When it comes to importing, the duties payable are a central consideration in how profitable the trade is, and whether the import is even viable for your business. Imported goods are most often assigned payable import duties according to their value. This is called an ad valorem duty. The exceptions are duties applied per unit of measure, for example, a set amount payable per kilogram. This is called a specific duty.
Import VAT is always calculated based on the shipment’s value, as well as payable import duties.
Since ad valorem duties are most common, the less you pay for imported goods, the less you would likely get taxed on the import. This poses a problem. If, for example, a foreign supplier offers one local client an unusually large discount for goods that another trader purchases at full price, working with invoiced amounts means the shipments would not be taxed fairly. As the purpose of import duty is partly to protect local industry from disproportionately cheap goods, an importer that is paying an unusually low rate for their goods should not have the benefit of also paying less import duty.
Read more about the functions of import duties and how duties protect local industries in our guide to understanding import duties.
Customs authorities administer fair taxation on imports by working with industry-related shipment values. This is referred to as the shipment’s customs value. The customs value of your import shipment may be the price you pay for it or a standardised value imposed by a customs official.
Here’s how customs officials determine an import’s customs value.
All imports are taxed on a FOB value
An import’s FOB value includes the value of the goods and any costs incurred in the country of export until the goods are loaded onto the export vehicle. The export vehicle also referred to as the carrier, is the ship, truck, airplane, or train that takes the goods out of the country of export.
If the commercial invoice includes fees the importer paid for international shipping or cargo insurance, these values are not part of the FOB value and therefore should not be taxed.
More information regarding the FOB value is given in our guide to paying as little import duty as possible.
The General Agreement on Tariffs and Trade (GATT)
The GATT is a legal agreement between all major trading countries on how to conduct trade and impose its related tariffs fairly. The GATT includes a standardised system of determining customs value that SARS refers to as the Valuation Agreement.
The Valuation Agreement stipulates six methods of determining the value of an import. At the time a customs value is determined, the six methods must be applied in strict hierarchical order. In other words, if the first method cannot assign a fair customs value, the second method must be used. If this is not successful, the third method must be used, and so forth.
The methods of valuation prescribed by GATT are called articles, and are named in order:
Article 1: The transaction value of the goods
This is the most often-used method of valuation, where tax is calculated based on the price paid or payable for the import. For customs purposes, this is the FOB value of the import explained above.
Article 2: The transaction value of identical goods
Where the transactional value is found to be out of line with industry standards, customs will refer to other imports of the same goods to determine a fair price.
Article 3: The transaction value of similar goods
Every industry brings innovations and products to light. If customs do not have data on imports of the exact product, they will refer to imports of goods that have similar physical properties and functions.
Article 4: The deductive method
Here customs will derive a valuation from the selling price of the imported goods in the local market.
Article 5: The computed method
Where data regarding an import and its selling price is completely lacking, customs will calculate a value from the components and/or manufacturing that went into producing it.
Article 6: The fall-back method
The fall-back method allows any of the other Articles to be applied more flexibly. This is a last resort and is rarely used.
Once a fair shipment value has been determined, customs will apply the rate of import duty applicable to the import. The rate of import duty will be assigned according to the tariff classification (tariff code) of the goods.
To learn more about tariff classifications, refer to our guide on understanding tariff codes.
What about specific rates of import duty?
If the price paid for an import is determined to be too low, and the rate of import duty is applied by a unit of measure, customs reserves the right to apply a payable upliftment. Practically, this would be a percentage of the invoiced value determined by how much the importer must be taxed to have acquired the goods at a fair price.
