Tariff Classification (Part 1)

• This event will be recorded and both the recording and the presentation slide deck will be made available after the webinar.

• You will all be in the “Listen Only” mode for the webinar.

• If you have a question please use the “Ask a Question” function on your GoTo Webinars panel.– All questions will be addressed at the end of the presentation unless

there is a common, reoccurring question.

• If you are experiencing technical difficulties, please use the “Chat” function on your GoTo Webinars panel; OR email Justin directly at justin@ghy.com

House Keeping

• This course will provide an understanding of the Harmonized System of Tariff Classification (HS) that is the foundational pillar in the global language of trade facilitation.

About the Class

• Anthony (Tony) Gurniak is a Certified Customs Specialist with more than 35 years in cross border trade facilitation and relationship management.

• In his career, the team that Tony oversees has facilitated in excess of 5 million transactions representing 56 billion dollars in product imported into Canada.

• Tony's client relationship base is diversified across all sectors including food, agricultural, chemical, aerospace, manufacturing, retail, etc.

About the Speaker

• The Harmonized System: “The language of trade”... – Developed and maintained by World Customs Organization

(WCO).– Is the basis for collection of customs duties and international

statistics by almost all countries.– Is backed by Explanatory Notes and a Compendium of

Classification Options and used as a basis for:• Customs tariffs; Rules of origin• Trade negotiations• Monitoring controlled goods; various customs control programs and

procedures

– High degree of error in this program – as high as 30% - 40%.

Tariff Classification

• Harmonized Description & Coding (HS) – 141 Countries – 6 Digit – International (4 Digit – country and state specific).– Responsibility of importer/exporter.– Affects duty, trade agreements, and rules of origin.– Customs ‘risking & security profiling’ largely based on HS

classification.• Information and declaration of most imports to Customs.• Incorrect HS results in compliance liabilities affecting costing and margins.

Tariff Classification

Importance of Correct HTS Classification• Responsibility of the importer as per the customs

regulation.• Determines the duty if importing or excise taxes apply.• Determines the “rule of origin” for most Free Trade

Agreements (i.e. NAFTA) requirements.• Identifies goods that are subject to control.• Required to be electronically submitted prior to goods’

arrival in Canada (commercial goods).• Risk based assessment based on classification.

An incorrect HTS classification and subsequent reassessment would affect costing and profit margins.

Duty of CARE

• Declarations have a direct impact on cross border supply chain, profitability, and brand reputation.

– Clerical/administrative errors considered negligence by customs.

What is the Harmonized System?

• The Harmonized System (HS) contains approximately 5,000 headings and subheadings covering virtually all articles in trade.

• These provisions are organized in 99 chapters, arranged in 21 sections.

• Along with the General Interpretive Rules and Legal Notes to the chapters and sections, these form the legal text of the HS.

The Harmonized System Structure

• Under the HS all products are described by a ten-digit number that is broken down by Chapter, Heading, Subheading, and Commodity Code.

The Harmonized System Structure• Example: 8481.80.00.72

– Commodity: Dual-control, polished-chrome sink faucet.

• 84 Chapter– Machinery and mechanical appliances.

• 84.81 Heading– Taps, calks, valves, and similar appliances.

• 8481.80 Subheading– Other appliances – Hand operated

• 8481.80.00 Tariff Item– Of other materials…

• 8481.80.00.72 Commodity– Faucets, plated, duel control.

• 8481.80– International Level

• 84 – Chapter• 84.81 – Heading• 8481.80 – Subheading

• 8481.80.00.72– Country-specific Level

• 8481.80.00 – Tariff Item• 8481.80.00.72 – Classification No.

• First 6 digits represent the international portion of the classification number used by all countries acceding to the International Convention on the Harmonized Commodity Description & Coding System.

• The Last 4 digits reflect Canadian tariff and statistical requirements.

The Harmonized System Structure

Any Questions Yet?

Half-Way Point

Classification Rules: G.I.R.’s (General Interpretive Rules)

• The HS is a “rule-based” classification system.• Classification is determined by strict application of the

G.I.R.’s.• There are six G.I.R.’s.• Rules 1 to 4 must be applied in sequence.• Rules 5 and 6 stand on their own.

Tariff Classification (>5,000 HS Codes)Basic Rules & Understanding

1. General Rules of Interpretation.

2. Legal Notes.

3. Explanatory Notes.

4. Other References (D Memo, CROSS, etc.)

• Parts and accessories.• Sets and kits.• New products on the market.• Multi-purpose products.• Products consisting of mixed materials.• Products that can be described by several different

names.• Chemicals.• Dual purpose goods.

