What are HS Codes
What are HS Codes?
Global trade thrives on logistics and lots of paperwork. With increasing trade, comes the product classification system (Harmonized System Code) which is must know info for any company doing business off shore. This standard classification system, followed by all countries, is called the Harmonized System. Every import, from raw to finished products, are classified for the purposes of assigning duties or for governments to know which products cross into their territories. It’s essential to understand the system and to use it wisely. It’s an important element for importers to pre-calculate their landed cost.
HS Code Defined
Harmonized System Code is a common trade term for importers and exporters. HS Codes are the method for standardized trade. The United Nations defines the classification system as “…the Harmonized System is an international nomenclature for the classification of products. It allows participating countries to classify traded goods on a common basis for customs purposes.” It came into existence in 1988 and currently has 200 member countries relying on it to classify their import/export trade. Read more about US tariffs here and more about Canadian tariffs here.
HS Codes Structure
A complete HS Code has 10 digits. To ensure passage from one county to another the importer must use 4 to 6-digits. For example, chapters 50 through 63 encompass all Textiles. Clicking on the link brings up everything from raw materials to finished clothing; and clicking on something specific brings up that product with their own headings, and sub-headings. After the primary digits, each country can use of additional, specific subcategories and notes. For example:
Global HS Codes have four components:
- Chapter: There are 21 distinct sections that split into 96 chapters. Exception chapters include chapter 77, which is reserved for future use, chapters 98 and 99, which are limited to national use, and Chapter 99, which is a specific code limited to temporary modifications. As an example, the chapter selected is 09, for “Coffee, tea, maté and spices”.
- Heading: The heading dictates the specific category within any particular chapter. In the example above, the 01 refers to coffee.
- Sub-heading: The last two digits of the international Harmonized Code are more specific, defining subcategories of products. For example, caffeinated coffee beans are 0901.21, but decaf are 0901.22. Incidentally, instant coffee would fall under a totally different heading – 21 – for miscellaneous edible preparations.
- Extra digits: Countries can use an additional 2-4 digits for country-specific categorizations. For example, the United States relies on ten digits codes called Schedule B numbers. The 0050 in the above example is used for non-organic coffee. Since these digits are unique, non-organic caffeinated coffee in another country would begin with the same 6 digits but the last four digits would likely be different.
HS Codes: It’s the law
The HS Code classification system is used globally to assess duty (Customs tariffs), establish rules of origin (combat anti-dumping), collecting trade statistics, and monitor controlled or dangerous products to name a few.
How complex can it be?
Fasten your seatbelt. Here’s a question:
Is recycled plastic resin granules allowed to be imported into Vietnam? Sounds straight forward.
If the recycled resin granules are not scrap it can be imported into Vietnam but that’s a partial answer. The applicable H.S code is 39 xxxx. Part II of the answer tells us that no import permit is required if exporter/importer applies the HS code properly. Then there are the variations to deal with. For example, if the recycled PVC pellets are classified under HS 3904.10.99: polymers of vinyl chloride or of other halogenated olefins, the import tariff (2016) states the rate of duty is normally 3%, however if it’s exported from China the duty is 20%, from ASEAN it’s 0%, or if it’s coming from Japan the duty is 3%.
You may ask ‘how do pellets affect me?’, but pellets, like every other commodity being shipped across borders is subject to the same scrutiny.
Universal HS Codes?
Yes and no. Of the 10 identifying numbers, only the first 6 numbers are universal. After that each country assigns up to 2-4 digits more. While complicated, this common product classifying system actually improves the speed trade.
How to determine the correct product code
You should know that this that this is a fairly straight forward proposition. Look at the Canadian HS Code Manual for example. Find the chapter that describes your product, then the sub chapter that describes elements of your product, then compare that with similar products. All of which is a prescription for problems. Many times, importers will choose HS Codes which are classified with lower duties, but upon inspection a customs official will raise a red flag and boom, you are liable not only for the shipment in question but for each import of that product going back years and years. While it’s nice to save a few bucks, having to defend half a million dollars of shipments can not only cause angst and penalties, every import or export you make can be opened up for scrutiny. Scrutiny is not a good thing. It will cause a lot of business interruption.
Aside from creative HS code choices selecting lower than actual codes to save money, there are many other classification issues to further complicate issues. Translation and usage problems, description reliability, inconsistent or unreliable item number, and discrepancies between Customs and suppliers in product descriptions.
The challenge is to set up a classification process that shows proper due diligence yet still makes certain that you are using the lowest possible duty rate. When purchasing products for import, pay careful attention to the Harmonized Code, you can research yourself but seeking help from your customs broker is always a good plan.
1. Break down your product
Break down your product into groups such that similar items are together. This is the best way of maintaining integrity of data. The obvious benefits are maximizing economies of scale when classifying like parts. As well, you can ensure similar parts are classified the same (reasonable care), and eliminate any inconsistencies within a part grouping.
Always check the customs rulings. There may have been changes, new rulings, or revocations. Technology constantly changes but HS Cods don’t necessarily keep up with technology.
3. Identify Product Specifications
After checking rulings, determine the product data required to choose the classification. As your supplier for detailed spec sheets. No doubt your supplier will have export experience shipping the same items to many importers in your destination country. Ask the vendor for help, as a starting place, then with info in hand circle back to the internet to check tariffs and then onto your customs broker who undoubtedly has imported the same product for other companies.
Any information found online, including this, is basic. Always check with customs for the latest and up-to-date codes but this is a good starting place.