Classification of goods for tariff purposes
It is essential that importers, exporters and their representatives properly classify goods. The failure to do so can give rise to an unpaid customs debt. This may arise in the course of a later audit. As with tax audits generally, there is the possibility of interest and penalty together with the initial liability where the duties have been underpaid.
Issues may arise in relation to classifying goods within the tariff. In most cases, this will be relatively straightforward. However, in many cases, issues regarding the identity of the goods arise in relation to their proper categorisation. There are various hierarchies of rules. It is possible to get a binding ruling from the revenue authorities.
Applies to Goods
The tariff applies to trade in goods. This implies tangible property. It is usually by definition movable property. Customs duty does not apply to intangible property such as know-how services and processes in themselves.
Goods are products which have an economic value. Banknotes and Coins which are no longer current currency are goods. It is held that non-reusable and nonrecyclable waste is capable of constituting goods for the purpose of the EU treaties.
Technically speaking prohibited goods may be nonetheless goods within the meaning of the customs code. Goods there are absolutely prohibited are not goods for the purposes of the code such as counterfeit money and drugs. For unlawfully exported goods such those in breach of revenue fiscal and trade legislation may constitute goods for this purpose.
The issue of what is a good has arisen in the context of software which has aspects of goods and aspects of intangible property. The European Court of Justice took the view in early cases that software is not a good as such. However, if embodied in a tangible medium it may be regarded as a good.
Intellectual property may affect goods and their value but does not constitute goods in itself. When intellectual property is embodied in goods, the cost of acquiring that intangible property must be regarded as an integral part of the price paid payable for the goods.
Electricity and gas are specifically provided for in the common customs tariff. In effect, because it enters through defined routes, it is adaptable to the application of customs duties. In contrast, TV signals are not treated as goods
Official Guides and Explanatory Notes
The Convention on the Harmonised System provides for a Council made up of representatives of the various State parties. It may propose amendments to the tariff and publishes explanatory notes.
There is a harmonised system of explanatory notes (HSEN). They are not exhaustive or necessarily definitive. They are updated from time to time.
The HS committee may issue opinions in relation to the text or explanatory notes where issues arise in practice.
The European Commission is authorised by law to clarify the content of the tariff headings. This includes measures regarding the application of the combined nomenclature including. The EU has also published explanatory notes on the EU code (CNENs), based on the Convention. CNENs may refer to HSENs. They do not replace it but are complimentary.
There are various guides to assist in the interpretation of the tariff.
- classification of goods
- explanatory notes
- amendments to notes and nomenclature to adapt to commercial, technological change
Practical Approach to Classification
There are about 10,000 tariff subheadings within which must embrace hundreds of thousands and perhaps millions of types of goods. Common trade descriptions need not necessarily coincide with the naming in the customs tariff.
Generally traders employee professional customs agents to act when making declarations. The agents generally look to the description provided that in the relevant invoice. Where there is binding tariff information, this may be used.
When goods are physically examined by customs authorities, there are classified by reference to the physical characteristics as appear at the time of examination. Where they are not examined in this way, they are based on the description furnished by the trader, usually matched by the customs clearance agent to the closest prima facie description in the combined nomenclature.
The broad approach is to classify goods in accordance with their objective characteristics and properties as defined by the wording of the headings and subheadings et cetera, in the common customs tariff and legal notes.
The customs may commence with the declared description and compare it with the characteristics. They will look at the purpose, use and inherent characteristics of the goods. The may consider technical data. They may consult the relevant notes.
In many instances, there will be an existing EU Binding Tariff Information available from the EU binding tariff information database for identical or similar goods. Where there is a doubt, there may be a requirement to lodge security to pay any additional duty that may arise.
Legal interpretation of Code
The matter of interpretation of the European Union customs code (in common with all EU laws) is one for the courts, primarily the European Courts but also national courts and tax tribunals, including Revenue the Tax Appeals Commissions.
The Court of Justice and other national tribunals are the ultimate and definitive arbiters in the interpretation of the law. They are obliged to rule from time to time in relation to matters of interpretation and application of the code in particular cases. The matter may arise in tax cases in Tax Appeal Commission appeals. The EU Court decisions are binding on the national customs administrations.
Courts and tribunals will take account of the various explanatory notes opinions. They will also take account of the general criteria laid down in EU and other case law interpreting the code.
