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When doing international trade, all products on shipments are subject to tariff classification. In other words, it is assigned a alphanumerical code that identifies what tariffs, taxes and regulations are relevant to them.
Do you know how this HS code is chosen?
Tariff classification is the process that assigns a numerical code (HS code) to goods. The purpose of this code is to be able to identify all the goods that are imported and exported in order to set taxes, obligations and duties.
Why is tariff classification important? Because it determines the percentage of import duties, statistics rate and VAT. It also determines the export refund percentage of the product that is marketed abroad, provided that all other required conditions are met. In addition, the tariff classification will determine the need for a non-automatic license or authorization for import or export.
HS coding of the merchandise is carried out as follows:
- First and second digits: These are the numbers of the Chapter in which the merchandise is classified. Chapters go from 01 to 97 (except 77 which is reserved for future updates). The chapters are grouped into Sections (there are (XXI) 21 sections).
- Third and fourth digits: Each chapter is subdivided into games (from 01 to 99).
- Fifth and sixth digits: Subheading of the Harmonized System.
- Seventh and eighth digits: Subdivisions of the Harmonized System.
- Ninth and tenth digits: Country level codes.
Let’s look at the general rules of interpretation of the Harmonized System.
The process of HS classification is complex. Many traders have arguments with Customs about the correct HS code to use for their products. The Harmonized System has 6 General Interpretative Rules that serve as a set of tools to choose the code to which each merchandise corresponds.
Rule 1: The titles of the sections, of the chapters or of the subchapters should only be taken as a rough guide. The classification is determined by the text that appear in the heading, the section notes or the chapter notes.
Rule 2: Incomplete, mixed or disassembled items can be classified using this rule. The second rule is used for incomplete or unfinished merchandise. It is split into 2 sub rules. Rule 2a: As long as the essential characteristics of the product are still present, they will be classified as if they are incomplete. In other word, if the disassembled or unassembled articles present the characteristics of the complete or finished article, they will be classified as complete. For example, a bicycle without a tire would be classified as a bicycle. Rule 2b: The classification of mixed products or of the composite articles will be carried out in accordance with the principles set out in rule 3.
Rule 3: This rule works for goods made up of more than one material, hence it is also for merchandise that can be classified into two or more items. This rule is split into 3. Rule 3a: The most specific description item will have priority. That is, the most specific will be used over the most generic. Rule 3b: Articles are classified according to the aspect that grants it the essential character. For example, a truck with a semi-trailer for transporting goods. Rule 3c: If all parts of a product they have the same essential character and cannot be classified under the previous rules, then components will have be classified and the product’s classification will be the highest classification number.
Rule 4: Assignment by similarity. This rule works when goods cannot be classified according to the earlier rules. Goods that cannot be classified by applying the above rules are classified in the heading that includes those goods with which they have the greatest similarity. In this sense, the affected goods will have to be compared with other similar ones to establish those of greatest similarity that can be defined based on elements such as the name, characteristics or use.
Rule 5: This rule is used for deciding how to deal with cases and packaging. This rule applies to merchandise in cases and containers. Rule 5a: This rule is used when the merchandise is transported in a kind of case that usually is used to pack the said merchandise. In this case, the case will be classified in the same product. For example, a guitar and its case. Rule 5b: If the container is for repetitive use, however, for example if the container is reused, each product must be classified again.
Rule 6: Reading the correct subheadings. This rule explains that the subheadings must be compared at the correct level. This is where the dash levels in the tariff text are important. You can only compare a single dash level with the description in another single dash. Similarly, you can only compare double dash line descriptions against each other.
A final note
When doing HS classification, it is also import to research into any available rulings that are available in the country of import or export. These would override any other decision relating to classification and have to be adhered to.
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