L.

O 1 Assess goods and documents for duty and tax liability

How to calculate duties and taxes when Shipping Internationally

One of the more complicated aspects of international shipping is having to deal with taxes.
Regardless of where or what you are shipping, taxes will always be a point of consideration and in
all honesty something that shouldn’t be taken lightly.

In this post, we are going to go into detail about tax-related information you need to know for
international shipping. Let’s start with the basics.

A duty is a kind of tax payable to the government, charged on goods and financial transactions.
Customs Duty: Includes both an Import and Export Duty,

Import duty, also known as tariff, is a tax that the importer has to pay to bring foreign goods into
the country.

What’s important to note is that an import duty, unlike a sales duty, varies considerably on a
category by category basis. A sales duty, on the other hand, to some extent can be standardized.

Next thing to note is that each country has its own specific import duty tax which it applies for each
HS code (Harmonized System Codes).

If you didn’t already know, Taxes are compulsory financial obligations levied by the government on
income, goods, and activities. What is known as an Indirect Tax are taxes charged on goods or
services.

Here are common taxes on goods:

· Import Duty
· VAT (Value Added Tax)
· GST (Goods and Services Tax)
· Others

Sales Tax:
A Sales Tax is a ‘direct consumption’ tax imposed on the sale of goods or a service by the local
government or state. The sales tax is collected by the seller from the end consumer when a
purchase is made.

VAT Tax:

A value-added tax, or VAT, is an ‘indirect consumption’ tax on the consumption of goods and
services. Unlike a sales tax, it is levied at each stage of the supply chain from the production stage to
the end, and is ultimately charged in full at the final stage of sale.

GST Tax:

GST Tax, or a goods and services tax, is an ‘indirect consumption’ tax on the manufacturing, sale and
consumption of goods as well as service on the national level.

Try out this calculation to see how much sales tax needs to be paid.
Sales tax amount to be paid = sales tax % x (CIF value + duty)

So the gist of it is that there are a number of kinds of taxes that need to be considered whether you
ship internationally or not, but why?

Well the simple answer is that imports need to be declared to local customs authorities so that
duties and taxes can be assessed. An import duty is a tax that the importer has to pay to bring
foreign goods into his or her country.

So when does this tax have to be paid?

After the item is shipped, duties and taxes are due at the time of declaration at the local customs at
the country of destination. They must be paid and cleared before the package can be delivered to
the recipient.

Now that you have a better sense of what these taxes are and what they mean, let’s look into
calculating them.

There are two main valuation methods (also known as Incoterms):

1) CIF Price Calculation (Cost, Insurance and Freight)

CIF = Total cost of a product right up to delivery

Duty = duty % x (product price + cost of shipping + cost of insurance)

CIF is a pricing term that means the cost of the goods, insurance and freight (shipping charge) are
included in the quoted price.

2) FOB (Free on Board)Duty = duty % x product price

FOB value is the price paid for the goods plus the cost of transportation, loading, unloading,
handling, insurance, and associated costs incidental to delivery of the goods at the port or place of
export in the country of export.

Example Import-Export Cost Calculation:

1) Calculating the customs value

The customs value in USA is FOB:

800 - Product price

2) Calculate the import taxes

Sales tax = 800 x 2% =16

Import duty = 800 x 10% = 80

3) Calculate Merchandise Processing Fee

Other common taxes charged by customs include:

• Excise duty (usually levied on alcohol, tobacco and fuel products)

• Consumption tax on luxury goods
• Environmental tax
• Clearance/entry fees

• Customs clearance fee, or customs handling fee for processing the import declaration
• Advancement fee for paying the duty and VAT on behalf of the recipient
• Airline handling fee for loading and unloading the goods
• Security fee for screening or x-raying the goods

L.O 2 Calculate taxes, fees and charges

Classes Of Taxes

Direct and indirect taxes

In the literature of public finance, taxes have been classified in various

ways according to who pays for them, who bears the ultimate burden of
them, the extent to which the burden can be shifted, and various
other criteria. Taxes are most commonly classified as either direct or
indirect, an example of the former type being the income tax and of the
latter the sales tax. There is much disagreement among economists as to
the criteria for distinguishing between direct and indirect taxes, and it is
unclear into which category certain taxes, such as corporate income
tax or property tax, should fall. It is usually said that a direct tax is one
that cannot be shifted by the taxpayer to someone else, whereas an
indirect tax can be.

