A Quick Guide to Customs Classification

Customs classification is the process of assigning a specific numerical code to a product for the purpose of customs clearance. This Quick Guide introduces Classification, the area of customs management that is the most subject to dispute.

Customs Classification and Commodity Codes

Contrary to local or domestic trade, in international transactions the buyer and the seller often speak different languages. This can create difficulties to read invoices and shipping documents and therefore identify goods when they arrive at a border for customs clearance. The solution was therefore to use a digital coding system that everyone can read to describe a product.

In order to be used worldwide, the coding system would need to be harmonised so the same number would identify the same product everywhere. This is the objective of the International Convention on the Harmonised Commodity Description and Coding System (the HS Convention). The HS Convention is the tool of reference for all those involved in international trade to identify a product, despite the language we speak, anywhere in the world.

The Commodity Code is therefore a digital code that provides the description of the product. It is sometimes called “Harmonised System Code”, “HS code” or “Tariff Code”. It removes language barriers and ensures the same product is recognised by traders, Customs authorities and international organisations worldwide. Every item will have a code number, however cutting-edge or obscure the product is. Commodity Codes are therefore often presented as the language of international trade.

The Commodity Code of a product is central to the business’s international operations and critical to Customs and trade compliance.

Customs Classification is the process of allocating a Commodity Code to a product following specific rules.

Customs Classification Legal Framework

The Coding System was developed in the early 1970s by the World Customs Organisation (WCO) to enable countries to identify and monitor goods crossing their borders. It takes the form of a nomenclature (a defined system of names and terms): The Harmonised Commodity Description and Coding System generally referred to as “Harmonised System”, “HS” or “HS Nomenclature”.

The Harmonised System is governed by The International Convention on the Harmonised Commodity Description and Coding System. The Convention is a multilateral agreement that was signed in 1983 and came into force in 1988. The Convention is not directly applicable and it is translated into national legislations, most of the time in customs codes.

The territorial scope of the HS convention covers all continents with over 155 countries signatories of the Convention. The product coverage of the Convention is equally extensive, as over 98 per cent of the merchandise traded globally is classified following the HS.

Application of Commodity Codes

The Harmonised System is usually presented as an international multi-purpose instrument. It is extensively used by traders, governments, international organisations, academics and the private sector to:

• Determine duty rate.
• Identify restriction and prohibitions.
• Monitor controlled goods.
• Monitor trade policies and rules of origin.
• Monitor prices.
• Implement and control quotas.
• Provide accurate and comparable data for trade negotiation and trade disputes.
• Build WTO schedules.
• Standardise the collection, analysis and comparison of international trade statistics.
• Match import and export trade statistics.
• Calculate freight tariff and international transport statistics.
• Compile national accounts.
• Support economic research.

Without it, many international conventions, particularly trade agreements, would be unenforceable or simply too confusing to be applicable.

Hierarchy of the Harmonised System

The HS lists the products in a hierarchy based on their level of processing. The more processed the product, the higher in the numerical hierarchy the product will be.

Structure of the Harmonised System

The HS contains over 5,000 commodity descriptions that are identified by a 6 digit code. All countries signatory of the Convention must classify products in the same way using the same 6 digit code, with a few exceptions.

These commodities are grouped in a legal and logical structure. This hierarchy is organised in Sections, Chapters and Headings. The HS has:

• 21 Sections: Sections are the top level grouping of products.
• 99 Chapters (97 Chapters + 2 final chapters – 98 and 99 for national use): Chapters are identified by the first 2 digits of the commodity codes.
• Over 1,200 headings: A heading is providing a description of products and is identified by a 4 digit code. The 4 digit code is made of the 2 digits of the chapter plus two other additional codes.
• Over 5,000 sub-headings: These are more detailed descriptions that are made of the chapter digits, plus the heading digits supplement by two additional digits.

Country-specific sub-headings

Beyond the 6 digits of the Harmonised System, countries can add additional digits to cover their national requirements and they very often do.

Maintenance of the Harmonised System

The Convention has set up the Harmonised System Committee which is managed by the World Customs Origanisation. The HS Committee regularly review the HS and act as an international dispute settlement body. Its role is to:

• Take decisions on classification questions and publish them in the Compendium of Classification Opinions.
• Prepare amendments to the HS Explanatory Notes.
• Settle disputes.
• Examine policy matters.

The HS Committee also updates the HS every five or six years to reflect developments in technology and changes in trade patterns. For each update, the WCO publishes correlation tables between the old and new versions.

Tip: Regularly check the commodity codes for your products. An annual check at the end of the year when the updated tariff is published for the next year. A full review when the WCO published the update of the HS.

Rules for Customs Classification

The Harmonised System is not just a harmonised nomenclature; it is also a harmonised set of rules for classification. The General Rules of Interpretation (GRI) form an entire part of the Harmonised Systems Convention and ensure that there is a standardised methodology to determine the appropriate code for a product.

General Rules of Interpretation (GRI) are translated into national legislations for traders to apply when selecting an HS code for their products. The process of classification is carried out by following the GRIs.

The six GRIs are the core process used for classification. They have to be considered in sequence until a classification has been established.

• Rule 1 covers sections and chapter headings.
• Rule 2 covers unfinished or incomplete goods and goods consisting of a mixture of materials or substances.
• Rule 3 covers goods that can be classified under two or more headings.
• Rule 4 covers goods that cannot be classified by one of the three rules above.
• Rule 5 covers packaging.
• Rule 6 covers sub-headings.

Read about the General Rules fo Interpretation.

Impact of Customs Classification on the Business

Commodity codes are fundamental to the international movement of goods. In international trade, businesses use commodity codes in different ways.

For customs and trade compliance

• To give a true description of the goods.
• To pay the correct amount of duty and tax – not too much and not too little.
• To check the import and export requirements specific to the product.
• To check whether there is a requirement for import and export licences.
• To check the possible application of anti-dumping or countervailing duties.
• To check whether the product is subject to sanctions, embargoes and other trade measures.
• To receive export refund when applicable.

For market access and cost management

• To check origin rules under Free Trade Agreements granting lower or nil duty rates.
• To determine whether any duty relief schemes or duty suspension can apply to the products.
• To carry out market research.

Responsibility for Customs Classification

The importer and exporter are legally responsible for providing accurate information to Customs, including the correct classification of the goods.

Declaring a wrong commodity code to Customs authorities means declaring a wrong description of the goods and therefore describing a wrong product. The consequence of an incorrect classification on the business can be:

• Financial: The business will have to pay any arrears of underpaid import duties. Sometime with interest and penalty. Countries’ customs codes often allow customs authorities to review transactions going back a number of years. The amount due can quickly become significant.
• Operational: Shipments may be delayed, goods could be seized.
• Strategic: Damage the business compliance track record.
• Legal: Result in a Customs audit, penalties, disputes with the authorities, legal proceedings.

Binding Classification Decisions

For products with complex or disputed classification, or simply to provide certainty to the classification process, businesses in most countries can apply to the Customs authorities for binding decisions – also called binding tariff information, binding ruling or advanced ruling. These are classification decisions from the Customs authorities specific to your product.

Businesses need to submit their classification for a specific product along with product information to the Customs authorities. If the authorities reject it, in most cases they will suggest an alternative Commodity Code that the business will need to review. It is therefore not a shortcut for classification. If Customs authorities approve it, a binding decision is issued. Binding decisions have a expiry date so they need to be renewed and they can be revoked by customs authorities.

There’s no cost to explore options and solutions. Any classification question, at home and abroad? Get in touch for an informal chat info@alegrant.com.