Understanding Transshipments to the US

Why are transshipment taxes important?

A transshipment simply refers to the process of transferring goods from one mode of transport to another, often done in an intermediary country before heading to their destination. This is a common shipping practice and is often done to consolidate cargo, save costs, or when there is no direct route to the destination.

Where this complicates things is in determining a product’s Country of Origin (CoO), meaning the country it was manufactured, produced, or grown, when they pass through one or more intermediary countries before arriving at their destination. As tariff rates differ for different countries, port authorities cannot afford to misidentify a product’s CoO and apply the incorrect tariff.

How do you determine a product's Country of Origin?

The US employs two separate methods to determine a product's CoO[2].

1. The Wholly Obtained Principle

Port authorities first check whether every component, assembly, and packing was completed in a single country. If the product fulfills this criteria, that country becomes the product's CoO.

 

If the product does not originate from one single country, port authorities then employ the 'subtantial transformation' test.

2. The 'Substantial Transformation' Test

A product is substantially transformed when it is processed such that a radically new product is created compared to its original form. The country in which the last substantial transformation takes place is considered the CoO.

 

While this test appears to solve the issue of CoO, the reality is that it is not a straightforward application due to its inherent vagueness. 

Examples of substantial transformation:

• Products which have undergone a change in tariff classification.
• Manufactured in intermediary country with an above-minimum percentage of value-added content originating from the intermediary country. The minimum percentage depends on the type of product and intermediary country.

Not substantial transformation:

• Simple assembly or mixing
• Repackaging
• Affixing marks, labels, or signs

Due to the sheer variety of products and processes, each shipment must be assessed on a case-by-case basis, making it a time-consuming and detail-oriented process.

Illegal Transshipment

An illegal transshipment refers to falsifying a shipment’s CoO to obtain a lower tariff treatment[3]. This is done by rerouting goods through an intermediary country and relabelling its CoO despite having no substantial transformation taking place there.

Such shipments can be detected through incomplete documentation, analysis of vessel movements, and on the ground inspections by port authorities. If caught, shippers will have to pay the 40% illegal transshipment tax, thus costing them more than the amount saved in dodging established tariffs.

These illegal transshipments undermine international trade rules and regulations, resulting in unfair trade practices and potentially provoking retaliatory measures from other countries, further upsetting the already challenging global trade environment.

How to prevent shipments from being misidentified as an illegal transshipment?

With the US’s reciprocal tariffs in place, port authorities are paying closer attention to potential illegal transshipments. Ensuring your shipments comply with trade rules is of paramount importance.

Core documents

• Certificate of Origin, containing information such as:
  • Exporter, importer, and producer information
  • CoO and the criterion stating how the product qualifies for the stated origin
  • Description of goods
  • Harmonized System tariff classification number
• Commercial invoice
• Bill of Lading or Air Waybill
• Packing list

Additional documents

• Customs Bond
  • Ensures importer compliance in paying all necessary duties and taxes
• Import License
  • For specific goods requiring a license before being imported to the US, such as:
    • Wildlife
    • Alcohol and tobacco
    • High-risk foods

Partner with DHL Express to simplify your importing process to the US

Understanding how transshipments affect a product’s CoO and its subsequent applicable tariffs can mean the difference between a smooth importation process and getting entangled with the port authorities. Knowing the CoO requirements in advance is a useful step in navigating the US’s reciprocal and illegal transshipment tariffs, as well as gaining secure footing in an increasingly uncertain global trade environment. 

Navigating US taxes and duties is a time-consuming process, but customs tools such as DHL MyGTS can simplify the process for you. Additionally, DHL Express is always ready to provide assistance; with our certified customs experts, you can leave the complexity of customs to us and focus on running your business smoothly.