

Shipping from China – Important Considerations

1. People want “Next Day Delivery”.

Start with realistic expectations.

Maybe some great shipping options are available, but remember in your dealings with Chinese business people that you shouldn’t expect to get the VIP No.1 best option offered to you at the very beginning of your relationship.

2.  “EMS” means Express Mail Service, and it is a fast, trackable postal service for packets offered by many countries’ Post Offices. China has EMS as well. Unfortunately the system in China doesn’t allow people to send many types of items, e.g. certain categories of electronics. So if you can use it for importing samples and small quantity orders, you are lucky. But if the supplier says it’s not possible, that is probably true.

3.  For different types of consignments and destinations, the major couriers often advertise quite different rates. And it is usually possible to find a way to pay less than the advertised rate.

4.  In the same breath you are talking about shipping you should also be discussing insurance . A lot could be written about this, but all I can say here is – make sure you know who is responsible – and who /what is covered – if your goods get damaged or destroyed or stolen.

5.  Packaging for international shipping is an important consideration. The supplier may want to cut corners and save on costs, particularly if you are not on hand to inspect the packing, and the sellers responsibilities end, say, FOB.

6.  If you are in the early stages of dealing with suppliers in China , you may be “shopping around” for good quotes, including shipping. Try to help the suppliers by asking forspecific quantities and delivery options. If you are not specific, and just ask for general shipping tables or a large number of different option quotes, you will be perceived as time wasting and may not get an answer.

RESOURCES:

•  Fedex international freight calculator: http://www.fedex.com
•  UPS international freight calculator: http://www.ups.com

If you are using a freight company to collect your goods from a factory or warehouse in China and deliver to you, you’re going to need the exact dimensions and weights of the cartons containing the products if you want the freight company to quote a price for you. And I do mean “exact” because a slight variance of a couple of millimeters here and there could increase the cubic weight calculation significantly. Don’t be too surprised if the measurements submitted to you by the supplier turn out to be wrong when the freight company collect the boxes, because they might not have measured carefully, might not know how to measure properly, or might have given you a completely guessed carton dimension before the goods were finished and packed. It’s just another thing you have to double and triple check especially when dealing with a factory / freight company combination. In such a situation it obviously pays to have a trusted representative on the ground in China, if possible.

“Delivered Duty Unpaid”

If you buy goods from China to be sent to you, you are importing from China. You’re importing even if you’re ordering a single item from a Chinese seller or getting a sample of any product from a Chinese company.

Every country in the world has some rules about importing, and here are the key basic facts:

•  There are certain types of goods which you are not allowed to import.
•  In some situations you will have to pay tax on your imports.
•  In some situations there will be no need to pay tax.

“Hey! Why are you charging me tax?”

A lot of people at are surprised that they have to pay taxes when they import products bought online from China. Some people ask why is tax being added to what they have already paid. But the tax is actually from their own country, not from China. What you need to know is:

“Import tax isn’t about who you are buying from. It usually doesn’t matter where the goods are coming from. It just matters that you’re trying to bring something into the country from the outside.”

That’s why you should do your own research about the rules and and regulations before placing your first order. Import taxes in the US are not too easy to understand.

The rates vary for different items and conditions from 0% up to 50% or even more, depending on country, carriage method, quantity and more, so you NEED to find out this information before you send any supplier your money.

Because import tax is about the destination country, not the country of origin, this section will talk generally about import taxes, so the ideas given here apply to all importing situations, even if it’s not China. Whether you have to pay import taxes, and how much, will depend on the following:

  • The type / classification of the goods
  • The value and/or quantity of the goods
  • In some situations the way in which the goods are packed and delivered
  • The mode of sending, i.e. who is sending the goods and who is receiving. e.g. a company receiving commercial merchandise from a company may have to pay tax, whereas an individual receiving a gift from another individual may not have to.

Every country has different rules and systems. And to add to the difficulty, the rules are not always enforced in a consistent way . For example, in some countries you could import a package and pay no tax at all, and then the next week import exactly the same order, and suddenly have to pay a lot of tax.

This may be because the customs office only performs random checks or hasn’t got the resources to inspect everything closely.

Import Tax Vocabulary

Here are the key words you will come across:

•  Duty: Tax charged on imported merchandise (and sometimes services). It means the same thing as “import tax”, although when people talk about import taxes they may also be including sales tax.

•  Excise: An excise just means a tax on certain goods. Typically it refers to a special tax on a category or type of goods that is levied inside a country.

•  Specific Tax / Specific Duty: This means you pay a fixed amount of tax for a fixed item or group of items of imported goods, regardless of the value of the goods.