Direct taxes

Direct taxes are primarily taxes on natural persons (e.g., individuals),

and they are typically based on the taxpayer’s ability to pay as measured
by income, consumption, or net wealth. What follows is a description of
the main types of direct taxes.
Individual income taxes are commonly levied on total personal net
income of the taxpayer (which may be an individual, a couple, or a
family) in excess of some stipulated minimum. They are also commonly
adjusted to take into account the circumstances influencing the ability to
pay, such as family status, number and age of children, and financial
burdens resulting from illness. The taxes are often levied at graduated
rates, meaning that the rates rise as income rises. Personal exemptions
for the taxpayer and family can create a range of income that is subject to
a tax rate of zero.

Taxes on net worth are levied on the total net worth of a person—that is,
the value of his assets minus his liabilities. As with the income tax, the
personal circumstances of the taxpayer can be taken into consideration.

Indirect taxes

Indirect taxes are levied on the production or consumption of goods and

services or on transactions, including imports and exports. Examples
include general and selective sales taxes, value-added taxes (VAT), taxes
on any aspect of manufacturing or production, taxes on legal
transactions, and customs or import duties.

General sales taxes are levies that are applied to a substantial portion of
consumer expenditures. The same tax rate can be applied to all taxed
items, or different items (such as food or clothing) can be subject to
different rates. Single-stage taxes can be collected at the retail level, as
the U.S. states do, or they can be collected at a pre-retail (i.e.,
manufacturing or wholesale) level, as occurs in some developing
countries. Multistage taxes are applied at each stage in the production-
distribution process. The VAT, which increased in popularity during the
second half of the 20th century, is commonly collected by allowing the
taxpayer to deduct a credit for tax paid on purchases from liability on
sales. The VAT has largely replaced the turnover tax—a tax on each stage
of the production and distribution chain, with no relief for tax paid at
previous stages. The cumulative effect of the turnover tax, commonly
known as tax cascading, distorts economic decisions.

Some excises and customs duties are specific—i.e., they are levied on the
basis of number, weight, length, volume, or other specific characteristics
of the good or service being taxed. Other excises, like sales taxes, are ad
valorem—levied on the value of the goods as measured by the price.
Taxes on legal transactions are levied on the issue of shares, on the sale
(or transfer) of houses and land, and on stock exchange transactions. For
administrative reasons, they frequently take the form of stamp duties;
that is, the legal or commercial document is stamped to
denote payment of the tax. Many tax analysts regard stamp taxes as
nuisance taxes; they are most often found in less-developed countries
and frequently bog down the transactions to which they are applied.

The Direct and Indirect Taxes applicable in Ethiopia

If you are a business company intending to open a new business here in Ethiopia or an already
established business, here is the list of taxes imposed on business companies operating in Ethiopia .
Basically the Ethiopian tax law provides Direct and Indirect Taxes.

The Direct Taxes are divided into five categories:

Personal income tax,

Rental tax,

Withholding tax,

Business profit tax and

Other taxes. Income From Rent Of Patent And Copyright, Income From Winning Lottery, Income
From Share In Company…etc fall under this category.

The main types of indirect taxes applicable are

Value Added Tax (VAT),

Customs Duty,

Excise and

Turn Over Taxes.

I. DIRECT TAXES

Incomes taxable under Article 6 of the Income Tax Proclamation No. 286/2002 includes:

• Income from employment (10% – 35%)

• Income from rental of building (10% – 35%)

• Income from business profit – for unincorporated entities (10% -35%);

–for incorporated ones (30%)

• Income from royalties is at flat rate of 5%

• Income paid for services rendered outside of Ethiopia is at a flat rate of 10%
• Income from games of chances (15%)

• Dividends (10%)

• Income from causal rental of property is 15% (any land, building or movable asset)

• Interest income (5%)

• Gains on transfer of certain investment property (sale or gift):

Building for business, factory, office (15%)

Shares of companies (30%)

• Income from agricultural activities – based on proclamations issued by regional states.

