Tariffs are taxes charged by a country's customs on goods that cross its borders, either coming in or going out, based on national laws. Tariffs usually belong to the top tax categories, often set by a country's top administrative bodies. In nations with a strong trade industry, tariffs can be a major source of tax income for some, they even make up a large portion of government revenue. While tariffs apply to imports and exports, import tariffs are generally the most impactful and serve as a key tool for managing trade.
How Tariffs Are Applied
The base value for calculating tariffs is called the customs valuation or dutiable value. For imports, customs authorities use the cost, insurance, and freight (CIF) price-the value when it reaches the port-as the customs valuation. For exports, it's based on the Free on Board (FOB) price, adjusted by taking off any export taxes. Here's how customs valuations work:
For imports: Customs valuation = price confirmed by customs → CIF price.
For exports: Dutiable value = [(export goods sale price + FOB price) − export tax] → price confirmed by customs.
To calculate the amount owed in tariffs, you can use this formula:
Tariff amount = Customs valuation × applicable tariff rate.
Main Traits of Tariffs
For Cross-Border Goods: Tariffs apply to goods crossing a country's borders and are collected by customs from the importing or exporting party.
Mandatory: Tariffs are compulsory and must be paid as a part of the import or export process.
Non-reciprocal: Tariffs don't offer the taxpayer a specific return or benefit.
Pre-established Rates: Tariff rates and classifications are set by law in advance.
Purposes of Tariffs
Protecting National Interests: Tariffs can help guard a country's economic independence and interests.
Supporting Domestic Industry: Tariffs can protect and grow local agricultural and industrial sectors by reducing competition from imported goods.
Managing the Economy and Trade: Tariffs serve as a way to control economic factors and influence trade relations.
Generating Government Revenue: For many nations, tariffs provide essential public funds.
Understanding Tariff Schedules
A tariff schedule, also called a customs code, is an organized list that classifies taxable and tax-exempt goods by type, and it specifies the applicable tariff rate for each. This schedule serves as the customs reference for collecting taxes and reflects a country's tariff policy in action.
Customs tariff schedules generally consist of two parts:
Rules and Guidelines: These lay out the regulations, instructions, and explanations for customs duties.
Tariff Classification Table: This includes tariff codes, product descriptions, and the corresponding tax rates.
Overall, these schedules are essential for customs policy, ensuring consistent and transparent taxation on imported items.