•  Ad valorem Tax: This means the tax you pay is calculated as a percentage of the total value of the goods. This is the usual way most import taxes are calculated.

•  Tariff: The word ‘tariff’ just means a charge. The word can be used to mean the same thing as ‘duty’ and also can be used to refer to a list of charges and how they are calculated, e.g. “The UK Tariff” is a large document explaining how to estimate import taxes for particular items coming into the UK.

•  Sales Tax / VAT (Value Added Tax): This is tax that you pay whenever purchasing a wide range of goods and services inside your own country. It is calculated as a percentage of the price of the goods or service. However, when importing you may have to pay this tax on the goods as if you were buying it domestically. If you are a business, you get this money back by charging the tax to your customers.

Customs Broker: A person or firm licensed by an importer’s government and engaged in entering and clearing goods through customs. The responsibilities of a broker include preparing the entry form and filing it; advising the importer on duties to be paid; advancing duties and other costs; and arranging for delivery to the importer.
Before you start importing – and I mean, before you even buy samples – you should do some basic research about import rules in your own country.The responsibility is on you to find out this information, not on your Chinese supplier: even if they want to help you it’s unlikely that they can give you authoritative facts about such a complex topic, especially when such rules in China are usually different anyway. However, if you have good communications with your supplier, it may be worth asking if they have ever had customers buying the same goods from them to import to the same country as you. It’s possible they can give you some anecdotal information that will help your planning. But anecdotal information is not hard fact so start by finding out the official importing and tax information directly from your government agency source:

Country

Official Customs Websites

Australia Australian Customs Service
http://www.customs.gov.au/
Brazil Secretaria da Receita Federal
http://www.receita.fazenda.gov.br
Canada Canada Border Services Agency (CBSA)
http://www.cbsa-asfc.gc.ca/
France Site internet de la Douane
http://www.douane.gouv.fr/

Country

Official Customs Websites

Germany Zoll online
http://www.zoll-d.de/
India Central Board of Excise and Customshttp://www.cbec.gov.in/
Italy Agenzia delle Dogane
http://www.agenziadogane.it
+ Sito istituzionale della Guardia di Finanza
http://www.gdf.it/
New Zealand New Zealand Customs Service
http://www.customs.govt.nz/
Spain A.E.A.T.
http://www.aeat.es/
UK HM Revenue and Customshttp://www.hmrc.gov.uk/
USA US Customs and Border Protection – Importing Information :
http://www.cbp.gov/xp/cgov/trade/basic_trade/
European Union (all) Some general legal / taxation rules are noted in this website:
http://ec.europa.eu/publications
/booklets/move/17/index_en.htm

Sources of import tax information:

  • Start with your country’s official customs information website. Phone them with specific questions only after you already know the basics.
  • Read websites and internet discussion boards which are focused on importing and your particular products. Don’t take other people’s experiences with tax as solid facts, but use the ideas to prepare yourself for the type of issues that may come up, and to think up the right questions you need to ask your supplier and Customs office.
  • If you are planning to import large quantities or high value products, you should definitely be considering paying for the services of a customs broker, even if it’s just for advice.

How You Can Pay Less Tax

No one likes paying taxes, and if there is some way to reduce import taxes, you want to know about it, right?

First, there is a difference between “avoiding taxes” and “evading taxes.” Tax evasion by definition is a crime and I don’t think I’ll cover advice for that in this course!!

However there may be many ways you can find – legitimately – to reduce or eliminate the taxes you pay on imported goods and improve the profit margins for your import business.

The majority of countries have some kind of threshold for goods value under which you won’t pay any tax. If you are a small scale importer, e.g. for eBay items, this will be very important to discover. In most countries there are also certain types of goods which don’t get taxed – they are exempt . You may be able to find two different allowable categories in which to declare a certain product – one description would incur a tax, and the other might not.

Of course, tax classifications are designed so as not to allow for this sort of thing, but there are an infinite number of different goods being imported so there are always huge grey areas. But I can’t get into details here of all the tricks and loopholes which exist in every country.

It will pay YOU to spend time researching YOUR country’s systems so you know how to get through the tax minefield. Even if you don’t find out any special tricks to reduce your taxes, you will at least know enough about how to avoid making mistakes and breaking the rules, which could land you with fines and unnecessary delays.

What is the value of these imported goods?

If you import goods worth $5,000 you are typically going to pay more tax than if this shipment was worth $2,500. Naturally.

