International trade is a tool to expand our markets for both goods and services that otherwise may not have been available for us. It is the reason why you can pick up between a Japanese, German or American car for example.
International trade plays a very important role in our daily life, for example if you walk into a supermarket and can buy south American bananas, Brazilian coffee and a bottle of south African wine, then you are experiencing the effect of international trade.
However International trade is a very complicated process and requires many documents and codes for classification which is a very important step in the whole import export process.
HS code definition:
HS Codes (or HTS Codes), also known as the Harmonized Commodity Description and Coding System, or simply the Harmonized System, are a standardized international system to classify globally traded products. The system was first implemented in 1988 and is currently maintained by the World Customs Organization. The HS Convention, signed in 1983, has over 200 member countries. As signatories, each country agrees to classify its tariff and duty structure according to the HS Code categories.
HS code is developed and managed by the World Customs Organization, the HS code
- Consists of 5,000 commodity groups covered in 99 Chapters containing 21 sections
- Is identified by a six- digit code that can be broken down into three parts
- Is supported by well-defined rules with legal and logical structure to achieve uniform classification all over the world
HS code is intended to ensure that it meets the current demands of governments and international trade.
HS code reduces the costs related to international trade as there is no “translator” required for people to read and understand this code. It contributes to the harmonization of Customs and trade procedures and the non-documentary trade data interchange in connection with such procedures, thus reducing the costs related to international trade.
To understand the meaning of HS codes, we will take 1704.90.10.00 as an example.
- 17 relates to Chapter 17 of Section IV – Prepared foodstuffs; beverages, spirits, and vinegar; tobacco and manufactured tobacco substitutes
- 04 relates to sugar confectionery (including white chocolate), not containing cocoa
- 90 relates to confections or sweetmeats ready for consumption:
- 10.00 relates to candied nuts
The first two digits (HS-2) identify the chapter the goods are classified in, e.g. 09 = Coffee, Tea, Maté and Spices. The next two digits (HS-4) identify groupings within that chapter, e.g. 09.02 = Tea, whether or not flavoured. The next two digits (HS-6) are even more specific, e.g. 09.02.10 Green tea (not fermented). Up to the HS-6 digit level, all countries classify products in the same way (a few exceptions exist where some countries apply old versions of the HS).
The system is used by more than 200 countries and economies as a basis for their Customs tariffs and for the collection of international trade statistics. Over 98 % of the merchandise in international trade is classified in terms of the HS.
It’s very important to understand HS code because this code is used by various organizations, governments for different purposes:
- Trade policies
- Quotas controls
- Price Monitoring
- Monitoring of controlled goods
- Setting of freight and transport tariffs
- Gathering of transport and trade statistics and economic research and analysis among other users
The HS is thus a universal economic language and code for goods, and an indispensable tool for international trade which is incorporated into more than 200 countries and customs clearance systems around the world.
Usage of incorrect code may be considered by customs as non-compliance, misleading or misdeclaration- all of which comes with its associated penalties.
Attention: Every country has its specific HS code, there is no Global HS code. Each country can modify it by adding two or four digits. The first 6-digit numbers are supposed to remain the same across the entire world.
How to choose the right HS code
Sometimes let’s say that you customers may ask you to specify a 10-digit HS number on the commercial invoice. the 10-digit number you use for U.S. export purposes may be different than the 10-digit number they need to use in their country for their import purposes. Why are they different?
As we mentioned before the first 6 digits are uniform for all countries who agreed to the Harmonized System. However individual countries have the authority to add to the HS system to create 10-digit codes based on their individual taxes and needs. (Some countries use eight-digit codes; others use 12-digit codes.
Exporting umbrellas form the United states to Germany.
In the United states umbrellas are identified by the HS number 6603.20.3000. If you are exporting to Germany and you complete the commercial invoice using all digits of that code, the German importer’s paperwork will be refused. Because in Germany the right code for umbrella’s is 6603.20.0000.
What Happens in case of Using an Incorrect HS Code:
- The product will be classified Incorrectly
- The goods will be entered into another country under an incorrect classification number
- The exporter’s certificate of origin will be prepared incorrectly
- import clearance delays may occur.
- The buyer may incur additional costs.
- The importing country may begin an investigation.
- Goods may be denied preferential duty treatment.
- Penalty action may be taken.
Tips on How to determine the correct HS code.
- The first step is to break down your products into specific groups, this step is critical to ensure efficiency and control of data. Note that in some cases there may be slight discrepancies between the HS code your supplier will use and the correct HS code in the country of import.
If you need help regarding classifying your products you can contact your freight forwarder or customs Broker.
Import duty rates vary for every country so it’s important that you consult with a professional before you import.
- Product ruling is a type of public ruling under the Taxation Administration Act. It gives certainty to participants or potential participants on the tax consequences of an arrangement. It’s highly suggested to check the Ruling whether you are familiar with the product or not, because it constantly changes, and tariffs doesn’t necessarily keep up with technology.
- Product specification is a document that provides critical defining information about a product and can include:
- identification of the manufacturer
- list of rules,
- bans and standards that apply to the item
- design specifications
- product images that visually illustrate the product
In order to assign the right classification, you should determine what type of information you need to know and required for your product.
Note: if the country of export and country of import have a current Free trade Agreement in place, the exporter can supply the importer with a certificate of origin that can reduce or eliminate import duty fees.
As you can see HS code is a very important tool, that’s required at each import/export process. Mastering HS code is a key for easier shipments. By providing the right code from the first time you will be saving time and money.
You can always ask for help from your Customs Broker or your Freight forwarder. Don’t hesitate to contact us for any further information or queries.
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