• Inheritances and donations: No estate duty or other death duties are levied in Ethiopia.

Personal Income Tax Rates/Month Tax rate

Income Rate Deduction

0 – 600 0%

601-1,650 10% Income X 10% - 60

1,651-3,200 15% Income X 15% - 142.50

3,201-5,250 20% Income X 20% - 302.50

5,251-7,800 25% Income X 25% - 565

7,801-10,900 30% Income X 30% - 955

10,900 በላይ 35% Income X 35% - 1500

Taxable business income of companies is taxed at the rate of 30% percent. Other business
taxpayers, with business income ranging from ETB 1,801.00 to ETB 60,000.00, pay between 10 and
30 percent. Business Income, more than ETB 60,000, is charged 35 percent.

Taxable Business Income Tax Rates

No Taxable Business Tax Rate (%) Deduction in

Income /Per Year/ Birr
01 0-7200 Exempted (Non- None
taxable)
02 7,201-19,800 10 720
03 19,801-38,400 15 1,710
04 38,401-63,000 20 3,630
05 63,001-93,600 25 6,780
06 93,601-130800 30 11,460
07 Over 130,800 35 18,000

So an individual foreigner, who lives in Ethiopia for more than 183 days in a period of twelve
calendar months, whether continuously or intermittently, is regarded as being resident for the
entire tax period and is taxed in accordance with the provisions of Income Tax Proclamation No.
979/2008 (Article 5.2). Article five of the proclamation, defines resident as follows:-

The one who has permanent residence address in Ethiopia or

If the person has a place in Ethiopia that he frequently resides in or

If the person is an Ethiopian citizen but lives abroad for the purpose of councilor office, diplomatic
or for any other similar purposes.
If the person was present for 183 days in Ethiopia within 12 months permanently or other way, the
law regards him as an Ethiopian resident and imposes him an obligation of paying tax from any
income he gets.

However, the following are excluded from the computation of taxable income in accordance with
Article 13 of the Income Tax Proclamation No. 286/2002 and Article 13 of the Regulations No.
78/2002:

Medical treatment;

Transportation allowance;

Hardship allowance;

Reimbursement of travelling expenses incurred on duty;

Per Diem and travelling expenses on joining and completion of employment, provided that such
payments are made pursuant to specific c provisions of the contract;

board members’ and board secretaries’ allowances; the income of persons employed for domestic
duties;

The contribution of the employer and the employee to the retirement or provident fund and all
forms of benefits contributed by employers that do not exceed 15% of monthly salary; and

Payments made to a person as compensation in relation to injuries suffered by that person or the
death of another person.

II. INDIRECT TAXES

A. The Value Added Tax (VAT)

VAT replaces the old business tax system of commodity and service taxes including the sales tax
and the withholding tax. The VAT rate is 15 percent of the value of every taxable transaction by a
registered person and all imports of goods and services other than those VAT exempted items in
Ethiopia. Taxable transactions which shall be charged with zero percent are: export of goods or
services to the extent provided in the regulations. The rendering of transportation or other services
directly connected with international transport of goods or passengers as well as the supply of
lubricants and other consumable technical supplies taken on board for consumption during
international flights.

B. Excise Tax

Excise Tax is payable on a range of consumer goods, whether produced locally or imported, e.g.,
alcohol, tobacco, salt, fuel, television sets, cars, carpets and toys. Its rates vary from 10% percent on
receivers, garments and textiles of any type and fabrics to 100 percent on perfumes, vehicles above
1,800 cc and alcoholic drinks. It is payable in addition to VAT.

C. Turn Over Tax

Turn over Tax under the total value of 500,000 Birr, is applicable to pay 2% or 10% percent from
annual taxable transactions on goods sold or service rendered locally. All income from domestic or
foreign sources is taxed whether it is obtained as remuneration, profit or gains, from employment,
business activities or any activity which brings income to the beneficiary.

For depreciation allowance, assets are categorized into different classes. The categories and rates of
depreciation are:

i. Buildings and structures 5%;

ii. Intangible assets 10%;

iii. Computers, information systems, software products and data storage equipment 25%;
and

iv. All other business assets including automobiles, buses and minibuses 20%.