But maybe you are already thinking you could import that $5,000 order and simply declare it to be worth $2,500, and pay less tax. Clearly there is an advantage to declaring a lower value, and you may ask ” Who decides the value anyway? — Can’t I decide on my own how much these goods are worth?” Well, the declared value of imported goods is always supposed to match the “transaction value”. What does this mean?

THE VALUE MIGHT BE JUST A MATTER OF OPINION

According to what I have read about practices here in the US (Note: this is not formal advice!), a shipment of goods can be declared at the “wholesale price”. This could be a lot lower than the actual price paid by the recipient for the goods. “Wholesale price” is defined as “the reasonable cost of the manufacturer to produce it” which could be a lot lower than what was paid and mean a lot less tax!

Note: The US concept of declared goods values won’t necessarily apply in any other country.

Note: The rules for arriving at the customs value in most countries are based on the “WTO Valuation Agreement” (previously known as the “GATT Agreement”). According to the WTO, the declared value of the goods must be, pure and simple, exactly the same as the amount of money paid by the buyer for the goods.

The Power Of Understatement

A common tactic to reduce import taxes is under-declaring the value of goods on the shipping waybill and invoice.

In other words, you paid the seller $100 for the items, but you tell Customs it’s only worth $30, so you pay less tax or avoid it completely. As you’ve read above, you’re not supposed to do this. We are not advising you to do this. Having said that, it is still a common practice, and it can be difficult for customs offices to deal with.

Note: It may be wise to ask the supplier to remove any price tags attached to your product. Case in point: a customer purchased some “True Religion” jeans, or rather exact copies for about $20 each. However, they shipped with tags that had a “retail” amount listed stating $150-200 USD per pair, just like you would find at a retail store. That customer ended up paying tax on the “retail” amount, not the amount they actually paid! A huge difference.

If the invoice that accompanies goods says a certain amount was paid for them, in many cases the customs office will have no choice but to accept that as the true value for taxation purposes.

On the other hand, for many common consumer goods, the Customs officers are extremely experienced in assessing their true market value and will quite easily override your declaration with their own non-negotiable idea of the goods value and tax amount.

Declared Value: Packet Value Affects Tax

Declared Contents: Packet Contents Affect Tax

Even if your goods are accompanied by the correct invoice, the Customs office will — in law — usually have the last word.

They decide on the value for tax purposes, not you.

And if you are still willing to risk it, consider that with a courier, the amount the goods are insured for is equal to… yes, you got it, the declared value of the goods. So if your $500 item goes missing, and you only declared it for $50, you will only get $50 from your insurance as compensation!

Another common thing to do for small orders such as eBay purchases is asking the sender to send the goods as from a private individual (not a company) and declare the goods as a “gift”. Again, this is not recommended if you are in fact buying the goods commercially, as it is a misrepresentation in the eyes of most countries’ Customs. Whatever approach you end up taking to import taxes and goods declaration, heed this warning:
Even if the shipping/ customs documentation is filled out by your supplier or by a shipping company or forwarder, YOU are the one who will be viewed as responsible for the goods, as the importer. If you are dropshipping, your customer will be the responsible one. Therefore if the Customs office considers – in their own opinion regardless of your opinions – that the goods declaration is false or misleading, they will tax you according toTHEIR idea of the contents and they could end up hitting you with:

  • Additional penalties
  • Confiscation of the goods
  • Criminal prosecution

Remember, if you are thinking of taking chances, that Customs officers are not famous for being flexible or having a sense of humor.

So if you are not 100% sure about what you are doing with an import order, just pick up the phone to your Customs bureau in your country and get some specific, case-by-case advice from the only people qualified to give it!

Tax Liability

  • The importer is solely responsible for all import taxes, sales taxes, and any other customs-related charges.
  • Suppliers will not quote/predict import taxes and charges in most any circumstances.
  • If you, the importer, refuse to pay taxes or otherwise refuse to comply with requirements of the importing or customs clearance process, the goods will usually not be delivered successfully. In such cases the goods could be seized by customs, destroyed, or returned back to China.

Tax And Air Mail Packets

  • Typically, taxes are more often / more strictly applied to courier shipments (UPS, FedEx, DHL) than postal shipments (Air Mail, USPS, EMS). In many countries, for single items, postal shipping is a simple way to reduce or eliminate import taxes.
  • However, shipping by air mail is not necessarily a guarantee of avoiding such taxes.

How To Pay Import Taxes

  • If you have to pay any tax on the goods you receive, the most common way is that the taxes are first paid at customs by the courier (e.g. DHL, FedEx, UPS) and then you simply pay back the courier using cash or your credit card, when they deliver the goods to your door.
  • On larger orders (meaning, for most countries, anything more than one or two cartons) you should consider hiring a professional licensed Customs Broker to assist you with the clearance of your goods when they arrive in your destination country. This is because tax and contents assessment are applied more strictly to larger shipments.