Approach of Courts
The courts take account of the notes in the tariff itself and the explanatory notes. It has regard to the wording and system of the tariff and the explanatory notes. The court may have regard to the purpose of the provision.
The courts have indicated that the opinions of the Committee on Common Customs Tariff Nomenclature constitute an important means of ensuring the uniform application of the common customs tariff by authorities and as such may be considered as a valid aid to interpretation of the tariff.
The courts acknowledge that the Council has conferred on the Commission acting in cooperation with experts of the member states broad discretion to define the subject matter of tariff headings and the classification of particular goods.
The courts have pointed out that the interpretation by the courts in relation to tariff classification cannot be altered by the Commission’s adoption of explanatory notes. While such notes constitute an important means of ensuring the uniform interpretation of the codes by the customs authorities, they do not have legally binding force.
However, it is not permitted to alter the tariff heading. The Commission’s powers are limited where the World Customs Organisation has given an interpretation of the particular nomenclature in question
Official Interpretative Principles Rule 1
There are six general interpretive rules of the tariff classification published by the Customs Cooperation Council
Rule 1 Classification is determined by the tariff headings. The titles of sections chapters and subchapters offer ease of reference only.
This is the basic rule for performing every classification. Classification is to be performed first and foremost according to the terms of the headings and notes to the section and chapters. The terms of the heading provide the core concept which is supplemented and clarified by the notes.
Only to the extent that these provisions do not otherwise so require, may in a subsidiary manner the subsequent rules below be applied. Therefore, before recourse to the below-mentioned rules, it must be determined whether the goods are sufficiently described by the terms of the heading and whether a note contains special instructions for classification.
Official Interpretative Principles Rule 2
Rule 2 a Reference to an article includes an incomplete on an unfinished article which has the essential character of the completed finished article. This includes the article assembled or disassembled.
This rule enables products which are extremely close to one another to the extent that they are in substance identical from the users’ point of view to be deemed the same notwithstanding differences relating only to the presentation.
Rule 2 b Any reference to goods of a given material or substance is taken to include a reference to goods consisting wholly or partly of such material or substance. It is to include references to mixtures with other material and substances and to goods consisting wholly or partly of such material or substance.
Official Interpretative Principles Rule 3
Rule 3 provides for the classification of goods consisting of more than one material. Rule 3 a provides that where by reason of the above rules, goods are classifiable under two or more headings classification is undertaken as follows. The heading which provides the most specific description is preferred to headings providing a more general description.
Mixtures and composite goods consisting of different materials of different components goods put up in sets for sale which cannot be classified by the above rules shall be classified as if they consist of the material or component which gives them their essential character.
Rule 3b provides that goods which cannot be classified under the above rules are to be classified as if they consisted of the material or component which give them their essential character so far as the criteria are applicable. The essential criteria might be ascertained by determining whether the product would retain its characteristic properties if one or other of the constituents were removed from it.
What constitutes the essential character varies from case to case. It may be decided by the nature of the material or component, its bulk, quantity, weight or value or the role of the constituent material in relation to the use of the goods.
Rule 3c When goods cannot be classified under the above rules they are classified under the heading which occurs last in numerical order among those which equally merit consideration.
Official InterpretativePrinciples Rule 4
Rule 4 provides that goods which cannot be classified under the above rules are classified under the heading appropriate to the goods to which they are most akin. What product is most akin is determined not only on the basis of physical characteristics but also their commercial use and value which in the absence of special circumstances is the price. The appropriate heading must be based on the essential characteristics, in particular, the nature of the goods. A technical examination may be required.
Official Interpretative Principles Rule 5
In addition to the above, the following rules apply in respect of the below-mentioned goods
Rule 5 a Cases and containers specifically shaped or fitted to contain a specific article such as musical instruments, camera cases, necklace cases or similar containers suitable for long-term use and presented with the articles which they are intended are classified with such articles, when of a kind normally sold therewith. It does not apply to containers which give the whole its essential character.
Subject to the above provision, rule 5b provides that the packing materials and packing containers shall be classified with the goods if they are of a kind normally used for packing such goods. This does not apply if such packing materials containers are clearly suitable for repetitive use.
Official Interpretative Principles Rule 6
By rule 6 the classification of goods in the subheadings is determined according to the terms of the subheadings and any related subheading notes and in accordance with the above rules on the understanding that only subheadings at the same level are comparable. For the purpose of the rule, the relevant section in the chapter notes also applies unless the context otherwise requires.