The recent shifts in US tariff policy have created a lot of uncertainty for businesses but also brought customs classification back into focus. Companies are looking for solutions on how to optimise their expenses or avoid higher customs duties. Therefore, some businesses are trying to use tariff engineering as a tool to minimise import duties.
What is tariff engineering?
Tariff engineering is the legally compliant practice of altering products so that they are classified in a tariff code with lower import duties. Such actions may include altering the composition of materials or changing the design of products so that they can be reclassified under different Harmonised System (HS) codes. While a good understanding of tariffs and customs rules can assist your business in designing products to benefit from lower duties, it's crucial to recognise the potential risks involved. Some strategies, which might be seen by some as tariff engineering, could be regarded by others as fraudulent practices. This can lead to investigations and fines from customs authorities, as demonstrated in the following example.
Between 2009 and 2013, Ford imported over 160,000 Transit Connect vehicles. Before importation, Ford installed second-row seats in order to classify them as passenger cars, which carried a 2.5% tariff rate, avoiding the high tariff rate of 25% for transport vehicles. However, the second-row seats were removed right after the customs clearance so that the vehicles could be delivered as cargo vans to the customers. Therefore, US customs authorities later reclassified these vehicles as transport vehicles based on their features and intended use. This reclassification led to allegations of false declarations by Ford, potentially resulting in over $1 billion in additional tariffs. Despite Ford's arguments, the actual use and construction of the vehicles were deemed more relevant by customs authorities. Last year, Ford settled the dispute by agreeing to pay $365 million and committed to obtaining binding customs rulings for future models, while also withdrawing its lawsuit challenging the classification.
The Ford case is not an isolated incident, where the distinction between transport and passenger vehicles raises numerous questions and challenges. Also in Switzerland, this distinction led to several fines and reclassifications of pick-up trucks over the past years, as besides customs duties, particularly the automobile tax plays a vital role. Therefore, Swiss customs released a document providing clarity on how to classify pick-up trucks. According to the HS Committee of the World Customs Organization, pick-ups are not considered vehicles for the transport of goods due to their relatively small loading areas. This classification can significantly impact the applicable tariff rates and regulatory requirements. Furthermore, the European Public Prosecutor's Office frequently publishes information about ongoing investigations related to customs fraud. These investigations highlight the importance of accurate classification and compliance with customs regulations. Businesses must stay vigilant and informed about the latest guidelines and rulings to avoid costly penalties and legal issues.
Customs compliance considerations
Our experience indicates that it is common for companies to frequently use HS codes provided by their suppliers without conducting proper cross-checking. Additionally, they often neglect to review these HS codes over extended periods or fail to update classifications following changes to the product. This oversight can lead to potential fines and prevent businesses from taking advantage of lower duties. While it might be tempting to get creative with HS classifications, companies must also consider compliance issues in order to avoid additional costs from fines imposed by customs authorities. Here are some key aspects businesses should consider to ensure compliance.
First and foremost, imported goods must have an accurate classification. The HS code system is complex, and in some cases, at first sight, it seems like goods can be classified under more than one HS code. However, following the General Interpretative Rules, it has to be highlighted that there is always only one correct tariff code, and therefore, companies cannot ‘choose’ their favourite HS code, but they must use the accurate one. Thus, it is crucial for companies to thoroughly research and verify the correct HS code for their products to avoid any discrepancies that could lead to fines or delays in customs clearance. Secondly, tariff rates often depend on various rules of origin, which are also contingent upon the HS codes and whether goods qualify for preferential treatment under Free Trade Agreements (FTAs). Third, another critical aspect of compliance is declaring the true and fair customs value of imported goods. Reporting a lower value to reduce tariff costs is illegal and considered customs fraud. To stay compliant with customs rules, companies should ensure that the declared value accurately reflects the market value or – in terms of transfer pricing – respect the arm's length principle, as it is known internationally for transactions between two related parties.
The recent changes in the US tariff policy have highlighted the importance of accurate customs classification and the potential benefits of tariff engineering. However, to successfully navigate the complexities of tariff policy changes and comply with new rules, businesses must stay informed about the latest developments in customs regulations. By adhering to the above guidelines, companies can ensure compliance with customs regulations and avoid unnecessary fines and costs. Accurate HS code classification, correct understanding of tariff rates and rules of origin, declaring the true market value, maintaining consistent import paperwork and staying informed about regulatory changes are all critical components of a successful import strategy. Regularly reviewing updates from customs authorities and seeking expert advice can help companies make informed decisions and avoid costly mistakes.
Therefore, if you want to stay informed about changes created by US tariffs and their impact on businesses, please join our webinar on 9 April 2025.
What is tariff classification of goods?
Goods/tariff classification involves determining the correct Harmonised System (HS) code for a product, which is also referred to as a commodity code or tariff number. The first six digits of an HS code are universally standardised by the World Customs Organization, providing a consistent framework for classifying goods worldwide. However, additional digits may be added by individual countries or regions to specify further details according to their own regulations and rules.
To classify goods accurately, it's essential to address these three "W" questions:
How can PwC support you?
PwC offers comprehensive services to help businesses navigate the complexities of global trade. Our Swiss team of customs experts is ready to assist you with:
- Preferential origin and customs duty management: We assist in managing preferential origin to benefit from reduced duty rates under various trade agreements and identifying opportunities to reduce overall import costs.
- Customs classification review: We support in reviewing and ensuring the correct classification of goods according to Harmonised System codes, which are crucial for determining applicable duties and compliance with import regulations.
- Customs valuation consulting: We provide expert advice on accurately valuing goods to ensure compliance with customs regulations, avoiding penalties, and ensuring smooth customs clearance.
