Author:
Integra International Grant Gilmour, CPA (Canada, BC) CPA (USA, Arizona)
Integra Tax World Newsletter Editor
E: [email protected]
Tariffs? What are they and how do they work? A glossary for accountants and their clients.
Tariffs are defined by the World Trade Organization as customs duties on imports. The roll of accountants and tax and legal advisors is to help clients understand and either mitigate the impact of taxes or recognize opportunities in taxation for savings. Tariffs and duties are a form of taxation. But until recently they were stable and predictable and often were not considered as planning opportunities by taxation professionals. This glossary is designed to build your familiarity with the concepts and language of tariffs.
Tariffs – are charged by the customs and border security branches of governments of countries when products reach their borders and are processed and released into commerce in that country. There are situations where tariffs are delayed or refunded as discussed below, and there are situations where tariffs are prepaid or secured financially by the importer of record prior or during the shipping process prior to landing.
Ad-Valorem Duties and Taxes – Tariffs, duties and taxes calculated based on a [declared] value of a product.
Certificate of Origin – This is a certificate that accompanies products identifying the product’s country of origin and can make a product qualified or not qualified for special status in a free trade agreement and when a tariff rate applies to different countries at different rates. It can be critical in identifying and calculating the correct rate. There are often other documents specified in free trade agreements that can identify the amount of country content or whether a threshold of percentage content has been achieved in a product to make it a product of one country versus another. An example: Rubber comes from a country A that does not have free trade agreement with either B or C and is converted to tires in country B which is enough added value to qualify it as duty free when sold from country B to Country C. A document certifying this origin and transformation must accompany the shipment otherwise it would be subject to duty rates in country C as if it were from country A.
Challenging a tariff – this normally has two distinct steps. Challenging the customs broker/agent for a misclassification or error in reporting. This can happen when documentation is missing from a shipment, or when the documentation is misfiled with the shipper as opposed to the receiver. The second challenge is a formal process with the government that charged the tariffs. Both of these processes take time, and shipments are not going to be held up for real or perceived errors. Importers of record can be financially harmed by the long delays in appealing tariffs. This makes having a relationship with your customs broker critical and it makes having Quality Control checks on your documentation essential.
Classification of Goods – Harmonized Tariff Schedule [HTS] /Harmonized System Convention [HS] is a global product classification system. Variations in utilization exist around the world but the structure and concepts are the same. Importantly, a product can have several HTS codes depending on its usage. For example, a screw on its own will have a code but it can also have a code as a component of completed product. Furthermore, the same screw might actually be a product made from another product and derivative codes might apply.
Countervailing duty, Anti dumping duty, Reciprocal tariffs
- Countervailing duty – this is a duty imposed by a government as a tool to mitigate the financial advantage given by another government to its exporters. The financial advantage is usually a subsidy, but the definition of subsidy is in the hands of the government imposing the duty.
- Anti dumping duty – this is similar to a countervailing duty in that it addresses a trade inequity. The product in question is being exported and sold at a price lower than the market price in the domestic market in the originating country.
- Reciprocal tariffs. This is a new term. You could consider the recent reciprocal tariffs imposed by the USA as a type of countervailing duty.
Customs brokers/Customs Clearing Agent – are the agents that calculate tariffs and advise the owner of the product and the importer of record (often the same person) of the amounts and as agents of the government collect those amounts. They are authorized by the importer of record with a power of attorney and by the governments by the registration, qualification, and licensing of their business to act as agents in that country.
Customs clearance – The actions of clearing a shipment from offshore to onshore and entering it into the domestic market of a country.
Derivatives – recent steel tariffs in the USA are an illustration of derivatives in action. Conceptually derivatives are products made from other products and containing primarily the first product. An egg for example might be a product. An omelet would be a derivative product of an egg. It is an egg transformed. Another derivative product of an egg might be meringue because it is also a transformation of an egg.
Duty Drawback – this is a program that allows an importer to get a rebate or refund of duty paid to their government if the same product is later exported. This program can work well for manufacturers that source product worldwide and then sell worldwide. It is no help to an importer that brings product into a country and only sells it within that country.
Duty on Royalty – some countries (China for example) recognize that a royalty might actually be part of the transfer price of a product and will charge duty on the royalty embedded in a product when that product arrives at customs clearance.
Duty Remission – (Also called exemptions) this is a program that reduces tariffs on products destined for certain industries or users. For example, safety gloves might have a general tariff on them, but the government might provide remission if those same gloves are used in health care. It is a mechanism to reduce the impact of tariffs on some domestic industries.
Financial Security [surety bond or cash bond] – Importers of record are required to provide deposits or bonds against the budgeted amount of their duties and fees. These bonds or deposits are used when a shipment customs invoice is not paid promptly. This impacts the financial relationship between the importer of record and the customs broker and the government. Because tariff amounts are increasing, I expect there will be some companies with challenges providing these increased deposits or bonds.