Products that are Difficult to Classify

• Named parts of general use have a ‘Unique Classification’ (fittings, nuts, bolts, seals, etc.).

• Parts/accessories committed exclusively by design may use ‘catch-all classifications’ (i.e. brake parts, steering parts, etc.).

Tariff Classification ‘Crash Course’

Brake Parts8708.30

Transmission Parts 8708.50

Suspension Parts 8708.80

Radiator Parts 8708.91

Exhaust/Muffler Parts 8708.92

Clutch Parts 8708.93

Steering Parts 8708.94

Composition irrelevant in ‘catch-all HS’

Unique Classification or Catch-All

Chapter 40 Rubber and Articles Thereof

Heading 40.16 Other articles of vulcanized rubber other than hard rubber

Sub-Heading 4016.93 .Gaskets, washers, and other seals

Tariff Item 4016.93.10 Of a kind used in automotive goods of Chapter 87

Statistical Level 4016.93.10.10 .Gaskets

Unique HS vary by composition (aluminum, steel, zinc, rubber, plastic, etc.)

Chapter 40 16 93 10 10

Heading

Sub-Heading

Tariff Item

Statistical Level

Catch-All

Usually a ‘part or accessory’ is committed exclusively by design for only one use.

• Part: defined as identifiable component of article, machine, specific good, that is ‘integral’ to design and essential to function of product in which it is used.

• Accessory: defined as article performing secondary role, not essential to function, designed for a specific purpose that could improve effectiveness of host machine, equip. apparatus, or appliance.

Catch-All Classification (Acceptable Use)

Bracket case study – D10-14-42

• 8708 part of chassis-frame, element of body, engine, running board, etc.

• 8302.30 incorporated into ends of rails of interior bus body, vehicle door handles, for blinds, or used to attach hoses to radiators.

Catch-All Classification In Action

HS Classification Process Summarized

• Determine what the product is, its material composition and its use (primary function).

• Is the product specifically named in the HS (normally a ‘part of general use’).

• Review and apply the General Interpretive Rules (GIR), Legal and Explanatory Notes.

• Utilize external references tools for support (CROSS – http://rulings.cbp.gov/

Understanding RisksBusiness/Relational/3rd Party Liability

• Customs systematically increasing audits and enforcing actions.– Undetected errors result in retroactive costs impacting

profitability (fines, penalties, administration, etc.)

• Importer of Record own ‘compliance and financial risks’ associated with declaration.

Cost of Non-Conformance• Border crossing delays.

– How many border crossings do you have each day/month/year?

• Supply chain disruptions.• Financial penalties.• FTA loss.• Additional customs fees (Merchandise

Process Fees – MPF).• Increased enforcements (exam/audit).• Increased COGS/reduced profitability.• Damage to brand reputation.

Can you afford it?

Best Practices Approach1. Ensure your supply chain partners are aware of what is

required of them to support declarations that are made in your name (as IOR).

2. Assign internal champion to ensure parts have classification and corresponding ECO (based on description, end-use, and composition) and adjust as appropriate (identify champion and timeline for completion).

3. Ensure new or changed parts follow same process (sustained and documented compliance).

4. Engage outsourced specialists if required (i.e. GHY).

• Global sourcing adds value and complexity.– http://tradecompliance.ghy.com/2012/08/coping-with-differing-glo

bal-trade-compliance-standards/– http://tradecompliance.ghy.com/2012/08

/gibson-settles-charges-but-at-what-cost/

• Governments are escalating enforcement actions (focused assessment – systematic review and targeting)– http://www.cbp.gov/linkhandler/cgov/trade/trade_programs/audit

s/focused_assessment/fap_documents/exh4a.ctt/exh4a.pdf

• Tariff (and NAFTA) essential to targeting/risking (problems not detected early have systemic impact and can be costly both financially and to importers’ brand/image)

Recognize Tariff is the Foundation of Trade

1. Identify plan of action – supply chain information integrity (document compliance accountability plan including use of description, tariff, origin, and value).

2. Indemnification – implement supplier indemnification clauses (costs of non-compliance).

3. Review regularly (at least annually).

4. Share findings of review (corrective actions and voluntary disclosures may be necessary).

You Will Be Audited – Have a Plan

Tony GurniakManager

Phone: 204-947-6700 ext. 234Email: tony@ghy.com

www.ghy.com

Contact Information