As e-commerce exporters put their strategies in place they should be aware of some of the fundamental rules and regulations surrounding duties and taxes. In particular, rules governing low value shipments. This is where businesses first come across the term ‘de minimis’.
So what does this mean and why should you care?
De minimis (pronounced dā ˈminiˌmēs) is a Latin term. It simply means something that is so trivial or small that the law will not consider it.
In the context of shipping goods to other countries, the importing (or destination) country might want to levy duties and taxes on those goods. These duties or taxes may be collected from either the buyer in the destination country or the company importing the products. It’s all a way for governments to raise revenues.
However, assessing and collecting duties and taxes takes up a lot of time and resources for the authorities in the importing country. So from a monetary point of view, it doesn’t make sense to spend time on low-value shipments. Also, every country gets to decide what they believe to be a ‘low-value shipment’ and what they want their countries’ de minimis value threshold to be.
So in practical terms, if you are importing a shipment with a total declared value LESS than this/these amount(s), duty and tax do not apply. In most cases, the duty de minimis threshold will be different from the tax de minimis threshold.
Of course every imported product has a customs value which is a declared value by the exporter. This is also stated on the commercial invoice (the document issued by the supplier for clearance). Depending on whether you have chosen Delivery Duties Unpaid (DDU) or Delivery Duties Paid (DDP), customs duties and taxes would have either been settled beforehand, or by your customers when the shipment arrives at the customs office or their local FEDEX/UPS/DHL depot.
Sellers should be aware that de minimis values greatly affect e-commerce strategies. This is because the values of B2C orders are usually much lower value than B2B. So if you are selling B2C, a higher percentage of your shipments will pass duty and tax-free into specific countries. Also, shipments below the de minimis value will definitely clear local destination customs faster. Plus, if you can sell below a country’s de minimis, you’ll have the opportunity to sell into that country more competitively.
Some examples in the European Union and the United States
It makes sense for businesses to clearly communicate to customers the de minimis limit , as a form or promotion. For example, if an EU shopper knows they can spend up to €150 before a duty will be applied, there is a good chance they will add more items to their shopping cart. The shopper will want to maximise the benefit of staying under the de minimis value. It can have a big positive impact on your ability to convert international shoppers into international customers.
Looking at de minimis in the United States, there were changes in 2016. The US raised the de minimis value threshold from $200 to $800. Most goods valued at US$800 or less can enter duty-free into the U.S. US$800 may not seem like ‘low value’ but in the eyes of the US authorities, this is indeed the case.
This change has provided global B2C e-commerce players with a big opportunity. A higher amount of their shipments qualify for faster customs and border clearance (these low-value shipments don’t suffer any delays due to formal entry or payment requirements).
However, most nations are not like the U.S. Most still maintain a low threshold for goods imported through their borders. The European Union and Canada have low de minimis thresholds ($20 CAD & €22 EUR respectively), which means duties for almost every item imported.
How does this rule vary from country to country?
So as we can see, the de minimis value varies greatly by country. Consider markets you ship to or want to target carefully.
Finally, remember that if you are an e-commerce company selling to customers abroad, a change in the de minimis in your target markets means that certain goods can reach your customers faster and at a lower cost.
For the European Union:
- EU duty and Value Added Tax (VAT) de minimis: both duty and VAT are exempt when up to €22
- VAT but not duty will be assessed if shipment is between €22 and €150
- Both duty and VAT are due when over €150
For the United States:
- Both duty and Goods and Services Tax (GST) are due when over $800 USD
Over the past years, there is a discernable trend for countries to limit the type of exemptions available to sellers (mostly SME’s) for low value consignments. Recent examples of countries that adjusted their ‘de minimis’ exemptions:
- From July 2018, Australia has replaced the VAT exemption for low value goods (which was AUD 1000), with a new vendor collection mechanism. Foreign vendors that supply more than AUD 75 000 of taxable goods to consumers in Australia per year are now required to register for GST and charge the tax on their sales to final consumers in Australia. Below the threshold of AUD 75 000, GST registration and collection is not required, hence relieving small foreign vendors from GST collection and payment.
- From January 2021, EU will eliminate its VAT ‘de minimis’ exemption on small consignments from that date.
These important changes that will take place in Europe are worth monitoring. We will provide further guidance later in 2020.
A useful reference paper to understand de minimis thresholds can be found here.
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