Understanding HS Codes: A Comprehensive Guide

A Journey Through the History and Evolution of HS Codes

The evolution of tariff classification systems, leading to the Harmonized System (HS) used today, reflects ongoing efforts to streamline international trade practices. Originating from early attempts at systematic classification in the mid-19th century, the development of tariff nomenclatures aimed to establish a common language of trade, ensuring clarity and consistency across borders.

The Evolution of HS Codes

The Harmonized System (HS) Codes have evolved significantly to facilitate international trade. Here's a brief timeline:

• 1853-1922: Development of an international statistical nomenclature with 186 items across five groups.
• 1927: League of Nations Conference lays groundwork for the Geneva Nomenclature.
• 1931: Introduction of the Draft Geneva Nomenclature with 991 headings in 86 chapters.
• 1950: Introduction of the Brussels Tariff Nomenclature (BTN) renamed the Customs Cooperation Council Nomenclature (CCCN) in 1974.
• 1983: CCCN replaced by the Harmonized Commodity Description and Coding System.
• 1988: The Harmonized System enters into force under the World Customs Organization, standardizing the classification of goods across more than 200 countries.

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The Structure and Classification of HS Codes

The Harmonized System (HS) codes provide a structured framework essential for international trade. Here's how they are organized and their functions:

Structure of HS Codes:

• Over 5,000 headings and subheadings
• Grouped into 21 sections and 99 chapters
• Each HS code comprises six digits: First two digits: Chapter Next two digits: Heading Final two digits: Subheading

?Functions of HS Codes:

• Customs Tariff Basis: Ensures consistent classification of goods globally. For example, live animals are classified under Section 1, with horses specifically detailed as Subheading 0101.21.
• International Trade Statistics: Enables collection and analysis of trade data. For instance, logs are classified under Heading 44.01, and wooden frames under Heading 44.14.
• Rule of Origin: Determines the source of goods for tariff purposes. This ensures consistency in determining whether goods qualify for preferential tariffs.
• Revenue Collection: Provides a framework for governments to levy import duties and taxes. For example, TVs are classified under Chapter 85 and motor vehicles under Chapter 87.
• Trade Negotiations: Forms the foundation for tariff concession negotiations in international trade forums like the WTO.

The classification structure of the HS accommodates goods ranging from raw materials to finished products across various industries and sectors globally. Goods under Chapters 1 to 83 are generally classified based on their material of manufacture, while those under Chapters 84 to 96 are typically classified according to their function.

Functions of HS Code Notes

The HS codes are supplemented with detailed notes that serve various functions:

• Notes of Exclusions: Specify goods that are not covered within certain chapters.
• Notes for Definitions: Provide clarifications on specific terms used within chapters.
• Notes for Classification Provisions: Establish the classification criteria for certain goods.
• Notes for Limitation of Scope: Define the boundaries of goods to be classified within a section or chapter.
• Classification by Using General Interpretative Rules (GIR): These rules ensure consistent classification globally, outlining step-by-step guidelines for determining the appropriate HS code for goods

General Interpretative Rules of the Harmonised System

The Harmonised System (HS) uses six general interpretative rules to classify goods in a structured manner. These rules are applied in order of priority.

Why are rules necessary?

• Not all goods can be classified directly under the terms of headings, sections, chapters, or subheadings.

Rule 1

• Titles of sections, chapters, and sub-chapters are for reference only.
• Legal classification is determined by the terms of the headings and any related section or chapter notes.
• Classification under headings should be considered first, followed by other rules if necessary.

Example:

• A live goat is classified under 01.04.
• A handbag is classified under 42.02.
• A padlock is classified under 83.01.
• Cherries are classified under 08.09.
• Sterile surgical catgut: Note 4(a) to Chapter 30 directs classification to heading 30.06, not any other heading, for "sterile surgical catgut, similar sterile suture materials, and sterile tissue adhesives for surgical wound closure.