Every investor has a tax obligation and is required to obtain a tax payer identify caution number
(“TIN”). An investor who involves in taxable activity has also an obligation to register for VAT.

D. Export Tax

Export Tax is levied on raw and semi-processed hides and skins, and wet-blue cow hide, pickled
sheep skins with wet-blue sheep and wet blue goat skins at flat rate of 150%.

E. Stamp and Transfer Duty

Stamp duty is payable on a broad class of legal instruments, such as:

On Memoranda and Articles of Association

upon first execution − a flat Birr 350

upon any subsequent execution − a flat Birr 100

Contracts and agreements and memoranda − a flat Birr 5

Security deeds − 1% on the value of the deed

Contract of employment initial stage − 1% of a month’s salary

Register of title to property − 2% of the value.

According to Ethiopian legal system any tax imposed is appealable. Thus any tax payer has the
Right to Appeal and can submit appeal on a tax decision rendered by the Tax Authority.

If you have an additional question or comment or need to get a practical legal support in this regard
please Contact us.

Note: This guide provides vital information on Ethiopian Tax law and practice and is not intended to
substitute professional advice given with full knowledge of the specific circumstances of each case
and proficiency in the law of Ethiopia such as might be provided by a tax Attorney or tax lawyer in
Ethiopia. Such information about tax in Ethiopia can be available from an Ethiopian Investment
Lawyer, Ethiopian Tax lawyer, Ethiopian, Ethiopian Employment Layer, Ethiopian Labour
Relationships Lawyer, Ethiopian Immigration lawyer.

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L.O 3 Complete transaction records

Journalizing. Journal. AND JOURNALIZINGURNALS AND JOURNALIZINGJOURNALS

AND JOURNALIZING
As described in Chapter 3, transactions are analyzed into debit and credit parts before information
is recorded. A form for recording transactions in chronological order is called a Recording
transactions in a journal is called Transactions could be recorded in the accounting equation.
However, most companies wish to create a more permanent record by recording transactions in a
journal.
Each business uses the kind of journal that best fits the needs of that business. The nature of a
business and the number of transactions to be recorded determine the kind of journal to be used.
The word journal comes from the Latin diurnalis, meaning daily. Most businesses conduct
transactions every day. To keep from getting overloaded, the businesses will make entries in their
accounting journals every day.
HIGH STANDARDS FOR JOURNALIZING
Sandra Huffman has worked for Marquesa Advertising for 30 days as an accounting clerk, a position
for
which the company owner, Ramona Marquesa, hired her. She journalizes all transactions, about 50
per day, handles all incoming and outgoing mail, prepares and files all source documents, and
performs other duties as assigned.
One day Ramona asked to see the journal. Sandra handed the journal to Ramona, who scanned a
few pages while Sandra fidgeted in her chair. Sandra didn’t know exactly what to expect, but she
knew she had not done as good a job with journalizing transactions as she should have.
Ramona then sighed and said, “I’m concerned about this journal, Sandra. You have recorded all
transactions in pencil, and I notice numerous erasures. I don’t know if the debits equal the credits,
but I can see right away that this one transaction for $20,000 should have been for $2,000. Some of
the dates are missing and some are out of order.
What do you suggest we do to turn this situation around?”
After apologizing, Sandra thanked Ramona for giving her the chance to improve her work. She
explained that she realized she had not been giving the journal the priority it required and went on
to describe how she would improve her performance in the future.
Using a Journal
Information for each transaction recorded in a journal is called an A journal with two amount
columns in which all kinds of entries can be recorded is called a Encore Music uses a general
journal.
The columns in Encore Music’s general journal are Date, Account Title, Doc. No., Post. Ref., Debit,
and Credit. The use of each column
Receipts
A business form giving written acknowledgement for cash received is called a When cash is
received from sources other than sales, Encore Music prepares a receipt. The receipts are
prenumbered to help
account for all of the receipts. A receipt is the source document for cash received from transactions
other than sales.
receipt.
OTHER SOURCE DOCUMENTS
Memorandums
A form on which a brief message is written describing a transaction is called a When no other
source
document is prepared for a transaction, or when an additional explanation is needed about a
transaction, Encore Music prepares a memorandum.
Music’s memorandums are prenumbered to help account for all of the memorandums. A brief note
is written on the memorandum to describe the transaction.
Calculator Tapes
Encore Music collects cash at the time services are rendered to customers. At the end of each day,
Encore Music uses a printing electronic calculator to total the amount of cash received from sales
for that day. By totaling all the individual sales, a single source document is produced for the total
sales of the day. Thus, time and space are saved by recording only one entry for all of a day’s sales.
The calculator tape is the source document for daily sales. calculator tape used as a source
document is shown. Encore Music dates and numbers each calculator tape. For example, in the
illustration, the number, T12, indicates that the tape is for the twelfth day of the month.is described
later in this chapter.
Accuracy
Information recorded in a journal includes the debit and credit parts of each transaction recorded
in one place. The information can be verified by comparing the data in the journal with the
transaction data to assure that all information is correct.
Chronological Record
Transactions are recorded in a journal by date in the order in which the transactions occur.
All information about each transaction is recorded in one place, making the information for a
specific transaction easy to locate.
Double-Entry Accounting
The recording of debit and credit parts of a transaction is called In double-entry accounting, each
transaction affects at least two accounts. Both the debit part and the credit part are recorded for
each transaction.
This procedure reflects the dual effect of each transaction on the business’s records.
Double-entry accounting assures that debits equal credits.
Source Documents
A business paper from which information is obtained for a journal entry is called a Each transaction
is described by a source document that proves that the transaction did occur. For example, Encore
Music prepares a check stub for each cash payment made. The check stub describes information
about the
cash payment transaction for which the check is prepared. The accounting concept, Objective
Evidence, is applied when a source document is prepared for each transaction.
A transaction should be journalized only if it actually occurs. The amounts recorded must be
accurate and true. Nearly all transactions result in the preparation of a source document. Encore
Music uses five source documents: checks, sales invoices, receipts, calculator tapes, and
memorandums.
source document. double-entry accounting.
general journal. entry.

