Tariff classification is arguably the most important feature of every import and export transaction. Not only does it determine applicable import or export tax rates or eligibility for free trade agreement benefits or duty exemptions, it also triggers a range of possible non-tariff barriers, such as inspections, license requirements, quota restrictions, trade embargoes, permanent establishment conditions, etc. In that respect it is surprising how little care many importers and exporters seem to take to ensure that tariff classifications that are declared to Customs are both correct and supportable.
On the other hand, a large number of products can be easily classified for customs purposes, whether or not the ‘classifier’ has any knowledge of tariff classification rules. It would be hard for anyone to classify a live sheep anywhere but under subheading 0104.10 of the “Harmonized Commodity Description and Coding System, generally referred to as "Harmonized System" or simply "HS". The HS is a multipurpose international product nomenclature developed by the World Customs Organization that comprises about 5,000 commodity groups; each identified by a six digit code, arranged in a legal and logical structure and supported by well-defined rules to achieve uniform classification. It is either officially or in principle applied by most countries in the world, thus harmonising the first six digits of every classification code.
National rules in many countries allow for further subdivisions of HS codes, sometimes aligned within a Trade Bloc such as ASEAN or the EU. Whereas customs duties and free trade agreement rules are typically based on the HS, national taxes and non-tariff barriers tend to follow national tariff subdivision.
There are two main reasons why tariff classification is more complex than it seems at first sight:
- Many internationally traded products do not easily fall into one HS code; they are either too new or too complex to be easily classified;
- Both HS level codes and national subdivisions require product knowledge that may not be easily available to importers.
Hence leaving classification to untrained or insufficiently knowledgeable people is inviting disaster. Customs authorities in the Asia Pacific region all review, to different extents, import and export transactions either at the time of declaration or during post-import audits to ensure that the correct tariff codes are declared and therefore revenue is adequately collected and other compliance requirements are adhered to. Customs investigations into tariff classification tend to be more aggressive if more revenue is at stake. However, many authorities also expect compliance in its own right, and may assess penalties even in cases where the importer simply cannot demonstrate sufficient due diligence in determining tariff codes, regardless of whether the correct code or even a code with a higher duty level was declared.
Non-compliance with classification rules could be costly. Back-duties and penalties, as well as higher deposit requirement, are direct monetary implications. Supply chain disruptions through import or export clearance delays, downgrading of a company’s trade facilitation status, or temporary suspension of import or export privileges could be far more damaging to a business.
Various benefits can materialise through the implementation of a globally consistent tariff classification approach. For example, internal controls can be strengthened, errors incurred by customs brokers or employees who lack in-depth product knowledge can be reduced and classification rationales can be used to handle disputes occurring in different jurisdictions. It may also be beneficial for importers to obtain advance tariff classification rulings, if available, to create more certainty in the import process.
Learn more about PwC's Outsourced Global Customs Classification Services in the link below.
How WMS can help
WMS currently offers various solutions in enhancing compliance with tariff classification requirements, supportability of classifications declared, as well as planning for duty advantage through tariff engineering. Services include:
- Review and assessment of accuracy and supportability of declared tariff classifications. This can be done either on an ad-hoc basis, or through a mass tariff classification outsourcing service. Consistency of tariff classification between territories is also becoming more important as customs authorities are increasingly connected.
- Design and implementation of tariff classification processes, procedures and central databases.
- Assistance in applying for a classification decision or advance ruling, including meeting with customs authorities to clarify any technical points about the product definition or the HS code determination
Resolving a classification dispute following an audit in China
A company was audited by China Customs for using an incorrect tariff classification code for biochemical equipment. This code attracted a lower import duty rate than the correct code would have done, leading to an underpayment of customs duty and import VAT.
How we helped
PwC WMS conducted a technical classification review of the products concerned and reached an agreement with Customs on the appropriate classification treatment. We offered the following assistance:
- Leveraging our experts specialised in the biochemical industry, we provided a detailed opinion of the correct classification of the products;
- We explained to management various potential supportable methodologies to classify the products concerned, and compared and contrasted these to the methodology previously adopted; and
- We offered mitigating strategies in order to minimise potential exposure.
Benefit for the client
- A more appropriate classification methodology and more supportable classification result going forward
- Minimised the exposure arising from the non-compliance through strategic mediation with Customs. Customs clawed-back duty and import VAT underpaid for a one-year period only, and no administrative actions (e.g. enterprise downgrading) or penalties were imposed.
Mass classification of a factory
A manufacturer of chemical products decided to move a whole factory to a new territory. Early discussion with Customs determined that no grouping or other shortcuts to tariff classification would be allowed. Consequently 8,000 SKUs needed to be classified in a short period of time to allow timely shipment of the factory.
How WMS helped
We outsourced the classification of all SKUs in the factory to our Customs Classification Center. Through efficient grouping of SKUs based on our industry product knowledge and our bespoke information gathering methodology we determined classifications for all SKUs, creating documentary evidence of classification decisions for declaration support purposes in less than two months.
Benefit for the client
- Quick and efficient classification of a large number of SKUs with supporting argumentation could not have been achieved by our client’s internal resources;
- Import of all shipments was accomplished without any delays or challenges from Customs.