❖ CLEARING ❖ FORWARDING ❖ CUSTOMS ESSENTIALS Customs Essentials Module 2.2 – The Customs Quartet CUSTOMS HS TARIFF CLASSIFICATION Occupational Certificate | 96368 – Clearing & Forwarding Agent | NQF 5 STDENT STUDY AID (3 of 4)
Disclaimer This material is the property of GMLS. It should not be construed as professional advice on any specific facts or circumstances. The contents are intended for general educational and informational purposes only and may not be quoted or referred to in any publications or proceedings without the prior written consent of GMLS, to be given or withheld at our discretion. To request reprint permission for this training material, please contact the GMLS office at Email [email protected]. The views set forth herein are the personal views of the authors and do not necessarily reflect the views of GMLS.
3 Module 2.2 Day 3 The Customs Quartet: CUSTOMS HS TARIFF CLASSIFICATION
Module 2.2. Lesson Plan 4 Day 1 • Lesson 1 – Introduction to the Customs Quartet • Lesson 2 – Essential Everyday Customs Knowledge 1. The Customs HS Code for Tariff Classification 2. The Customs Rules of Origin 3. The Customs Value and Value Basis in the RSA Day 2 • The Customs Rules of Origin Day 3 • The Customs HS Tariff Classification Day 4 • Lesson 1 – Customs Valuation • Lesson 2 – Duty Calculations
Lesson Plan – Day 3 Lesson 1: Fundamental Knowledge Component – Background Information to HS Classification Lesson 2: Essential Knowledge Component – The HS Classification Rules Lesson 3 – Applied Knowledge Component – Critical Application with 2 Case Studies
LESSON 1 6 Fundamental Knowledge Introduction to the WCO HS Tariff Classification Code & Classification Requirements
Lesson 1 Fundamental Knowledge Component Background Information to HS Classification Tariff Classification Prelude, before we start The Importance of Correct Tariff Classification The Consequences of Incorrect Tariff Classification Other Statutory Control Measures Invoices as Prescribed Analysis Certificate & Confidentiality Importer’s Written Clearing Instruction Introduction to the HS Convention WCO General Interpretive Rules (GIR) Explained
Tariff Classification Prelude, before we start… Applying 5 specific questions to Tariff Classification: 1. What do I have, what is it? 2. What is it made of? 3. What does it do? 4. How is it presented? 5. Is there any other technical information I need (i.e. descriptive literature)? Let’s “park” them for later on. 8 Always keep this handy during this specific lesson, and constantly match these questions with the information shared throughout this lesson.
9 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Everything can be Classified • Every conceivable thing can be classified in accordance with a tariff classification code! • In other words, whether that thing can be seen or not, touched or not, smelled or not, if it exists and its has been given a name or description, then it can be coded in a classification context, in this case, according to the HS Codes. • Below is an extract taken directly from the SARS Customs website. 10 Ctrl+Click the link to access: Tariff – South African Revenue Service (sars.gov.za)
11 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The Importance of Correct Tariff Classification • The purpose of classifying goods is to identify the correct tariff heading & subheading in order to apply the correct rate of customs duty (Schedule 1 – Part 1), • The payment of additional customs duty (Schedule 1 – Part 2 A & B), • The payment of anti-dumping duty, countervailing duty and safeguard duties (Schedule 2), • The payment of surcharge (when in force), • Possible rebates of Customs Duties (Schedules 3 and 4), • The VAT ultimately payable by importer (VAT Act), • Import permits aspects i.t.o. restricted goods or allowable import quotas (i.e. ITAC, Dept. of Agriculture, SAPS, SABS SANS Codes & NRCS LOAs), and • Collection of statistics (trade stats & balance of trade, imports vs. exports) 12
13 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The Consequences of Incorrect Tariff Classification • Duties and Taxes: Any incorrect classification will result in an underpayment of import duties and taxes, thus any underpayment of import duties and taxes are subject to a Customs Penalty. • Live Shipments: Customs queries could result in physical “stops” and physical examinations, thus putting strain on the supply chain from importer all the way to the end-user. This could further result in unforeseen penalties due to late supply (i.e. MVMs experiencing line stoppages). • Estimated Landed Cost vs. Actual Landed Costs: Cost estimation is both important for budgeting and calculating profit mark-ups. Any unforeseen increases in duties, other taxes and subsequent penalties when calculating the actual landed cost, means potential profits might be wiped out, loss in business and even in extreme cases, force businesses to close down. • Post Clearance Audits (PCA) and Post Clearance Inspections (PCI): This happens on a scheduled basis where Customs will carry out an audit on post-clearances (trader’s records). Customs may make new rulings on goods that were incorrectly classified which resulted in an underpayment of duties and taxes. In such cases Customs will call for such underpayments and subsequently penalise the trader also (they may even apply additional forms of penalties, i.e. forfeiture). 14
15 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Other Statutory Control Measures DTI / ITAC Imports & Exports Control Acts 16 • Prohibited Goods are goods that may not be imported or exported. • Restricted Goods may be imported or exported, but they are subject to control by means of import or export permits issued by ITAC. IMPORTANT: • The Tariff Classification Code is essential to understand which goods may fall under the “Restricted Goods” lists (see example on next slide). • Control / restrictions are further enforced by other statutory bodies, i.e. Port Health, State Vet, Plant Inspector, NRCS, etc. The listing of such goods within the Imports and Exports Control Acts can be found in the Prohibited and Restricted Goods Index.
