Summary:
- Customs clearance is the process of successfully moving cargo through customs for it to enter the country.
- Ensuring you have correctly completed all the relevant import-export documentation, such as Purchase Orders and Bills of Lading, reduces delays in customs clearance.
- The duties and taxes assigned to each shipment depend on factors such as the product type and its monetary value.
- Incorrect or missing documentation is the biggest cause of customs clearance delays.
The importing and exporting of cargo is big business, and the United States is the second-largest goods exporter in the world. Countries impose duties and taxes on goods coming into the country, with some countries also charging export duties. For nations like the United States, revenue made from import duties is significant; in 2020 alone, the U.S. made $71 billion from this source. These duties are administered and collected by the customs department.
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Whether you run a small business that plans to start shipping your goods internationally or you are moving back to the U.S. after a stint living overseas and need to ship the contents of your home, understanding customs clearance procedures and how they work will benefit you and your shipping ventures. This comprehensive guide can bring you up to speed.
What Is Customs Clearance?
Customs clearance is the process of successfully moving cargo through customs for them to enter the country. The term customs clearance also refers to a document issued to a shipper that proves all standards have been met and all the correct duties have been paid, meaning the cargo is free to cross the border.
Understanding the process of customs clearance can be extremely helpful for businesses wishing to ship their goods internationally; the more you know ahead of time, the less likely you are to make costly mistakes.
Customs clearance can be broken down into four relatively simple steps:
1. A Customs Officer Inspects Your Paperwork
Having your customs paperwork in order is imperative for successfully shipping goods, whether you’re shipping lithium batteries, cosmetics or automobile parts. Depending on what you’re exporting, where to and even what transport you will use, the documents you need may differ.
It is also vital that you stay informed about changes to import-export policies in the countries you work with, as any changes to legislation could impact you and your business. It is always easier to solve issues of missing or incorrect paperwork before cargo has been shipped.
The following is a list of some of the most common documents import-export businesses need to comply with customs regulations. Remember, this list is not exhaustive; you must research your own specific requirements.
- Bill of Lading (BOL): Possibly the single most important document in international shipping, the BOL is a contract between the freight carrier and the owner of the cargo or the shipper. When the carrier receives the shipment, an authorized party signs the BOL to verify what goods have been received. Without a signature from the correct party, they will not release the shipment.BOLs contain vital information such as a description of the goods, instructions for handling them and the shipping destinations. BOLs are needed for shipments on all means of transportation. In the case of airline carriers, it is known as an Airway Bill (AWB).
- Purchase Order (PO): A PO is the buyer’s order request to the seller, acting as official proof that an order has been made and received. It contains essential information, such as the details of the parties involved in the transaction, the date of the transaction and the type and quantity of the goods.
- Commercial Invoice: A commercial invoice provides the complete details of a transaction between the buyer and seller along with the shipping terms. Although similar to a PO, commercial invoices are the principal document used for valuing and controlling imports and determining what duty is to be paid.
- Letter of Credit: Monetary transactions between banks in different countries can become incredibly complex, so a Letter of Credit guarantees payment.
- Export Packing List: An Export Packing List is a detailed description of goods to be shipped. It is often used to put together a BOL, settle disputes between shipper and freight carrier and even be given to banks as part of a letter of credit. The list includes details such as the cargo’s dimensions, weight, packaging type and necessary safety measures.
- Certificate of Origin (CO): A CO confirms the manufactured goods’ country of origin, attesting that the goods meet certain specifications to be considered as originating from the given country. Many international trade treaty agreements require a CO for goods to be eligible for export.A shipper is responsible for being aware of the destination country’s regulations and providing an appropriate CO. However; they are often certified by an authoritative party, such as the Chamber of Commerce.
- Dock/Warehouse Receipt: A Dock/Warehouse Receipt is a document that verifies that goods have been received by the international carrier and in what condition they have arrived. It includes information such as the dimensions, weight and characteristics of the cargo.
- Export License: Export Licenses are issued by government bodies and allow restricted items to be legally shipped internationally. Examples of items that may need an Export License include medicines, plants, works of art, chemicals and paramilitary goods.
- Insurance Certificate: An Insurance Certificate is proof of the type and amount of insurance coverage is assigned to a shipment. This protects the exporter from monetary losses should the cargo arrive damaged or get lost.
2. Import Duties and Taxes Are Calculated
Before your goods can be cleared through customs to continue to their final destination, you will have to pay your import duties and taxes. There is no one-size-fits-all cost; instead, the amount you owe will be calculated taking various factors into account, such as:
- The economic value of the goods, including the freight costs and insurance fees. Products under a certain amount, the de minimis, are not charged duties. However, certain restricted items may incur a fee regardless of their monetary value.
- The type of goods: customs authorities use an HS code (Harmonized Commodity Description and Coding System) to classify your cargo. This is a six- to ten-digit number required for international shipping and is displayed on documents such as your commercial invoice.
- International trade agreements between the sending and receiving countries.
