As the seller, your business is always responsible for all costs and risks involved in delivering goods to the destination country, and sometimes selling to certain countries isn’t worth the costs and risks. And when working with a third-party logistics provider (3PL), it is equally important that your business has clearly communicated any of the decisions you’ve made about exporting your products to other countries.
While it is important to consult with import/export professionals before making business decisions, here are some crucial considerations to start to think about if you’re a small ecommerce brand venturing into the realm of international sales:
Brokerage, Taxes and Duties: Typical Customs Charges
Before diving into some considerations for your business, it’s important to understand what the typical charges are that someone would see when importing products, beyond the standard freight/shipping costs.
- Brokerage fees are charges levied by a customs broker or freight forwarder for facilitating the clearance of goods through customs. Customs brokers handle the necessary paperwork, documentation, and compliance procedures on behalf of the importer, ensuring smooth entry of the goods into the destination country.
- Taxes, often referred to as value-added tax (VAT) or goods and services tax (GST), are government-imposed levies on the sale of goods and services within a country. Taxes contribute to the government revenue and cover a broad range of public services and infrastructure.
- Duties, also known as customs duties or tariffs, are taxes imposed by the destination country on imported goods. Duties are designed to protect domestic industries, regulate trade, and generate revenue for the government.
DDP vs. DDU: The Duty Dilemma
Who pays for typical customs charges? This is where the two terms Delivered Duty Paid (DDP) and Delivered Duty Unpaid (DDU), the latter also known as Delivered at Place (DAP), come into play to define how customs charges are paid by the seller or the buyer. Understanding the terms DDP and DDU, is paramount for successful international sales.
- DDP involves your business collecting brokerage fees, taxes and duties upfront from the customer, either as a separate charge or inclusive in product prices.
- On the other hand, DDU (or DAP) requires customers to pay these fees directly to the postal carrier immediately before delivery, upon delivery or soon after via an invoice.
To consider using DDP, you as the seller must have a strong understanding of the customs procedures and costs in the destination country, including the country's import and tax laws, making this a less convenient option for sellers. For the buyer however, DDP is often more convenient as it provides a clear, upfront cost with no additional charges upon delivery. Your business is responsible for making sure the fees, taxes and duties are paid to the appropriate authorities, either directly or through an intermediary customs brokerage. It’s also worth noting that while most developed countries embrace DDP, sellers should be aware of exceptions, such as Russia.
When using DDU, the customer may face unexpected costs upon delivery, such as customs duties, import taxes, and handling fees charged by the local carrier, so it’s very important to communicate this with your customer before the initial purchase is made. DDU can sometimes lead to delays if the recipient is unprepared to pay these fees or if there's a lack of clarity about the process. DDU might be preferable for sellers who do not wish to deal with the complexities and uncertainties of international taxes and duties, or in situations where it is the only option.
With both DDP and DDU, the destination country may refuse import for many reasons specific to that situation, but typically it is because the seller did not provide all required information to their 3PL or postal carrier, such as Country of Origin, HS Codes, Declared Values and Tax IDs/VAT Numbers, the item being imported is considered restricted or dangerous, or the buyer refused to pay any outstanding import fees upon delivery. In these cases the package will either be deemed “lost” and destroyed or sent “return to sender” with return shipping and import fees collected from the seller upon its return.
Strategic decision-making on where to sell products based on these two terms is crucial for avoiding customs-related pitfalls.
Country of Origin: Where Your Product is Manufactured
Determining a product's country of origin is vital for importers, impacting duty payments during the import process, so as a seller you must have this figured out beforehand. Rules of origin, governed by national laws and international treaties, vary and misdeclaration can lead to customs penalties.
Many people assume that “Country of Origin” refers to the place a package was shipped from, but this is not the case, rather it refers to the place each item was manufactured. Manufacturers can often globally source materials, making origin determination complex for new products, typically requiring trade compliance experts. Preferential and non-preferential rules apply to different items, with preferential rules linked to specific trade agreements, offering some benefits like lower or zero-duty rates.
Sellers like yourself must provide proof of origin, and the burden of proof lies with them.
HS Codes: The Universal Language of Customs
Harmonized System (HS) codes play a pivotal role in international trade. Developed by the World Customs Organization (WCO), these standardized 6-digit codes categorize and identify products being imported/exported. Customs officers, in conjunction with country of origin, manufacturing details, and declared value, rely on HS codes to determine how to handle each package.
Ensuring accurate HS codes are declared is imperative to prevent delays or issues at customs.
Declared Values: Honesty is the Best Policy
Customs authorities focus on the reported value of individual items to determine duties. This means that the value of each item reported on a paid invoice for a customer is what is being considered, not the value of the item to your business. Ensure all discounts are accounted for in each line item value rather than deducted from the sum total paid, otherwise discounts are not considered.