Why You Need To Do Your Own Research

  • Import and tax rules are (a) different in every country; (b) changing often; (c) highly dependent on the shipment size and contents; and (d) not consistently applied by your country’s different ports and customs houses. Therefore your shipper probably cannot offer you specific advice about how much tax you will have to pay, or any guarantees related to this issue.
  • Sometimes the importing rules according to your country’s government and customs are not enforced as strictly or consistently as they say. A good way to find out the realities of importing into your country is to begin with a series of smaller orders from your prospective supplier and make careful notes of what (if any) steps you had to go through or charges you had to pay. You may be pleasantly surprised how easy importing is for you.

Who Provides Import Paperwork?

  • In general all the paperwork required for clearing your goods through customs is provided by your shipper. Usually the shipping invoice and courier waybill included with all shipments from your shipper is sufficient.
  • Sometimes additional paperwork such as product licences are required by customs. Usually your shipper will track all of your shipments until they reach you, so if there is such a requirement, they will respond to it on your behalf, usually without the need for you to take any action, however, ensure this is the case with your specific shipper beforehand.
  • You may need to show a copy of the shipping invoice to receive your products in some cases. Ask your shipper for this.
  • It is your responsibility to confirm the details of the shipping paperwork with your shipper before the goods are sent out. We will follow your instructions for customizing the shipping documentation according to your requirements, and you, as the importer, bear full responsibility for any exception arising from this paperwork.

Import Taxes And Dropshipping – Warning!

Dropshipping means you “sell” goods to an end customer, and your supplier sends the goods directly to your customer without you handling the goods. This means that the end customer is the consignee of the package being sent from China, and this means your customer is also considered to be the “importer” of the goods. Thus, your customer bears full responsibility for importing the goods and paying any applicable taxes, duties, and other charges. Make sure you research the situation and inform your customers clearly in advance!

Responsibilities:

  • In this system, you as the Dropship Vendor are solely responsible for informing your Dropship Customer about the China origin of the goods, the shipping method, the import declaration used, the import process, any taxes or charges that are likely to be charged or could be charged, and the mechanism for receiving goods and paying applicable charges. You are solely responsible for establishing and communicating whatever delivery terms, warranty, guarantees, or other contracts that you wish to establish with your customers.
  • When dropshipping via eBay selling, Amazon selling, or any similar third party sales platform, you must additionally abide by their terms and conditions for clarifying the delivery/import process for your customers and clearly communicating/advertising your terms before the sale.
  • In an exception case where a Dropship Customer refuses to receive goods, refuses to pay taxes, or otherwise fails to comply with the import process, you as the Dropship Vendor bear full responsibility for resolving the issue directly with your Dropship Customer. In dropship cases the supplier as the Dropship Wholesaler will be deemed to have fulfilled all responsibility for delivering the order, and the shipper will usually not accept any liability in such cases. In practical terms this means that in such a failed delivery case, you would have to decide whether or not to compensate your customer, but your supplier would not offer you any form of refund.
  • If you consistently fail to inform your customers properly about their import responsibilities, leading to delivery exceptions, we reserve the right to close your account and cancel any outstanding orders.

Start Small, Learn From Your Experiences, And Build Up Your Expertise

Shipping and Taxes are complex issues and may be the crux of whether you succeed in your import business or… fail to succeed.

As you gain experience importing from China and elsewhere you will get valuable knowledge in all sorts of technical areas that will gradually mean you are rising to expert status. And you may not wish to share too many secrets!

  • The only things that are certain in life are death and taxes . Oh, and in your importing life you can add “lost shipments” to that too! Remember your insurance!
  • Shipping, insurance, and import taxes can totally wipe out the profits you thought you were going to make! Do as much research as you can, as early as you can!
  • Don’t blame your supplier for your import taxes. Just make sure your delivery, labeling, packing, and declaration instructions to them are defined clearly . Don’t rely on anyone’s advice about import taxes unless it comes from a professional customs broker.
  • Buyers off eBay do not expect to have to pay more once they receive their item after they’ve already paid for it. Gain some practical experience from importing goods from China before you jump into dropshipping.

One of the best sources of information about import taxes is your own experience! Every time you import and do/do not get taxed, keep clear centralized records of what taxes had to be paid in relation to the type / value of the goods. Use these figures as a system of estimating future taxes on import shipments.

Provided to Power Sellers Center by Chinavasion