Customs officials use your shipping documents, most significantly your commercial invoice, to calculate your taxes and duties. Ensure to supply all the necessary information, as not doing so can mean you pay more for your taxes and duties than necessary.
3. Payment of Your Duties and Taxes
There are two main ways for import taxes and duties to be paid: Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP). DDP means that all necessary fees have been paid before the goods arrive at customs. This is the most common method for most courier services; they include the import fees in the shipping price paid by the customer before the goods are delivered. This method is much more reliable and generally ensures the customs clearance process is completed without issue.
Learn More About Calculating Shipping CostAs the name suggests, the DDU method means the taxes and duties have not been paid before delivery. In DDU arrangements, the exporter is responsible for the safe delivery of the goods. They pay the transport costs and assume responsibility for any damage caused in transit. The buyer then becomes responsible upon the arrival of the goods, covering the import duties and taxes.
The DDU method can work out to be more expensive because the independent customs brokers used to collect the import payments can charge their own fee for the service.
4. Your Shipment Clears Customs
Once all the required duties and taxes are paid and the customs authorities confirm that you have all the necessary documentation for your shipment, it can clear customs and your chosen courier can continue transporting it to your end destination.
How Long Does Customs Clearance Take?
In most cases, customs clearance is swift, typically taking under 24 hours. However, if there are issues such as missing or faulty paperwork, the process could take several days or even weeks. The best way to avoid these delays is to make sure all your paperwork is present and correct ahead of time.
What Causes Customs Clearance Delays?
In some instances, customs clearance can be delayed. Some common reasons for these delays include:
- Incomplete shipment documents; for example, the commercial invoice is missing the value or quantities of the goods.
- Incorrect product code.
- The description of the products is too vague or is written in the wrong language.
- Incorrect value or quantity. This is sometimes undervalued to avoid paying higher duties or taxes but only results in a delay.
- Seasonal holidays such as Chinese New Year or Christmas can cause shipping delays leading to a pile-up at customs and subsequently delaying clearance.
- Adverse weather conditions such as hurricanes cause delays.
- Political unrest, such as strikes or port closures, can delay shipping and customs clearance. It is recommended that you stay informed about current affairs in the countries you ship to so you can let customs know of any situations that could cause delays.
- Shipping and customs clearance can be delayed by poorly packaged goods, particularly if the items could be dangerous. Consider purchasing custom shipping boxes to ship your goods. Not only will this prevent items from getting damaged, but having uniform boxes with your company’s name on the side can reduce the chance of one getting separated from the others. It’s a good idea to choose packaging that is made specifically for your items, such as quality lithium ion battery packaging for transporting batteries or shipping barrels for dry goods and clothing.
What’s the Difference Between Duties and Taxes?
Paying the correct duties and taxes is a vital part of the customs clearance process, but the terms are often confused. The term “duties” refers to a type of tax placed on international goods (those that cross borders) as government revenue. Their main purpose is to protect domestic industries. The exporter usually pays these duties.
When the term “taxes” is used in reference to the importing and exporting of goods, it describes the taxes that are also added to domestically purchased items such as value-added tax (VAT), sales tax and goods and services tax (GST). Despite the fact that the products have been manufactured and purchased overseas, these taxes still apply. The percentage of the tax varies from country to country, but the importer typically incurs these fees.
These duties and taxes usually must be paid before the goods are released from customs in the destination country, and courier services usually include this in the initial shipping fee.
However, in some circumstances, your freight carrier may be able to pay the fee on your behalf, therefore ensuring that your goods get cleared and released as fast as possible. The carrier will then invoice you for the charges. If you would like your carrier to assume this responsibility, make sure you check with them beforehand that they offer this service to avoid further delays.
What Payment Methods Does the U.S. Customs and Border Protection Accept?
Knowing that you will have to pay duties and taxes on your imports into the United States, you may be wondering how these payments should be made. The United States Customs and Border Protection accepts Department of Treasury authorized payment methods, including credit cards, debit cards, PayPal and ACH credit.
However, not all methods are necessarily accepted for the fees you may need to pay. To find out more, consult the U.S. Customs and Border Protection’s website.
Be Prepared to Ensure Swift Custom Clearance
Once your shipment arrives at its destination border, the process of customs clearance is relatively straightforward if you have the right documentation and it has been filled out correctly. The challenge, therefore, is to ensure all your shipping documents, from your Bill of Lading to your Certificate of Origin, are present and correct before shipping.
As with anything, being informed and prepared ahead of time can help you to avoid issues during customs clearance. This includes staying up-to-date on changes to shipping requirements in the relevant countries.
However, it is worth noting that, no matter how well you prepare your documents, there are some circumstances beyond your control, such as adverse weather conditions, a barge stuck across a canal, or political unrest. By keeping yourself informed of international affairs such as these, you will be able to warn your customs ahead of time that, due to unforeseen circumstances, they should expect delays to their shipment. This will allow them to do their own damage control and help ensure your business relationship remains untarnished by shipment delays.
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