A growing number of foreign companies is looking to start or increase their import-export business in China. Classifying and declaring goods accurately according to China’s version of the Harmonized System (HS) is a key component of a successful operation.
In the past few years, international companies have had to pay more attention to the classification of their products in China to avoid criminal or civil penalties. The misclassification of goods can turn out to be a very costly mistake.
The HS Code is widely used in every international trade process. As an importer or exporter, it is necessary to fully understand and make proper use of it.
The Harmonized Commodity Description and Coding System, also known as the Harmonized System (HS) of tariff nomenclature is an internationally standardized system of names and numbers to classify traded products. It came into effect in 1988 and has since been developed and maintained by the World Customs Organization (WCO).
There is not a global HS Code. Every country has a specific number, but the first 6 digits are supposed to be the same across the world. Each nation can modify it by adding two or four digits as per their requirements without changing the first six ones.
In 2018, China increased the total number of digits in its commodity codes from 10 to 13. The first eight digits are based on the WCO HS code plus the Commodity HS code of “Import and Export Tariff of the People’s Republic of China”; digits nine and 10 are additional “customs supervisory numbers”, and digits 11, 12, and 13 relate to inspection and quarantine (CIQ).
Thanks to the HS system each country can describe an item in the same way. Without a common system for classifying products, the movement of merchandise in international trade would be slow and costly. This method has been adopted throughout the world in order to simplify the classification process and to ease global trade.
Chinese law requires companies to accurately classify and declare goods imported into or exported out of China under its version of the Harmonized System (HS).
More recently, tensions between China and the United States caused an increased number of retaliatory tariffs on goods coming from each country. Tariff classification is crucial in determining whether affected products fall within the tariff lists issued by the two countries.
Customs authorities in either country can identify those products that have been classified with a different HS code to avoid the tariffs resulting from the trade war. Multinational companies need to be prepared for inquiries or investigations from China Customs and have a strategy to mitigate potential penalties.
Over the past years, the General Administration of Customs of the PRC (“China Customs”) implemented a series of trade facilitation reforms. Prior to this, China Customs would verify the HS code declared by the importer before goods were released. After the reforms, the authorities stopped conducting such verifications, which effectively shifts the burden to the importer to ensure that the items are correctly classified.
Just because China Customs releases the products does not mean that the corresponding tariff classification declarations are accurate. China Customs may initiate a post-clearance audit on tariff declarations anytime up to three years after the release of the corresponding goods.
China’s trade facilitation reforms in this area may actually increase noncompliance risk for importers. Without shipment-by-shipment verification by China Customs at clearance and release of goods, a relatively minor mistake could result in severe consequences for companies.
In China, duty rates on import goods are composed of most-favored-nation (MFN) duty rates, conventional duty rates, special preferential duty rates, general duty rates, tariff quota duty rates, and others. Temporary duty rates may apply to import goods within a specific time limit.
MFN duty rates apply to imported goods originating from members of the WTO that are subject to the common application of the MFN clause, import goods originating from countries or regions with which China has concluded a bilateral trade agreement for reciprocally granting of MFN treatment, and import goods originating from the customs territory of China.
Unlike some other countries, China calculates ad valorem import duties based on cost, insurance, and freight (CIF) value, that is, after shipping and insurance have been added. If the commercial invoice “hides” the cost of shipping and insurance inside the unit cost for the goods, rather than making them explicit, then Customs will assume that these costs have not been included and will calculate the duty based on the cost of the goods plus their assessment of shipping and insurance.
Customs regulations do not clearly specify which HS codes are applicable to each item, which is one of the biggest challenges faced by exporters. It is vital that you classify your products with the correct HS codes, so that customs authorities know what regulations and certifications to apply.
Using the wrong HS codes can delay customs clearance, costing you time and money. If you accidentally use the wrong HS code, you should cooperate with your Chinese importer and preferably seek advice from an expert in this area.
It is important to check whether the HS Code you use is the one most suitable for your products, since HS codes can be affected regularly by new government reforms to optimize imports, by China’s signing of preferential treaties with different countries, as well as by the professionalism of your local agents when dealing with customs authorities.
HS codes can be found and summarized by online searching tools, but this method is not recommendable because the systems are automated and could be sometimes inaccurate.
Since the restructuring of China’s customs agencies, the rotation of officers has created an uneven level of expertise in handling issues such as tariff classification. The differing levels of experience of China Customs employees add more uncertainty, risks and challenges for multinational companies.
The initial approach of China Customs is to determine whether an imported product satisfies the explicit provisions of the tariff classification rules. If the product classification is not consistent with these rules, authorities consider the classification to be a regulatory violation.
In general, the classification rules are applied in the following situations:
The product in question is expressly described in the headings or subheadings or the explanatory notes to the sections, chapters or (sub)headings of the China Tariff Schedule.
The product in question is a commodity specifically provided for in the Explanatory Notes to Headings of the China Tariff Schedule.
The product in question is identical to a commodity as described in the Explanatory Notes to Subheadings of the China Tariff Schedule.
The product in question is identical to those which have been covered in the classification rulings or decisions issued by China Customs.
There is evidence showing that China Customs has made a pre-classification ruling or decision on the product and has sent such ruling or decision to the company engaged in the import or export activity.
According to customs rules, a misclassification constitutes a regulatory violation, and the violating company may be subject to confiscation of illegal gains (if any) plus a fine ranging from 30% to 200% of the underpaid import taxes. An intentional misclassification may expose the violating company to a smuggling charge, which is a criminal offense.
A misclassification would not be deemed as a regulatory violation (and thus no penalty would be imposed) if the misclassification does not fall within any of the above circumstances, and meets any of the following requirements:
The misclassification arose from an incorrect pre-classification ruling issued by China Customs.
The product in question has been substantively reviewed by China Customs in the past, but the HS code declared by the company has never been challenged by China Customs. Substantive review includes laboratory testing, physical inspection, or a request for the company to file a supplementary declaration or revised declaration of HS code.
The classification of the product in question is technically difficult and has been submitted to GAC’s Technical Committee on Tariff Classification for its review.
Firms that export components and parts or newly developed products, must understand correctly the Chinese tariff classification rules and maintain clear communication channels with China Customs. Strategic legal and operational perspectives are essential in determining the HS codes and duty rates applicable to products in the current international trade environment, particularly given the possible civil and criminal liability.
Whether you know the product well or are just starting out, always check the rulings. Verify to see if there has been any change in logic, new rulings, or revocations. Technology is constantly changing, and tariffs do not necessarily keep up with it.
Foreign companies should obtain pre-classification rulings from China Customs for their most significant products, in order to maintain compliance. They should as well keep track of changes to the Subheadings and Headings of the Explanatory Notes of the Tariff Schedule.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at email@example.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.