It pays to understand how the international taxation system works before you start selling abroad.

Take a glance at the business news just now and there’s a fair chance the dreaded ‘t word’ – tariffs – will feature prominently in the headlines.

That’s been the case since January 20 when Donald Trump assumed the US Presidency with a promise to shake up the way other nations trade with the Land of the Free and home of the world’s largest economy.

Since then, there’s been plenty of talk, and even more action, on the topic of tariffs. If you’ve been shocked, awed or are just plain confused about how tariffs work, here’s a quick guide to help you get up to speed.

What is a tariff?

Put simply, a tariff is a tax that’s imposed on goods or services imported from another country. It increases their cost and makes it harder for them to compete with homegrown equivalents. Governments impose tariffs for several reasons: to protect domestic industries by encouraging consumers and businesses to buy from local suppliers; to raise additional revenue; to ensure their country isn’t reliant on other nations for critical supplies; and for political purposes.

While they’re currently the topic du jour, tariffs are nothing new. The US began levying them in 1789 shortly after the American War of Independence while here in Australia, our first Customs Tariff Act was passed in 1902.

Are there different types of tariffs?

Yes. Tariffs tend to come in two main types. Ad valorem is a Latin term that means ‘according to value’. Hence, ad valorem tariffs are calculated as a percentage of the value of the items being dispatched – think the 10 per cent the Trump administration has imposed on Australian goods and services.

‘Specific tariffs’ are levied as a fixed amount per unit, irrespective of the value of that unit – say, for example, a flat $1,000 on every imported motor vehicle.

Compound tariffs are less commonly imposed and are a combination of ad valorem and specific tariffs.

Who collects tariffs and when?

The collection of tariffs is the responsibility of the customs authority in the country to which goods are being imported. Here in Australia, that’s the Australian Border Force while across the Pacific, the US Customs and Border Protection is on the job.

Tariffs are paid by the individual or organisation importing the goods or services. They’re generally collected at the time the items cross the border or are being cleared by customs.

How does a customs authority know what tariff to impose on a shipment?

Harmonised System (HS) codes take the guesswork out of determining the tariffs importers should pay, on everything from Ugg boots to iron ore. They’re used to identify products across international borders and their use is mandated in more than 200 countries.

HS codes denote both the category an item falls into and the specific type of product it is. They vary in length from six to 10 digits.

What’s this about de minimis exemptions?

Welcome to another Latin term: de minimis. Broadly translated, it means ‘pertaining to little things’. In the import/export realm, de minimis value refers to the threshold below which goods are exempt from import duties and taxes. De minimis values vary considerably around the globe. Australia’s de minimis threshold is $1000 but buyers are required to pay GST on almost all the goods and services they import. The US de minimis threshold currently sits at $US800 but that may well change in the wake of a Trump administration review. Indeed, it has already recently ended for goods entering the US from China and Hong Kong.

Tariff-ic troubles: What happens if a business gets things wrong?

It’s easy for businesses to make mistakes when it comes to determining what fees and tariffs should be added to an overseas order and the consequences can be significant when this occurs. Use the wrong HS code, or crunch your numbers incorrectly, and there’s every chance your shipment will be rejected by customs, confiscated or held up on the dock for weeks, incurring exorbitant storage fees the while. And if you’ve underpaid other state and federal charges, your customers may be asked to make up the difference upon delivery and your goods stranded in limbo if they – understandably – refuse to do so.

Tools to help you tackle tariffs with ease

The good news is, these trials and tribulations are entirely avoidable, thanks to automated tax compliance technology – especially solutions from those providers building in the latest AI advances. Designed to simplify all the tasks associated with cross-border compliance, applying international fees and tariffs to export sales, compliance tech automation can be used to manage tax registrations, licensing, tax calculation and reporting, document management, e-invoicing, and more.

Install it in your back office and you’ll be able to calculate a wide range of cross-border taxes and fees in real time, on shipments to the US and more than 75 other overseas jurisdictions.

It’s foundation technology that takes the hard work and hassle out of exporting and makes it ultra-easy for businesses like yours to tackle tariffs and taxes with confidence, secure in the knowledge that you’re doing things right, and staying focused on building your business.