CIF--cost, insurance, freight--and FOB--free on board--are two methods generally used to calculate duty rates. According to USAExportImport.com, the CIF method is used by most countries. VAT is generally applied on the CIF or FOB-plus-duty value.
USA Export Import offers examples of CIF and FOB duty calculations. The most common method of calculating duty on imports is by adding together cost plus insurance plus freight. This is a pricing term, or formula that indicates that the cost of goods, insurance and freight are part of the quoted price. To calculate duty you must also add VAT into the equation. If the CIF equals $1,000, and the duty rate is 7 percent, the duty charge will be $70. Now the CIF plus duty charge equals $1,070. Using 18 percent for the VAT rate, the amount based on $1,070 equals $192.60. Add together CIF ($1,000) plus duty charge ($70) plus VAT ($192.60) to get a grand total of $1,262.60. VAT is calculated based on the CIF plus duty charge.
A formula less commonly used is FOB. According to USA Export Import, this pricing term indicates that the cost of goods--including manufacturer insurance costs and transportation from the manufacturer to the port of departure, and costs of loading the vessel--are included in the price quote. FOB only applies to inland waterway transport of shipments via sea. Shipping and insurance are not included in calculations for international shipping. For example, multiply FOB value ($932) by the duty rate (7 percent). This comes to $65.24. Add the FOB ($932) to the duty rate ($65.24). The sum is ($997.24). Using 18 percent for the VAT, multiply $997.24 by .18 to get the amount of the VAT, $179.50. Add the FOB ($932) plus duty ($65.24) plus VAT ($179.50) for a grand total of $1,176.74. VAT is calculated based on the FOB plus duty charge.
