Import duty calculation: the formula customs uses and where it goes wrong

Key points

Import duty is not charged on the invoice price but on the customs value, and those are two different figures.
Three figures decide the bill between them: the customs value, the commodity code and the origin.
Import VAT is charged on the customs value plus the duty, so you pay VAT on a levy.
Freight up to the point of entry into the EU belongs in the customs value, even when it is invoiced separately.
A recovery can look back three years, so a structural error in the sum becomes three years of shipments.

A buyer calls to ask why the broker’s invoice is higher than the figure he worked out himself. He had taken 24,000 euro times 4.5 percent and arrived at 1,080 euro. The declaration says 1,170. Ninety euro looks like nothing, until you notice the same error sits under every shipment of the past year.

The arithmetic is not the hard part. Knowing which figure to put into it is. Almost everyone working out import duty for the first time uses the invoice price, and that is precisely the figure customs does not use.

Below is the formula as it is actually applied, with an example you can check yourself.

What is import duty actually charged on?

On the customs value. As a main rule that is the transaction value: the price actually paid or payable for the goods, topped up with a set of costs that have to be added in.

To the transaction price you add:

transport costs up to the place where the goods enter the EU
insurance costs over that same leg
loading and handling charges connected to that transport
royalties and licence fees you must pay as a condition of the sale

And you deduct what demonstrably falls after entry: transport inside the EU, assembly and maintenance after import, and the import duty itself. That deduction only applies where the amount is shown separately on the invoice. If it is not shown separately, it counts in full.

That is why the customs value is nearly always higher than the invoice, and rarely exactly equal to it.

Which three figures decide the amount?

The customs value is one of them. The other two are the commodity code and the origin, and they each do something different.

The commodity code sets the percentage. Those codes run from zero percent for a lot of electronics and machine parts to well above seventeen percent for some textile and footwear headings. Two digits of difference in the code can mean ten percentage points of difference in the rate.

The origin decides whether that percentage is actually charged. If the shipment comes from a country the EU has a trade agreement with, and valid proof of origin travels with it, the same rate can drop to zero. Without that paperwork you pay in full, even where the goods were demonstrably made there.

A worked example from start to finish

Five hundred aluminium wheel hubs from Turkey. Invoice 24,000 euro ex works. Sea freight to Rotterdam 1,800 euro, insurance 200 euro, road haulage from the terminal to Tilburg 450 euro, invoiced separately.

The customs value is 24,000 plus 1,800 plus 200, so 26,000 euro. The 450 euro of road haulage comes off, because it sits inside the EU and it is shown separately.

At a rate of 4.5 percent the duty is 1,170 euro. Not 1,080, because the 1,080 was worked out on the invoice price.

Across 200 shipments a year on the same pattern that is 18,000 euro of difference. Not because the rate is different, but because the base is.

What about the import VAT?

Import VAT is not charged on the customs value alone. It is charged on the customs value plus the duty, plus any other levies, plus the transport costs up to the first place of destination in the country of import.

In the example above: 26,000 plus 1,170 plus 450 is 27,620 euro. At the Dutch rate of 21 percent that is 5,800.20 euro of import VAT.

Most businesses can deduct that amount, but they have to pay it first. Unless it is reverse charged. With an article 23 licence you book the import VAT in your own return instead of settling it at the border. At two containers a week that is easily half a million euro of working capital a year.

Where does it go wrong in practice?

Four things keep coming back, and the first is by far the most expensive.

Freight up to the EU border is left out, because it sits on a separate carrier invoice.
Road haulage inside the EU is deducted while it is not separately specified.
The commodity code was copied off the supplier once and never tested since.
Preference is claimed on the country of dispatch rather than the country of origin.

What these errors have in common is that they do not show. The declaration goes through, the container is released and nobody notices a thing. It only surfaces on an audit afterwards, and customs then looks back up to three years.

When does the transaction value not hold?

In a number of cases you may not use the price paid as the basis. That plays out among other things on supplies between related companies where the relationship influenced the price, on free samples, on goods received on consignment, and on barter transactions.

You then fall back on the alternative methods, in a fixed order: the transaction value of identical goods, then of similar goods, then the deductive method, then the computed value, and as a last resort the fall-back method.

That order is not a menu. You may only move to the next method where the previous one is demonstrably not applicable. We see companies with intercompany supplies run into this most often, and in those cases it pays to agree the approach with customs up front rather than argue it afterwards.

Frequently asked questions

Q: Is import duty calculated on the invoice price?

Ans: No, on the customs value. That is the price paid plus the freight, insurance and loading charges up to the place of entry into the EU. Costs after entry can be taken off, but only where they are shown separately on the invoice.

Q: Do you pay VAT on the import duty?

Ans: Yes. Import VAT is calculated on the customs value plus the duty plus the transport to the first place of destination. So you pay VAT on a levy, and that is the rule rather than a mistake.

Q: How do I find the right rate?

Ans: Through the commodity code in the combined nomenclature, paired with the country of origin. The rate sits in TARIC and can differ per origin, because trade agreements and anti-dumping duties hang off that same combination.

Q: How far back can customs go when there is an error?

Ans: As a rule three years from when the customs debt arose, and longer where a criminal offence is involved. A structural error in the sum therefore gets multiplied by three years of shipments, usually with interest on top.

Q: Can I have the rate fixed in advance?

Ans: For the commodity code you can, with binding tariff information. That gives you three years of certainty on the classification and binds customs across the whole EU. A comparable instrument exists for valuation in specific situations.

Want to know whether your customs value is built up correctly, or what a shipment will really cost before it leaves? Run it through our import duty calculator, or let us test the build-up per shipment. We file the customs declarations and record the arrangements in the authorisation you sign once.