How to manage taxes and tariffs for cross-border fulfillment?
If your company is growing and you haven’t read our previous post about strategies to avoid warehouse overstocking, we recommend you check it out, as overstocking and understocking are very common situations that can impact your business.
However, these are not the only situations that can occur while you’re expanding your business across international borders. Any growth can unlock new markets and revenue streams, but it also comes with a complex web of taxes and tariffs.
Mismanaging these costs can lead to unexpected expenses, shipping delays, and even legal issues. Whether you're an eCommerce entrepreneur, a logistics manager, or a global retailer, understanding how to navigate duties, VAT, import taxes, and trade agreements is essential for seamless cross-border fulfillment.
In this article, we’ll share with you some of the key tax and tariff considerations that as a fulfillment center in Mexico we’ve encountered, we’ll also explore strategies for minimizing costs to keep your global operations efficient and compliant.
Understanding taxes and tariffs in cross-border fulfillment
Navigating international logistics means dealing with a host of financial obligations that vary depending on the countries involved. At the core of this challenge are taxes and tariffs, costs that can significantly impact pricing, profit margins, and customer satisfaction if not managed correctly. To effectively plan and execute cross-border fulfillment, it’s essential to understand what these charges entail and how they apply to your business operations.
Key tax types
When selling across borders, businesses encounter different types of taxes depending on the destination country.
One of the most common is the Value-Added Tax (VAT), a consumption tax levied on the value added to products and services at each stage of production or distribution. VAT is widely used in Europe and many other regions, and it's often the responsibility of the seller to collect and remit it.
Similarly, Goods and Services Tax (GST) functions in countries like Canada and Australia, where it’s typically charged at the point of sale. Some countries, like the U.S., apply a sales tax instead, which is usually state-based and collected at the retail level.
In addition, import taxes may be imposed by the destination country when merchandise crosses its border, and these vary greatly depending on product type and origin.
Tariffs and duties
Tariffs, also known as customs duties, are taxes imposed on goods imported into a country. These are typically calculated as a percentage of the item’s value, and they can vary significantly based on the product category and the country of origin.
To properly assess duties, businesses must use Harmonized System (HS) codes, which are standardized numerical codes assigned to every type of product traded internationally. Accurate classification using HS codes is crucial because it determines the duty rate and eligibility for exemptions under trade agreements.
For example, a misclassified item could result in overpayment or penalties. Fortunately, many countries participate in Free Trade Agreements (FTAs), such as NAFTA/USMCA or the EU’s trade pacts, which allow certain goods to be imported duty-free or at reduced rates, provided specific rules of origin are met.
Strategies to manage and minimize cross-border taxes and tariffs
Effectively managing taxes and tariffs in cross-border fulfillment isn’t just about understanding them; it’s about building a proactive strategy to reduce costs and stay compliant.
We encounter that those companies that use a mix of regulatory knowledge and smart logistics planning and are not afraid to generate partnerships with fulfillment centers can avoid unnecessary expenses and create a smoother international shipping process. Hereunder are some key strategies to minimize the financial impact of global trade.
1.- Leveraging trade agreements and tariff exemptions
One of the most effective ways to lower tariff costs is by taking advantage of Free Trade Agreements (FTAs) between countries. These agreements often allow for reduced or zero tariffs on qualifying goods, but only if specific rules of origin are met.
For example, under the USMCA agreement (formerly NAFTA), a product manufactured in Mexico may be shipped to the U.S. duty-free if it meets certain criteria regarding where its components were sourced.
Companies should also explore tariff exemption programs, such as duty drawback, which allows importers to receive a refund on duties paid for products that are later exported. These programs require thorough documentation but can significantly reduce total tax liability when used correctly.
2.- Proper documentation and compliance
Customs authorities rely on accurate and complete documentation to assess taxes and tariffs. Inadequate or incorrect paperwork can result in delays, fines, or overpayment. Essential documents include the commercial invoice, which must clearly state the value, quantity, and description of the merchandise; the packing list; and the correct HS codes for each item.
Businesses must also ensure that their products are properly declared with country of origin information, especially when trying to benefit from FTAs. Implementing strict internal compliance protocols and regularly training staff can help prevent costly errors and streamline customs clearance.
3.- Optimizing shipping and warehousing for tax efficiency
Where and how goods are stored and shipped can have a major impact on the taxes and tariffs incurred. One strategy is to use bonded warehouses or foreign trade zones (FTZs), which allow businesses to store products without paying duties until they enter the domestic market or exempt them if the goods are re-exported. These facilities can also offer flexibility in packaging or labeling products closer to the point of sale.
Additionally, businesses should analyze their shipping routes and fulfillment center locations to determine where they can save on duties and speed up delivery. Splitting inventory across multiple fulfillment centers near key international markets can also reduce costs and transit times while minimizing exposure to high-tariff regions.
Now that you’ve learned more about international taxes and tariffs, what are you waiting for to start practicing these strategies? If you are still interested in any kind of assistance, don’t hesitate to contact us. Also, don’t forget to share this article on social media, and stay tuned to our blog for more updates.
