When you tick this box, it means that your customers will be charged with additional tax for the shipping fee you’ve set based on destination country of the shipping. If you want to apply this, then you need to set the country destinations of your shipping into the table and set the tax rate with percentage number.
How does this take effect to the cost customers have to pay?
For example, you set tax of 10% for country United States. Then you tick the box 'Charge Taxes on shipping rates'. You sell products in United States and serve shipping in USA with rate of USD 10. A customer from USA bought a product from your store at price USD 10 and asked to be shipped within USA too.
The total price he has to pay is: USD 10 (product’s price) + USD 10 (shipping rate to USA) + USD 1 (10% tax on product’s price) + USD 1 (10% tax on shipping rate to USA) = USD 22.