FOB, CIF or CFR: how your Incoterm changes the tax you pay

Two importers buy the same machine from the same supplier in the same week. One pays USD 50,000 FOB Shanghai. The other pays USD 53,500 CIF Chattogram. They are buying identical goods at an identical total cost. They will not pay identical duty.

The reason is that Bangladesh customs does not assess duty on what you paid the supplier. It assesses duty on the CIF value plus landing charges. Which Incoterm you agreed determines how much of that figure is already inside your invoice and how much has to be added on top — and getting that wrong is one of the most common sources of a landed-cost estimate that turns out short.

The three terms you will actually meet

FOB — Free On Board. The seller's responsibility ends when the goods are loaded onto the vessel at the port of origin. Your invoice covers the goods and the cost of getting them onto the ship. Freight and insurance to Chattogram are yours, paid separately.

CFR — Cost and Freight (you will still see the old term C&F). The seller pays the ocean freight to the destination port. Your invoice includes it. Insurance is still yours.

CIF — Cost, Insurance and Freight. The seller pays both freight and insurance to the destination port. Your invoice includes everything up to arrival.

There are eleven Incoterms in the current set, including EXW, FCA, DAP and DDP, but FOB, CFR and CIF account for the overwhelming majority of Bangladesh sea freight. The logic below extends to the others in the same way.

Why this changes the tax and not just the cash flow

The assessable value is the base on which every component of the tariff is calculated. As we set out in the assessable value explained, it is normally the CIF value plus landing charges. Customs is not interested in which party arranged the freight — it wants the value of the goods delivered to the Bangladesh port.

So if your invoice is FOB, freight and insurance are added to reach the assessable value. If your invoice is CIF, they are already in it. Either way customs arrives at roughly the same number. The error is made by importers, not by customs: quoting duty off an FOB invoice figure and forgetting that the base will be larger.

A worked example

Take a shipment of office furniture classified under 94033000, wooden office furniture, which carries a Total Tax Incidence of 118.15%.

Suppose the goods are worth BDT 5,000,000, ocean freight is BDT 400,000 and insurance is BDT 50,000.

Bought CIF. Invoice = BDT 5,450,000. Assessable value, before landing charges, is BDT 5,450,000. Duty and taxes at 118.15% ≈ BDT 6,439,175.

Bought FOB, and quoted carelessly. You see an invoice of BDT 5,000,000 and budget 118.15% of it ≈ BDT 5,907,500. Customs adds the freight and insurance you paid separately, assesses on BDT 5,450,000, and bills BDT 6,439,175.

You are BDT 531,675 short — on a shipment where nothing went wrong, no rate was misread and no code was misclassified. The duty rate was right. The base was not.

Note what drives the size of that error: it is the freight and insurance multiplied by the TTI. At 118.15% a BDT 450,000 logistics bill adds over BDT 531,000 of tax. At the 17.88% that hospital beds attract, the same freight would add only about BDT 80,000. The higher your tariff line, the more expensive your freight becomes.

The practical consequence for sourcing

This has a counter-intuitive implication. On high-TTI goods, freight is not merely a logistics cost — it is a taxed logistics cost. A BDT 100,000 saving on ocean freight for goods at a 1,007.5% vehicle line is worth roughly BDT 1,100,000 once the tax effect is counted.

It also means the apparent price advantage of a distant supplier shrinks faster than most spreadsheets assume, because the extra freight gets taxed alongside the goods.

None of this is an argument for understating freight. It is an argument for including it accurately at the quoting stage.

What is not in the assessable value

Costs incurred after arrival are generally outside the base: inland transport from Chattogram to Dhaka, your C&F agent's fee, port demurrage, warehousing. These are real costs and belong in your landed-cost model, but they are not multiplied by the TTI.

Landing charges — a notional addition for the cost of bringing goods ashore — are inside the base. The conventional figure applied in Bangladesh practice is 1% of CIF, but you should confirm the current treatment with your C&F agent rather than assume it, because it is an administrative practice rather than a rate published in the tariff schedule.

What the gap costs on real tariff lines

The difference between FOB and CIF is freight plus insurance. That sounds like a shipping question. It is actually a tax question, because the whole cascade is built on the value you declare.

Take a consignment with an FOB value of BDT 1,000,000 and freight plus insurance of BDT 150,000, a realistic 15% for containerised goods from East Asia. The assessable value is 1,150,000, not 1,000,000. The extra tax that 150,000 attracts depends entirely on the line:

Look at the T-shirt row. The freight cost BDT 150,000 and generated BDT 156,090 of tax — the tax on the shipping exceeds the shipping. On the shampoo line it is nearly double.

This is the practical reason the FOB-versus-CIF confusion is so expensive. An importer who budgets from the supplier's FOB invoice does not merely forget the freight; they forget the freight and the tax multiplier applied to it. On a high-TTI line the omission is more than twice the freight bill.

Why cheaper freight is worth more than it looks

The same arithmetic runs in your favour. On a line at 104.06%, every taka saved on freight saves 2.04 taka of landed cost — one taka of freight and 1.04 of tax. On a 189.2% line each taka saved is worth 2.89.

Freight negotiation, consolidation, and choosing a cheaper routing are therefore worth considerably more on heavily taxed goods than on lightly taxed ones. A logistics saving on a boiler returns 1.29 taka per taka; the same saving on cosmetics returns 2.89. The value of a shipping decision depends on the tariff line it is attached to, which is not how most businesses evaluate freight quotes.

The reverse is also true, and it catches people out: air freight on a high-TTI consignment is punished twice. The premium over sea freight enters assessable value and is then multiplied. Urgency is more expensive on shampoo than on machinery.

Agreeing the term is not the same as agreeing the value

A final caution. Choosing CIF does not transfer the valuation problem to your supplier. You remain responsible for declaring a correct assessable value, and if the freight element embedded in a CIF price is implausibly low, that is your exposure, not theirs.

Equally, buying FOB and arranging your own shipping does not let you leave freight out. The cost of carriage to the port of importation belongs in the assessable value whoever paid it and whoever arranged it.

The Incoterm decides who organises and who pays. It does not decide what the goods are worth for duty. Keep the freight and insurance documents with the consignment file in either case — they are what substantiates the figure you declared.

A checklist before you agree an Incoterm

• Know which term the quoted price is on before you compare two suppliers. An FOB quote and a CIF quote are not comparable numbers.
• Build your duty estimate on CIF, always. If the invoice is FOB or CFR, add the missing elements first, then apply the TTI.
• Get insurance arranged either way. Under FOB and CFR the risk is yours from loading. Uninsured goods do not become cheaper to clear if they are damaged.
• Remember that CIF is not DDP. CIF ends at the port. Duty, taxes and clearance are still entirely your responsibility.

Once you have a reliable CIF figure, the rest is arithmetic. Look up your code to get the segregated breakdown and the Total Tax Incidence — the worked example on each product page applies the published rates to any assessable value you enter. If you want to sanity-check the result afterwards, see how to tell whether a quoted landed cost is plausible.