Use Journal Entries to Record Transactions and Post to T-Accounts

When we introduced debits and credits, you learned about the usefulness of T-accounts as a graphic
representation of any account in the general ledger. But before transactions are posted to the T-
accounts, they are first recorded using special forms known as journals.

Journals

Accountants use special forms called journals to keep track of their business transactions. A journal
is the first place information is entered into the accounting system. A journal is often referred to as
the book of original entry because it is the place the information originally enters into the system. A
journal keeps a historical account of all recordable transactions with which the company has
engaged. In other words, a journal is similar to a diary for a business. When you enter information
into a journal, we say you are journalizing the entry. Journaling the entry is the second step in the
accounting cycle. Here is a picture of a journal.

Recording Transactions

We now return to our company example of Printing Plus, Lynn Sanders’ printing service company.
We will analyze and record each of the transactions for her business and discuss how this impacts
the financial statements. Some of the listed transactions have been ones we have seen throughout
this chapter. More detail for each of these transactions is provided, along with a few new
transactions.

On January 3, 2019, issues $20,000 shares of common stock for cash.

On January 5, 2019, purchases equipment on account for $3,500, payment due within the month.

On January 9, 2019, receives $4,000 cash in advance from a customer for services not yet rendered.

On January 10, 2019, provides $5,500 in services to a customer who asks to be billed for the
services.

On January 12, 2019, pays a $300 utility bill with cash.

On January 14, 2019, distributed $100 cash in dividends to stockholders.

On January 17, 2019, receives $2,800 cash from a customer for services rendered.

On January 18, 2019, paid in full, with cash, for the equipment purchase on January 5.

On January 20, 2019, paid $3,600 cash in salaries expense to employees.

On January 23, 2019, received cash payment in full from the customer on the January 10
transaction.

On January 27, 2019, provides $1,200 in services to a customer who asks to be billed for the
services.

On January 30, 2019, purchases supplies on account for $500, payment due within three months.

Supplies
 2,720.00
Accts. Pay.—Ling Music Supplies
2,720.00