The importance of correct classification cannot be underestimated. However, companies often neglect the classification, which might result in significant costs, e.g. wrong amount of duty being paid or improper use of free trade agreements. The classification of goods is not always unambiguous which can also provide possibilities for savings by using competing tariff codes.
Tariff Classification is the process of determining the correct tariff code for imported and exported goods. Classification of goods is relevant from a customs point of view. It has an impact on customs duties, excise duties, import VAT, origin management, preferential duties and import and export restrictions.
Why classify goods and what can go wrong?
Unfortunately companies often do not pay attention to the classification of goods. Usually companies rely on the freight forwarders to classify the products. It is very important to understand that the responsibility of the correct classification is on the importer or exporter of records (i.e. the freight forwarder prepares the customs declarations on behalf of the importer/exporter).
The customs authorities draw attention to the classification of the products in their audits. The incorrect classification of goods can lead to significant duties for example if the companies have used a tariff code with a lower duty or the use of a free trade agreement would not have been possible.
How to manage the classification of goods imported and exported
Classification of goods is information driven. The starting point for the correct classification is to “know” the product to be classified. From a classification point of view it is important to know for example what is the product used for, the material it is made from and is it a finished product or is it a mixture of components. Without access to correct information about the product, the classification of a product is at best a good guess.
The next requirement for correct classification is the knowledge of the customs tariff and the technique of classification. The basis for the international coding system is the Harmonized System (HS), which is applied by 138 contracting parties and more than 200 customs authorities worldwide. The HS includes general rules for interpretation (GRI), which define how goods shall be classified in the tariff schedule. The HS and customs tariff is divided into 21 sections and 97 chapters. Each section and chapter contains notes, which define more specifically what products can be or cannot be classified into the section or chapter. In addition the explanatory notes should be used in the classification of goods.
From the above mentioned it becomes clear that to be able to classify a product, it requires product knowledge as well as classification knowledge. Usually people with the expertise of the products (e.g. engineers) do not have the expertise on classification and people with classification expertise have often a lack of technical product knowledge. Therefore, companies should try to combine the expertise. It could be useful to arrange classification meetings on a regular basis between people responsible for customs such as logistics, sales and people responsible for the products such as sourcing, R&D.
Possibilities for savings
As mentioned earlier, the classification of goods is not always unambiguous. The tariff schedule is full of competing codes, which means that a product can be classified into several headings. This opens the possibilities for savings on customs duties by using tariff codes with a lower duty rate.
For example, a finished product might have a tariff code for parts used in the manufacturing of the product. It could be easy to classify all parts used in the manufacturing of the product into parts. However, if the parts could be used also for other purposes, it might be possible to classify the parts into other headings which have a lower or zero duty rate.
Binding tariff information (BTI)
It is highly recommended to ensure the correct classification of products. The only possibility to receive a binding decision from the customs authorities about the classification of a product is to apply for a BTI. The main benefit to the company is legal certainty with regard to tariff classification.
The EU has created the BTI system as a tool to assist companies to obtain the correct classification for goods. BTI is issued on request to companies by the customs authorities and it is valid throughout the EU. The BTI’s are published in a centralized database (BTI Consultation). In Switzerland it is a bit different. Although the system of BTI’s (Zolltarifauskunft) is also in place, the results are generally not published and therefore only known to the requesting party.