Free trade agreements – This is a broad term covering many different types of agreements. And free trade can be part of a larger more comprehensive agreement that also covers things like immigration and aspects of taxation and aspects of mutual cooperation on other topics. The central concept is that the agreement adjusts trade barriers between the countries involved to facilitate trade. The most obvious trade barrier is tariffs but other barriers like recognition of certifications and standards can also apply. There are often Rules of Origin defined in a free trade agreement.
Free Trade Zones/Free Trade Area – Locations within a country where products can be temporarily exempt from duties and tariffs and also often local sales and similar taxes. These are usually associated with shipping locations and ports but can also exist independent of a port. The ones that are independent of a particular port might exist to promote an industry or activity within a country while giving protected status to the industries operating there.
Incoterms – An internationally recognized set of defined shipping terms. Things like where the ownership passes between the seller and the purchaser are covered. Who is responsible for the freight costs and insurance are covered and importantly who is responsible for the duties and taxes are covered in the Incoterms. For example, DDP is delivery duty paid and puts all the responsibility on the seller, but EX Works transfers ownership and responsibility at the warehouse door of the seller to the purchaser and puts the majority of the responsibility on the purchaser. This has huge implications for who is responsible for tariffs and taxes.
Importer of Record [IOR]. This is the entity primarily responsible for the customs clearance and the payment of tariffs. If this is recorded incorrectly in the customs documents the other party can be charged the tariffs and then there is a messy process to correct the mistake. This mistake is being highlighted recently since tariff rates have changed from 0% in many cases to 25% for some products.
Non-resident importer [NRI] – this is the term used for when the importer of record does not have a business location within the destination country.
Parts and Repairs – most countries have provisions applying different tariff rates or exempting tariffs on parts or repairs of products that previously had tariffs paid. The rules usually require a one for one exchange of the repaired product or replacement product for the damaged product.
Rules of Origin – specific provisions in a free trade agreement or other comprehensive agreement between countries that provides what and how products are determined to be eligible for the favourable terms of the free trade agreement.
Tariffs on services – generally services are exempt from tariffs, however as mentioned above with royalties some governments consider services bundled with goods or services required in conjunction with product purchases to be part of that product and thus subject to tariff.
Value for Customs – Transfer Pricing – this is a similar concept to transfer pricing in international taxation, but it has important nuances that are different. There are various methods of valuation that are in some respects similar to Transfer pricing methods of valuation. It is important to consider that what might seem advantageous for taxation could be disadvantageous for tariffs. This is a whole discussion if its own. To help explain: consider that if a government accepts a low transfer price, that transfer price effectively moves profit to another country and that other country might have lower income tax rates. Yet that transfer price is also used by the receiving country to calculate duties and the receiving country might have collected more duty at a higher transfer price. Thus, the receiving country is getting more income tax revenue and less tariff revenue. The discussion about transfer prices is as much about what governments of countries have chosen as a revenue generation tool; income taxes versus tariffs; as the discussion is about what international businesses chose as reasonable transfer prices to match profits with productivity.
Conclusion
Like any area of taxation, understanding the concepts and language can be critical in managing the risk and recognizing opportunities. Integra member firms are ready to advise you and your business strategically on international business and the impacts of tariffs.
This glossary is intended to be a growing document. If you found a definition confusing or inaccurate; or a term is missing; please email the author and we will endeavour to improve the glossary. If you have questions about tariffs and their impact on your business, please reach out to your local Integra member (https://integra-international.net/find-an-integra-firm/) or reach out to the author to connect you with a local Integra firm.
© 2025 Integra International. All rights reserved. This Article is not intended to provide legal or other advice, and you should not take, or refrain from taking, action based on its content. Prior results do not guarantee a similar outcome.
About the Author:
Grant Gilmour
Grant Gilmour is our Editor of the Integra Tax World newsletter. He is semi-retired with several Side Hustle Projects, including the Newsletter. Before retirement Grant was an active member of the Board of Integra and ran a Cross Border Tax Specialty Practice in the Metro Vancouver Area of Canada. Grant’s education started with an Honours degree in Genetics, and he has always had an interest in working with clients in the STEM fields. Think of Genius inventors when you think of Grant’s ideal client. Grant is also currently enrolled at Queens University in Canada, studying Immigration Law because his ideal client often was an immigrant as well as STEM business, and you can always learn more. Grant is Scout Leader in his hometown of Fort Langley, challenging young minds to use their critical thinking skills.
Integra International Bio:
https://integra-international.net/find-an-integra-firm/find-firm-profile/name/grant-gilmour/
