The importance of the HS to tariff classification: thoughts from the IFCBABy the International Federation of Customs Brokers Associations
The WCO website tells us that tariff classification using the Harmonized System (HS) Nomenclature “allows a world of many languages to speak with one.” As we mark the 30th anniversary of the official adoption of the HS in 1988, few could argue against the value of this universal language that has brought great clarity to the world of trade. With 157 Contracting Parties to the HS Convention basing their domestic Customs tariffs on the HS, and dozens more using it despite not being signatories, the HS truly is the language of international trade. It is currently used by more than 200 countries that comprise approximately 98% of world trade.
Since its implementation 30 years ago, the HS has become not only the basis for identifying goods, assessing duties and taxes, and compiling trade statistics, but is also used by other government agencies, international organizations and the private sector for a variety of purposes. This logical, systematic, universal language is used for developing trade policies, monitoring controlled goods, developing specific rules of origin, determining freight rates, analysing transportation statistics, monitoring pricing and controlling quotas, as well as for general economic research and analysis.
We know that the intention of this universal language is to bring clarity, but what happens when language between countries has national variations such as differences in the application of the HS? It is true that we have tools such as the General Interpretive Rules (GIRs) for the HS (perhaps we can consider these as grammar rules), but what happens when Customs administrations, importers, Customs brokers, and lawyers share the same language, but their interpretation is different?
We know that there can be differences of opinion about tariff classification not only internationally, but at the national level too. There are numerous examples of legal cases where the different interpretation of the HS nationally led to interesting appeals of the HS classification.
Given the complexities involved with HS classification and the potential impact on compliance and revenue collection, governments around the globe have introduced various ways to provide guidance on the interpretation of the HS. The WCO itself established Standard 9.9 of the General Annex to the Revised Kyoto Convention on the simplification and harmonization of Customs procedures, providing for advance rulings, so that importers have confidence in the tariff classification of goods prior to their importation.
Some Customs administrations also issue directives on the classification of certain goods, and others publish a list of items that will be subject to post-clearance audit or compliance verification, highlighting issues of common misclassification. By publishing this list, importers are provided with a means to support their own compliance and, if required, make a correction before an audit occurs. Awareness of this list of audit priorities can initiate a conversation between the importer, the Customs broker and the Customs administration about enhanced overall compliance, contributing to fairness and transparency.
In addition, the WCO publishes the Explanatory Notes that provide users with the official WCO interpretation of the HS. Although the Explanatory Notes are not binding in all countries, they are widely and practically used to enhance the uniform understanding and application of the HS worldwide.
We can’t forget the Legal Notes, which are legally binding. Without these, how would one know that the expression “babies’ garments and clothing accessories” means articles for young children of a body height not exceeding 86 cm (heading 61.11), or that Chapter 10 does not cover grains, which have been hulled or otherwise worked, but that rice, husked, milled, polished, glazed, parboiled or broken remains classified in heading 10.06?
The WCO’s HS Committee (and the HS Review Sub-Committee), in addition to overseeing the five-year cycle of changes to update the HS, is tasked with the settling of interpretation disputes and providing classification opinions for the Compendium of Classification Opinions. It also provides classification opinions and recommendations on new technologies, such as 3D printers and drones.
Implementation of the HS by national Customs administrations is often accompanied by a comprehensive penalty regime for incorrect tariff classification. From a private sector perspective, when there is a penalty regime in place, there must be clear parameters to ensure that requirements and obligations are clearly understood, and that there is a redress or appeal procedure in place. For instance, did the importer or the Customs broker know that an incorrect HS code was used? Did they ignore a ruling? Penalties can be devastating, considering the penalty amount assessed, plus possible additional duties and taxes, which can result in an additional payment that the importer did not consider when pricing the imported goods for sale. All of their profits, and more, may be lost.
It is critical to measure the impact of a penalty system on classification compliance. It is reasonable to suggest that if one is penalized financially for making an error in tariff classification, the same error is not likely to recur. However, it is also reasonable to suggest that Customs administrations issue penalties for incorrect tariff classification only after careful scrutiny, within clear parameters, and that the mechanism to appeal a penalty should be simple and timely, with input from all parties. Penalties should not be seen as the only way to promote compliance and deter non-compliance: countries should constantly strive to find the best possible mechanisms to resolve differences of opinion and to educate all who have responsibility for HS classification, both inside and outside Customs administrations.
Managing the HS review
The HS has not remained static and it must continue to evolve. What happens when changes are made to the HS, and what are the impacts for business and for national Customs administrations? We have just completed a review cycle, with the next one scheduled for 2022. Changes to the HS affect trade agreements, requirements of other government agencies, sourcing decisions by business, and changes to education programmes, information technology (IT) systems, and communication tools and websites.
Conversion is a significant cost for governments and the private sector alike. A single change to the HS can result in thousands of changes to product databases, especially for Customs brokers with hundreds of clients importing a wide variety of products. One tariff item may be split into two or more new tariff items, requiring the manual reclassification of all products from the old to the new. Our experience is that most changes are from one HS number to three or four, but there is at least one example where a single tariff item in 2016 expanded to ten in 2017!
Looking ahead to 2022 and the implementation of the next set of HS changes, we encourage WCO Members to be responsive to the needs of business as they adapt the WCO’s changes to national priorities, and finalize national tariff schedules. We need adequate time to convert existing databases.
We also need Customs administrations and other related government departments to leverage technology in order to enable seamless automated downloads of information. For example, if HS codes can be downloaded into a Customs brokers’ database, goods subject to anti-dumping duty or to another government department’s regulations can be easily identified on a timely basis.
In addition, we need to respect sensitive commercial information and be clear about commitments to trade compliance in both government and the private sector. Even though information about their clients’ goods might be sensitive or proprietary, Customs brokers must make it clear to importers that, in order to be compliant, certain information must be provided in order to determine the correct HS code.
In this time of ‘big data’ and data analytics, what is the future of the HS? There are ideas around the HS itself, including broad access to readily available and reliable country-specific information, and the use of generic HS categories for the classification of goods for revenue collection. There are also discussions about alternative nomenclature systems that could supplement or replace the HS by providing additional information about goods to various parties. For example, we know of one country that is considering the use of GS1 standards in order to enhance the HS code to better identify imported goods. Watching all of these developments, we must guard against increased costs, unnecessary complexity, possible duplication, and the potential for errors.
As the global trade community reflects on the first 30 years of the HS, we must congratulate the WCO on this universal language that has contributed to better efficiencies, improved revenue management, and provided greater clarity for business and related service providers. We acknowledge the outstanding contribution of HS experts at the WCO’s Headquarters in Brussels and the tariff specialists in WCO Member administrations in making the HS the success that it is, and we look forward to celebrating the next HS milestone.
The International Federation of Customs Brokers Associations (IFCBA) works to promote the value and use of Customs brokers worldwide, bringing about improvements in Customs policies and practices on a global basis that benefit both Customs brokers and their clients, as well as keeping them at the centre of the international trading system.