Small ecommerce brands must ensure that the declared values on invoices are accurate, including any applicable discounts as failure to do so in shipping documentation can lead to customs-related challenges and potential penalties.
TAX IDs, VAT Numbers and IOSS: Tax Identification Matters
For Business-to-Consumer (B2C) transactions, only the sender (you the business) needs to provide a business Tax ID or a VAT Number (Value-Added Tax) on a customs declaration to the postal carrier before the shipment is processed by the postal carrier. For Business-to-business (B2B) shipments, both the sender and the receiver must provide this tax information before the shipment leaves. Without these numbers, the package may not be accepted by the postal carrier or into the destination country.
Each country, and many states/provinces, track the total value of all business imports and business exports associated with each business. Consult with a tax expert to determine if and when you need to be concerned with any limits the destination may have before your business is required to collect, pay and report taxes for imports to that destination.
Collecting, paying and reporting taxes is no joke, so double check that your business has all of the correct information before proceeding with international sales.
Prohibited and Restricted Items: Understand and Comply
Check for any restrictions on shipping certain items to the destination country, to ensure that you are not sending prohibited items, as the entire package will be refused for import. Common items that are refused may include alcohol, biological substances, weapons, food, medication, seeds, textiles, trademarks or one of many other restricted or dangerous items. Definitely do not mislabel your invoice or products to try to import restricted items into countries where they are not allowed as this could have significant legal and other consequences on both you and the recipient.
Most 3PLs recommend that small ecommerce brands consult with import/export experts before selling internationally, and understanding rules around prohibited and restricted items is just one of those many reasons to do so.
Exporting Considerations: USA and European Markets
Two of the most common destinations for Canadian ecommerce packages are the USA and European countries, so it’s important to understand some of the major differences between the two.
Exporting from Canadian businesses to recipients in the USA comes with the advantage of duty-free status for many packages valued under $800 USD, assuming the recipient (person or business) hasn’t already received other out-of-country packages that same day. However, this requires exporters to register appropriate forms with the appropriate authorities for customs inspections. Your business can do this with the help of a customs broker working directly with the proper authorities in the USA or your business can ship “duty free” through a 3rd party who takes on this liability for your business at a cost. Major postal carriers typically do not offer this as a service because they do not want to take on the liability of your business (DDU only), but there are several freight-forwarders who will (DDP optional), so ask your 3PL what processes they have in place and how you can take advantage of them. For higher-valued packages (over $800 USD), collaboration with a customs broker is always advisable to avoid delays and unexpected fees.
Exporting to European countries introduces the need for VAT or IOSS (Import One-Stop-Shop) numbers for packages valued over €25 EUR. Meaning, taxes must be collected on all packages where the total value of all items exceeds €25 EUR. While some postal carriers work with third-party VAT number holders to provide businesses like yours with DDP options, meticulous setup for DDP with the postal carrier is necessary before shipping with them and they will limit imports to €150 EUR per package. For higher-valued packages (above €150 EUR) going into European countries, it is crucial to speak with a customs broker prior to selling to customers.
While understanding the intricacies of each market is essential for B2C transactions, it especially so for B2B transactions as they can carry additional requirements and penalties. Please consult with a customs broker who has experience in overseas B2B shipments, a tax expert who has experience in overseas B2B transactions and speak with a local representative of the business from the country you intend to export to before proceeding with any sales there.
Warehousing Abroad: Surprise Tax Implications
One of the more surprising things for ecommerce businesses selling internationally, is that storing inventory in warehouses in other countries may trigger corporate taxes and regulatory processes in those locations. Small ecommerce brands must be aware of the tax implications of having physical inventory in foreign warehouses. Additionally, partnering with marketplaces like Amazon and eBay adds another layer of complexity, as these platforms handle tax collection on behalf of sellers.
In conclusion, navigating international sales requires meticulous planning and adherence to local regulations. Small ecommerce brands must stay informed about DDP and DDU terms, Country of Origin, HS codes, Declared Values, Tax Identifiers, Product restrictions, exporting nuances per destination, the tax implications of warehousing abroad and even more that only an import/export expert can truly advise on. By doing so, they can mitigate risks and capitalize on the vast opportunities offered by the global marketplace.
For more information on the topic of international shipments leaving Canada, before consulting with a paid services customs broker, consider referring to information freely available from your preferred postal carriers:
Fedex Canada: https://www.fedex.com/en-ca/shipping-services/international/export.html
UPS Canada: https://www.ups.com/ca/en/shipping/international-shipping.page
Canada Post: https://www.canadapost-postescanada.ca/cpc/en/business/shipping/international.page
