Cheap is a word which often comes to mind when scouting foreign products. If only you could import these goods without additional cost, your profits would skyrocket. However, in reality, the price drastically changes once the goods have arrived at your doorstep. Shipping costs, import duties, and taxes all add up to the price of your product. The total amount you pay for your imports is called landed cost. In this article, I will explain how to calculate landed cost for your goods.
The Three Main Elements of Landed Cost
- Product cost
- Shipping cost
- Import duty & tax
1. Product Cost
Product cost is the first main element of landed cost. It refers to the price of your goods. It is the price you agreed up on with your supplier. Usually, this price quote is under specific terms (a.k.a. Incoterms). These terms describe: delivery conditions, risk passing conditions, transport conditions and customs responsibilities. The most commonly used terms in China are, EXW and FOB. Price quotes under these terms basically mean, the buyer is responsible for the entire import process.
2. Shipping Cost
Shipping cost is the second main element. It refers to all costs associated with shipping a product from A to B. It includes a great variety of costs such as:
- Transportation cost
- Freight insurance
- Terminal handling charges (THC)
- Handling fees
- Clearing fees
- Document fees
- Surcharges (BAF & CAF etc.)
- Security surcharges (ISPS & ISS)
In order to obtain an accurate estimate of shipping cost, my advice would be to request multiple quotes from freight forwarders. Note: make sure (nearly) all costs are included in your quote to avoid unpleasant surprises.
3. Import Duty & Tax
Import duty & tax is the last main element of landed cost. Goods imported into the US or the EU are subject to duties and taxes. For the EU, an import duty and VAT have to be paid. However, For the US, only an import duty is charged. Import duties are often a certain percentage of the customs value of your goods. Duties are calculated with the following equation:
Import duty = duty rate (%) X customs value
Import duty rates can be found here:
The customs value is determined by the following equation:
At last, VAT is calculated by the following equation:
VAT = VAT rate (%) X (customs value + import duty)
In conclusion, landed cost is the actual amount you pay for your imports. The three main elements of landed cost are: product cost, shipping cost and import duty & taxes. Together, these costs significantly increase the price of your product. Be wary, other costs might be incurred in the process such as: inspection, currency and travel expenses. It is evident that these should be added to total cost calculation.
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