Rule 2

Part (a):

• Incomplete or unfinished articles are classified as complete if they have the essential character of the complete article.
• This includes unassembled or disassembled articles.

Examples:

• Automobile Engine: An incomplete automobile engine (without carburettor) is classified as a complete engine under the same heading.
• Furniture: Unassembled furniture (like IKEA products) is classified as assembled furniture.

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Part (b):

• References to a material or substance include mixtures or combinations with other materials.
• Goods made of multiple materials are classified according to the principles of Rule 3.

Example:

• Copper and Steel Pan: A kitchen pan made of copper and steel can be classified under headings for both materials (73.23 for iron or steel, 74.18 for copper).

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Rule 3

• Applied when goods can be classified under two or more headings.

Part (a):

• The heading with the most specific description is preferred over a more general one.

Example:

• Electric Shaver: Classified under 85.10 (Shavers) rather than 84.67 (Tools for working in the hand) or 85.09 (Electro-mechanical domestic appliances).
• We noted two possible headings for the side mirror: 87.08 - Parts and accessories of the motor vehicles of headings 87.01 to 87.05 …70.09 - Glass mirrors, whether framed, including rear-view mirrors. “Glass mirrors, whether or not framed” is more specific than parts of motor vehicles. So, the side-mirror is classified in heading 70.09 we used GIR 1 and 3 (a).

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Part (b):

• Mixtures, composite goods, and goods in sets are classified based on the material or component giving them their essential character.

Examples:

• ·???????? Leather and Textile Gloves: If the palm and key areas are leather, giving essential character, classify under leather gloves.
• Brush, Mirror, and Comb Set: If no single item provides essential character, classify based on the component providing the essential character.

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Part (c):

• If Rules 3(a) and 3(b) fail, classification is under the heading last in numerical order among those meriting consideration.

Example:

• A sandwich with beef and cheese, packed with potato chips, is classified under 16.02 for the meat.

Rule 4

• Goods not classifiable under Rules 1-3 are classified under the heading for goods to which they are most akin. Known as the ‘kinship rule,’ it is rarely used.
• Only used when: there is no heading which can cover the goods through its terms or notes (GIR 1); and GIR 2 is not able to expand references to allow coverage of the goods.

? Requires a “most akin” test

Example:

• New Technological Device: If a new type of electronic device doesn't fit existing headings, classify under a heading most akin to similar existing devices.

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Rule 5

Part (a):

• Special containers (e.g., camera cases, musical instrument cases) are classified with the articles they are designed to contain if presented with those articles.

Example:

• Camera Case: Classified with the camera if the case is specially shaped or fitted to contain it.

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Part (b):

• Packing materials and containers are classified with the goods if they are normally used for packing those goods, unless suitable for repetitive use.

Example:

• Wine Bottles: Classified with the wine they contain if they are of a kind normally used for packing wine.

Rule 6

• For legal purposes, classification within subheadings follows the terms of those subheadings and related notes.
• Only subheadings at the same level are comparable.
• Classification at Subheading level MUST already have a 4-digit classification e.g. 3702 Using rules 1-5. Classification within subheadings according to the terms of the subheading & subheading notes
• Use same rules (1-5) to determine classification at subheading level. Only Subheadings at the same level are comparable.
• In this rule, relative section and chapter notes also applies, unless the context otherwise requires. ‘Subheading at the same level’ one-dash subheadings (level 1 Or two-dash subheadings (level 2)

Example:

• Note 4 (B) to Chapter 71: “The expression “platinum” means platinum, iridium, osmium, palladium, rhodium and ruthenium.” Subheading Note 2 to Chapter 71: “Notwithstanding the provisions of Chapter Note 4(B), for the purposes of subheadings 7110.11 and 7110.19, the expression “platinum” does not include iridium, osmium, palladium, rhodium or ruthenium.” Note 4 (B) to Chapter 71 applies to all subheadings of the Chapter except 7110.11 and 7110.19
• Note 3 to Chapter 29: “Goods which could be included in two or more of the headings of this Chapter are to be classified in that one of those headings which occurs last in numerical order.” Subheading Note 2 to Chapter 29: “Note 3 to Chapter 29 does not apply to the subheadings of this Chapter.” Subheading Note 2 to Chapter 29 provides the context that “otherwise requires” and Note 3 to Chapter 29 does not apply to subheadings

