Correctly classifying your imports is crucial. In this QAD Precision Report we look at why classification can be challenging, and how importers can simplify this process.
It all comes down to perspective. When you take a step back, the international trade system can seem simple: one company’s export is someone else’s import. Across the supply chain, everyone is playing a part in this system that spans the globe.
Of course, it’s much more complex than that. Companies around the world require a way to communicate and keep everyone on the same page. There may be no such thing as a single universal language. However, there is a trade classification system in place that efficiently operates through a common language: the Harmonized Commodity Description and Coding System (HS).
The HS was developed and is maintained by the World Customs Organization (WCO). Using this system, practically every traded good has a six digit code that relays product information to customs officials. These codes are known as subheadings. Every exported and imported good must be classified using these codes.
Authorities from different countries use these commodity codes to identify and track which products are being imported into their respective country. With that information, customs officials can quickly determine if a product is eligible to enter and what duties or tariffs may apply. In short: everyone needs to speak the language of numbers.
More than 211 countries around the world use this system and around 98% of international merchandise is covered under HS guidelines. Data is collected by WCO for international trade statistics. As a result, these can affect trade negotiations and the monitoring of controlled goods. All imports must be classified in accordance with the HS as well as the import country’s own tariff classification policies.
Many WCO Member countries go beyond the six digits as a way to be even more specific. Nonetheless, it is these first six that establish exactly what the particular item is and its proper classification is a critical first step.
For companies, proper classification will directly impact costs. Simply put: with appropriate classification, you’ll pay the appropriate duties and taxes. Whereas if you overpay, naturally, you’ll hurt your bottom line.
Conversely, if you pay too little up front, you’ll end up paying more in the long run. Significant penalties are levied against companies that underpay, and it is especially bad for repeat offenders.
However, choosing the correct commodity code can get complicated. Take for example, a gold mahogany pen. Is it a mahogany pen or a gold pen? Is it a part of a larger set that comes with other items?
Factors range from the component materials used in manufacturing, the principle use, and a full description of the goods. It’s up to an Importer of Record (IOR) to correctly use the General Rules of Interpretation (GRI). This is the set of rules that govern the interpretation of the HS. The IOR must ensure no mistakes are made.
Improper classification, on the other hand, can lead to major setbacks for the company participating in the global trade. Whether it was purposeful or accidental, their own fault or a third-party’s, if you are participating in global trade, proper classification is your legal responsibility. Regulatory compliance is not optional.
A violation can take many forms, but the following methods are common violations that can lead to import fraud:
Improper classification - Trying to avoid duties or get around admissibility criteria
Inaccurate valuation - Greatly undervaluing the goods to avoid paying taxes and duties
Incorrect qualification - Stating the country of origin incorrectly in order to get the goods to qualify under a free trade agreement when it normally would not
It may be hard to prove some of the above as deliberate fraud. Nevertheless, if authorities allege fraud or even gross negligence against you, it will lead to a myriad of consequences that can include:
Up to 5 years of additional back duties and interests
Increased requirements that add time, cost, and oversight
While compliance may seem difficult to navigate, the good news is you don’t have to go it alone. Find an Import Management software that automates and executes the processes associated with clearing imports through customs authorities.
The QAD Precision solution has specialized tools for compliance and a GRI Wizard that walks any user through interpretation of the rules. Once classification determinations are made, they are added to the solution’s Global Product Item Master. This captures a product’s attributes, documentation, and classification decision criteria. As a result, this information can be used again in the future. It also automatically generates admissibility flags and identifies preferential duty eligibility under a Free Trade Agreement.
If used correctly, it can save you money, too. Importers often end up paying too much duty because they aren’t aware of all the tariff provisions available for them. Check out the solution to ensure that your company is uniform and consistent with HS codes today.
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