Any international traveler knows how tricky navigating customs can be. And things get even trickier when international trade, government agencies and businesses get involved.
While customs compliance is complicated, it’s far from impossible. We’ve compiled a list of the most important things to keep in mind when insuring your company’s freight meets compliance standards.
Keep reading for our team’s tips on avoiding these consequences and navigating customs with ease.
Tip 1: Ensure the right classification code.
It’s not always easy, but it’s essential: ensuring your merchandise has the correct classification code. Harmonized Tariff Schedule (or HTS) codes allow companies and trade commissions to categorize and track imports and exports. Each item going across a border needs to be classified correctly to ensure it meets the country’s compliance requirements and can be accurately taxed.
The code system is complex. For example, tomatoes imported into the United States might have different codes depending on what country they were harvested in or the time of year they’re imported. And different codes are taxed differently—so using an incorrect code can lead a shipper to drastically over- or under-pay.
A customs broker can help determine the correct HTS code for a product. The International Trade Commission website also has an online database and cross-rulings that show what codes were applied to similar products in the past.
Tip 2: Consider whether you want to ship DDP, FOB or EXW.
Importers and exporters have endless choices when it comes to dividing responsibilities and risks for international shipping. EXW (Ex Works), FOB (Free On Board) and DDP (Delivered Duty Paid) are among the most common, and explain who is responsible for each aspect of the transportation. EXW, for example, means the seller prepares the order for pickup at the factory, but isn’t responsible for anything after it leaves. DDP is the opposite—the seller (or exporter) is responsible for transporting the goods to its final destination, ensuring customs clearance and duties are paid, and covering all risks along the way.
Every situation is different, but in almost all cases, we recommend avoiding DDP.
Why? Giving the exporter all the responsibility might sound ideal (less work, right?) but it also gives the importer less control. That means less control over when the freight will arrive, how it’s taxed and what happens to it along the way. A foreign company is also less likely to be familiar with the rules on the import side and more likely to make a costly mistake. Which brings us to…
Tip 3: Double check the valuation.
The value of goods crossing the border will influence the amount of duty owed to customs. But too often, a business will under- or over-report the value because they don’t understand the transaction details or logistics of how the freight is being transported.
To illustrate, picture a large shipment of machinery coming to America from a country in Europe. If it’s shipping DDP, where the European exporter is responsible for all transportation, the importer will pay one lump sum for both the equipment and the service. But if that same machinery is shipped EXW, where the importer is responsible for the shipping costs, the value will be different.
Another aspect to consider is added service. If, as part of the transaction, that same European manufacturer agrees to send an engineer to oversee the installation of the equipment at its final destination, that may be part of the price the American buyer pays to the European seller—but it shouldn’t be considered part of the freight’s value. Additionally, items that are manufactured elsewhere before being assembled in the United States will usually have a different valuation than goods that enter the country fully assembled.
These are all oversimplified examples, of course, and as you’re probably realizing, compliance isn’t always clear-cut. But customs brokers can help you determine the correct valuation to ensure you’re paying the right amount of duty.
Tip 4: Get your documents in a row.
Not a literal row, of course—almost everything is digital these days. But make sure your documentation is detailed and thorough. A customs broker will be able to provide a comprehensive list of all the information needed for a specific order, but the following are a good place to start.
- Commercial invoice
- Packing list
- Incoterms, which outlines the terms of sale, insurance, and other logistics
- Bill of lading, which will show the carrier how the freight is being moved
- Any import permits or other documentation for government agencies such as the FDA or USDA
Tip 5: Keep a record for U.S. customs compliance.
That documentation is still important even after the freight has made it through customs. U.S. regulations dictate records need to be kept for five years after the trade has occurred. In the event of an audit, the records will verify whether a business has followed compliance requirements or has potentially under- or over-paid. Without those documents, that audit will be even more of a headache, so the more organized you are now, the safer you’ll be.
Tip 6: Choose your customs brokers wisely.
Unfortunately, not all freight forwarders or customs brokers are qualified (or ethical) enough to navigate customs without incurring penalties. Customs brokers based in the United States will have a deeper understanding of compliance regulations than exporters or foreign brokers. And just one mistake repeated over time can add up—like using an incorrect HTS code on the same shipments year after year and finding out in an audit that there’s money still owed.
More things to look for in a customs broker are below, but there’s one major red flag that’s always telling: a forwarder who tells clients they can classify freight differently to save money or skirt a compliance regulation. Sure, it could work, and even save the customer a lot of money initially—but the risks far outweigh any short-term rewards.