The Art and Science of Tariff Engineering

Tariff engineering is a strategic approach used by businesses to design and manufacture products in ways that classify them under tariff codes with lower duty rates. This practice leverages an in-depth understanding of the physical and legal variables that influence the duty rate applicable to specific products. By making calculated modifications, importers can achieve significant cost savings.

Historical Context

The concept of tariff engineering has its roots in an 1881 Supreme Court case, Merritt v. Welsh. The Court ruled that manufacturers have the right to alter their products to achieve favourable tariff classifications, provided there is no fraud or deception involved. This landmark case legitimised tariff engineering as a legal and strategic tool for managing import costs.

Practical Applications

Effective tariff engineering requires meticulous planning and early involvement of customs specialists. Key considerations include:

1. Material Composition: The material used in a product can drastically affect its tariff classification. For example, footwear with textile uppers might attract lower duties than leather uppers.
2. Construction Methods: The way a product is constructed can influence its classification. This includes factors like stitching techniques and the presence of specific design elements.
3. Product Features: Features such as the presence of a foxing strip on shoes, the height of footwear, or whether a garment has pockets can impact duty rates.
4. Intended Use: The classification can vary depending on whether a product is deemed for protective use, sports, or casual wear.

Examples of Tariff Engineering?

1.??Footwear: Converse, owned by Nike, added layers of felt to the soles of their shoes, reclassifying them as slippers. This adjustment reduced the duty rate from as high as 37.5% for shoes to just 3% for slippers.

2.??Apparel: Columbia Sportswear incorporated tiny pockets below the waistline of women’s blouses, reducing the tariff rate from 26.9% to 16%. This minor design change exemplifies how small modifications can lead to significant duty reductions.

3.??Candles: Some manufacturers of Chinese candles subject to antidumping duties of 108.3% began producing wickless candles, reclassifying them as articles of wax rather than candles. This allowed them to avoid the high antidumping duties.

4.??Action Figures: Marvel successfully argued that their action figures should be classified as toys rather than dolls. Dolls, defined as representations of human beings, carried a 12% tariff, whereas toys had a tariff rate of 6.8%. This reclassification reduced the duty rate by nearly half.

Optimising Classification Codes

To optimize tariff engineering, businesses should follow these steps:

1.??Know Your Product: Analyse product design, composition, sourcing, and manufacturing details. Review current classifications with trade compliance professionals.

2.??Know Your Opportunity: Understand the nuances of the Harmonized Tariff Schedule (HTS) codes. Utilize resources like Explanatory Notes (ENs), CROSS rulings, and Informed Compliance Publications (ICPs) for guidance.

3.??Know Your Process: Coordinate closely with product development and design teams to implement changes strategically and ensure compliance. Consider submitting binding ruling requests to pre-empt potential customs disputes.

Tariff engineering is a powerful tool for businesses navigating the complexities of international trade. By strategically designing products to fit favourable tariff categories, companies can achieve substantial duty savings. This process requires careful planning, a deep understanding of customs regulations, and collaboration across various business functions. The practice of tariff engineering not only optimizes cost management but also enhances a company’s competitive edge in the global market.

Staying Updated and Ensuring Compliance

1. Regular Updates: Stay informed about changes to HS codes and tariff schedules.
2. Accurate Documentation: Use the correct HS codes on shipping documents to avoid penalties and delays.
3. Expert Assistance: Work with customs brokers or trade consultants for complex classifications and regulatory compliance.

Conclusion

Mastering the use of HS codes and understanding customs tariffs are fundamental for efficient international trade. By adhering to classification rules and keeping abreast of updates, businesses can optimize their operations and ensure compliance with global trade regulations.

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World Customs Organization