{"id":10855,"date":"2022-07-20T15:57:57","date_gmt":"2022-07-20T22:57:57","guid":{"rendered":"https:\/\/www.qad.com\/blog\/?p=10855"},"modified":"2023-01-18T15:58:41","modified_gmt":"2023-01-18T23:58:41","slug":"knowing-whats-what-classification-codes","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2022\/07\/knowing-whats-what-classification-codes","title":{"rendered":"Knowing What\u2019s What: Classification Codes"},"content":{"rendered":"

[vc_row][vc_column][vc_single_image image=”10856″ img_size=”full”][vc_column_text]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.<\/span><\/i><\/p>\n

It all comes down to perspective. When you take a step back, the international trade system can seem simple: one company\u2019s export is someone else\u2019s import. Across the supply chain, everyone is playing a part in this system that spans the globe.<\/span><\/p>\n

Of course, it\u2019s 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).<\/span><\/p>\n

Defining the Harmonized Commodity Description and Coding System<\/span><\/h2>\n

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.<\/span><\/p>\n

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.<\/span><\/p>\n

Why Correct Classification is Crucial<\/span><\/h2>\n

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\u2019s own tariff classification policies.<\/span><\/p>\n

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.<\/span><\/p>\n

For companies, proper classification will directly impact costs. Simply put: with appropriate classification, you\u2019ll pay the appropriate duties and taxes. Whereas if you overpay, naturally, you\u2019ll hurt your bottom line.<\/span><\/p>\n

Conversely, if you pay too little up front, you\u2019ll end up paying more in the long run. Significant penalties are levied against companies that underpay, and it is especially bad for repeat offenders.<\/span><\/p>\n

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?<\/span><\/p>\n

Factors range from the component materials used in manufacturing, the principle use, and a full description of the goods. It\u2019s 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.<\/span><\/p>\n

Compliance is the Only Option<\/span><\/h2>\n

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\u2019s, if you are participating in global trade, proper classification is your legal responsibility. Regulatory compliance is not optional.<\/span><\/p>\n

A violation can take many forms, but the following methods are common violations that can lead to import fraud:<\/span><\/p>\n