Classification: Shopping for the best tariff rate?

If the nature of the product you import can be deemed complex, multi-functional and/or sophisticated, then, chances are, its tariff classification (and hence its applied rate of customs duties) could be ambiguous and subject to change. Tariff classification is an intuitive and oftentimes amorphous methodology meant to determine under which description and “tariff line” in Section 104 of the Tariff and Customs Code your imported article should fall under. The said tariff line bears the rate of duty which will be made to apply.

Usually, descriptions are straightforward and acceptable at face value. If you are importing a ubiquitous ball point pen, then it would readily be classified with little dispute under the tariff line for “ball point pens” and applied the rate of duty specified for that line. However, if that ball point pen had added features such as flashlight and paper knife functionalities, then separate and distinctly possible tariff lines and rates for the product are as follows:

ball pens - - - - - - - - - - - - seven percent

flashlights - - - - - - - - - - - 15 percent

paper knife - - - - - - - - - - 10 percent

Contending interpretations between importers and customs officers are therefore possible, if not imminent, and the above-mentioned fluid rules, as well as the potential risks and opportunities, would now come into play. Importers would want to, as much as possible, classify their product under the tariff line with the least amount of duties while customs would tug on the opposite side.

The stakes in classification cases could be fairly substantial. One case that made the business headlines three years ago was a question raised on the proper classification of powdered orange juice. An analysis of the said powdered juice showed that a composition substantively high in sugar. It was because of this that certain sectors wanted to have the said powdered orange juice classified instead as “sugar”, which has a tariff rate then of 48 percent. This would have had a significant impact, obviously, when you consider that the classification long used for the said powdered orange juice has a corresponding tariff rate of only five percent.

From the foregoing, it is clear that financial consequences resulting from classification issues could easily run into the millions of pesos. With possible implications of this magnitude, companies are highly encouraged to seriously look into their tariff classification procedures and practices seriously.

Ball point pens, and sugar and powdered beverages are only the starting point of this whole systemic process of exploiting/mitigating tariff classification risks/opportunities. Numerous product innovations are giving way to more sophisticated products with even more complex technical specifications that may baffle even the most experienced customs officers. Product diversity and market changes are even foreseen to expand further in the future. As new products and features are introduced, chances increase for these products to arguably fall under even more contending tariff lines. 

How then are potential conflicts and ambiguities in tariff classification resolved? Fortunately, there is an international convention on the descriptions used for tariff lines and how products should be properly classified according to those tariff lines. This is called the Harmonized Commodity Description and Coding System (HS) Convention. Contained in the said Convention is a detailed list of tariff lines and descriptions used for the classification of imported goods. The ASEAN Harmonized Tariff Nomenclature (AHTN) is based on the said list. It comprises of around 10,000 meticulously organized tariff lines bearing different descriptions, which are uniform and standard for all contracting parties to the HS Convention (with the exception of specific national subheadings which are unique to a country). It uses a system of digits (corresponding to specific categories) and dashes to differentiate between product descriptions. More digits and more dashes represent more specific descriptions.

The main point of reference to resolve competing tariff lines is what is called the General Rules of Interpretation (GRI) for the HS, adopted into Section 103 of the Tariff and Customs Code. The GRI’s specify certain criteria on how a product’s characteristics should be matched with the descriptions contained in the HS Codes. This process of justifying your tariff classification through the GRI can be tedious, time consuming, and sometimes utterly impenetrable.

One other important consideration here is that the number of tariff lines and descriptions in the HS are subject to updating and change. This would mean past and present classification schemes used by companies may be rendered obsolete as tariff lines may be added or removed in each revision. The most recent revision was only promulgated this year, known as the HS 2007 amendments. The immediately preceding revision was undertaken 5 years before – or the HS 2002 amendments.

For all it knows, a company may still be classifying its importations under a tariff line that no longer exists or under one with a description that has since been altered – which either way leads to a risky and inaccurate declaration. It could also be possible that a new tariff line more applicable to your imported product has already been created with a different rate of duty. In this case, you involuntarily misclassified your products and run the risk of either underpaying (if the applicable tariff line has a higher rate) or overpaying (if the applicable tariff line has a lower rate) your customs duties.

Importers therefore should ensure that they properly document their classification methodology to substantiate their declarations. As the Bureau of Customs is now conducting Post-Entry Audits to check on whether all customs rules (of which tariff classification is an integral part) have been complied with, this necessity is underscored.

Companies are encouraged to employ professionals well versed in customs and trade related opportunities/risk management, costs reduction, and increasing efficiencies. Whether you are a multinational company with a large market or a new venture just starting trade, time and money can be substantially saved by planning the right strategies for movement of your goods and provision of your services to promote compliance and foster favorable customs position. Certainly, experience in local and international classification rules is a minimum requirement since international rules are recognized within the Philippines.

(Jeremy I. Gatdula is a Principal for International Trade and Customs Services of Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).