Customs classification is fundamental to customs planning and compliance on non EU movement of goods because it is used to determine:
• The duty rate for imports (this varies between 0-247%)
• The origin rule to be met under Free Trade Agreements that grant lower preferential rates on qualifying imports
• The scope of any customs duty relief schemes
• The requirement for import licences and export licences
• The application of Anti-dumping duties
• The application of duty suspensions allowing duty free access
Customs classification is the most common ground of dispute between importers and the tax authorities.
The customs classifications or commodity codes are set out in the Tariff Regulation (Council Regulation 2658/87), and each year an Annexe is produced setting out approximately 14,000 customs commodity codes (for 2012 this is produced in Regulation 1006/2011).
A searchable version of the customs tariff is published by the EU Commission.
The customs classification is determined using the six legally binding General Interpretive Rules (GIR), which are found at the beginning of the customs tariff.
Customs classification is an objective test in that “the decisive criterion for the customs classification of goods must be their objective characteristics and properties (at time of import), as defined by the wording of the headings of the Tariff Regulation and the notes to the sections and chapters”.
Therefore, an importer must have a clear understanding of the goods (what made of, how produced, functionality etc.) and then research the customs tariff (tariff heading descriptions as well as the section and chapter notes).
Specific GIR rules apply where there are two or more competing classifications for an item, for composite goods, goods imported in sets, packaging etc. (see GIR 2-6).
It is possible for importers to obtain legally binding classification rulings, known as Binding Tariff Rulings or BTI where the customs classification is unclear. It is critically important that the information provided in support of a ruling is accurate otherwise the ruling affords no protection. If the amounts of potential duty between competing customs classifications is material then it is advisable to submit supporting arguments as to why one code should be preferred to the other.
Businesses can employ various well established and tested customs planning options to legitimately reduce the duty rate on imported goods, including:
• Building up- adding functionality to an item or additional items or parts together to change the classification
• Stripping down- reducing functionality or shipping items separately to change the classification
Care needs to be taken to ensure any changes are sufficient and so planning is usually “formalised” by obtaining BTI for the proposed new imports.
Reclaims and Additional Duty Demands
Customs compliance is subject to audit based control. Any errors in customs classification can result in the tax authorities re-assessing imports to the commodity code with the higher duty rate and collecting any underpaid duties going back up to three years.
Similarly, if businesses have imported goods to an incorrect commodity code with a higher duty rate then a claim can be made to recover overpaid customs duties going back up to three years.
Customs classification can be complex and the following problems are common:
• Poor product description provided to agents who are left to classify products without any support
• Businesses importing thousands of products making the classification process a time consuming and resource intensive exercise
• Businesses holding commodity code information in their commercial systems but not providing this to the agents resulting in two sets of inconsistent customs classifications
• Global or pan-European businesses using different commodity codes for the same products
The tax authorities have access to electronic data on all imports and are increasingly using this to target businesses for incorrect classifications (using peer analysis and looking at related businesses).
We recommend businesses:
• Determine who classifies your imported goods and how
• Periodically check their customs classifications (to reflect tariff changes, sourcing changes and product developments)
• Ensure the correct commodity codes are sent to your agents and correctly used
• Apply for BTI where classification is unclear and the differences in duty could be considerable
• Check with colleagues at other related companies for consistency
ITS works with clients to ensure the correct commodity codes are used and recover any overpayments. We have access to various databases on existing rulings and considerable experience in customs classification developed over 19 years.
Contact us (firstname.lastname@example.org) if you need any assistance on this matter.