17 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Goods Subject to Control / Restriction Measures Extract from the Prohibited and Restricted Goods Index 18 Prohibited, restricted and counterfeit goods – South African Revenue Service (sars.gov.za) Example of other import permits other than ITAC import permits are required. The ”Action Required” the message “Detain for State Vet” will appear on the CN1 clearance document. Note the permit requirement. Also be advised that a product might be detained for more than one statutory requirement (in this case, Port Health would feature also). Ctrl+Click the link to access:
19 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Invoices as Prescribed • This relates to the seller / supplier’s commercial invoice (final tax invoice or TRANSACTIONAL Invoice), which is one of the most important documents necessary in the entry process. • It is mainly from the information contained in this document that the entry clerk is able to establish the customs tariff number for the goods and determine the value. • Section 41(1) of the Act specifies the particulars required on invoices and states in part that: “The exporter of any goods imported into the Republic shall render a true, correct and sufficient invoice, certificate of value and certificate of origin of such goods in such form and declaring such particulars of such goods as may be prescribed in the rules as may be necessary to make a valid entry”….. 20
21 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Invoices as Prescribed (continued) • In essence Rules 41.01, 41.04 and 41.05 require the submission of the supplier’s original invoice which must reflect full particulars to describe the goods (not merely trade names or part numbers of goods) and be in one of South Africa’s official languages. Section 41 (4)(a) reads as follows : “All particulars necessary to make a valid entry and all particulars in respect of the transaction value or any commission, discount, cost, charge, expense, royalty, freight, duty, tax, drawback, refund, rebate, remission or other information whatever which relates to and has a bearing on such value shall be declared by the exporter in any prescribed invoice in respect of any imported goods”…… 22
23 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Example of the Supplier’s Commercial Invoice showing all the critical information as required for Customs Clearing Purposes. For Tariff Classification, WCO HS Tariff 6-Digit Code, refer to Items 2 & 4. Important also is Item 3 referring to Country of Origin, in this case referred to on the invoice as country of manufacture. 24
25 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Analysis Certificate & Confidentiality • An analysis certificate is sometimes required by Customs when it is necessary to confirm the exact composition of a product especially when there is uncertainty regarding tariff classification. • In particular certain metals require the production of these certificates which have to be obtained from the manufacturer. • Note, due to new inventions due to new technology, most supplier’s having invented a new product are very reluctant to supply information specific to the make-up of such a product. In the case of Customs, Customs may insist on the analysis certificate or engineered drawing(s) to assist with classification. However, it is a rule that Customs MUST treat such information as strictly confidential. 26
27 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Importer’s Written Clearing Instruction The submission of importer’s instructions is also covered by Rules 39.01, 39.02 and 39.03. • This instruction serves to inform the clearing agent of which procedure the importer would like his goods to be entered and provides a mandate to proceed (PCC A - L, Numeric CPC or RPC linked to old Purpose Code, i.e. A11 = Enter for Home use Duty Paid or DP). • It also protects the innocent party in the event of misrepresentation (in other words it serves as an indemnity to protect the Clearing Agent / Customs Broker). • The instruction also contains information valuable to Customs regarding tariff and valuation. • It is a specific requirement for ocean cargo. 28
29 My Notes… NB, Important! What I must remember! A-Ha, interesting!
Introduction to the HS Convention 30 WCO HS Convention & General Information link: http://www.wcoomd.org/- /media/wco/public/global/pdf/topics/nomenclature/acti vities-and-programmes/30-years-hs/hs-compendium.pdf WCO HS Classification Handbook link: http://harmonizedsystem.wcoomdpublications.org/pdfs/W COOMD_MSH_EN.pdf
31 My Notes… NB, Important! What I must remember! A-Ha, interesting!
History of the Harmonised System (A) THE GENEVA NOMENCLATURE • In 1931, the League of Nations’ “Sub-Committee of Experts for the Unification of Customs Tariff Nomenclature” completed its “Draft Customs Nomenclature”, commonly referred to as the Geneva Nomenclature. • The tariff classification Nomenclature consisted of 941 four-digit headings, organised into 86 Chapters which were grouped into 21 Sections. • A revised version was issued in 1937. • The work on the above tariff Nomenclature was prematurely stopped due to the outbreak of the 2 nd World War in 1939. 32
33 My Notes… NB, Important! What I must remember! A-Ha, interesting!
History of the Harmonised System (B) THE BRUSSELS TARIFF NOMENCLATURE (BTN) • From 1948 onwards, the European Customs Union Study Group started preparing a common Customs tariff for use by all participating countries based on the Geneva Nomenclature. • In 1949 the new draft, which rearranged, abridged and simplified the Geneva Nomenclature, became the Brussels Convention on Nomenclature for the Classification of Goods in Customs Tariffs on 15 December 1950. • At the same time of this Convention, a Customs Co-operation Council (C.C.C.) and the Convention on the Valuation of Goods for Customs Purposes were established. It came into force on 11 September 1959, following the adoption on 1 July 1955, of a Protocol of Amendment establishing a revised version of the Nomenclature, and it was initially known as the “Brussels (Tariff) Nomenclature (BTN)”, but in 1974 it was renamed the “Customs Co-operation Council Nomenclature (CCCN)”. 34
35 My Notes… NB, Important! What I must remember! A-Ha, interesting!
History of the Harmonised System (C) CCC NOMENCLATURE (CCCN) 36 • The Customs Co-operation Council Nomenclature (CCCN) is a systematic list of goods comprising of 21 Sections with 96 Chapters (99 Chapters until 1987), comprising of 1241 headings (1011 headings until 1987). • Each heading was identified by two groups of two digits each (i.e. 01.01), where the first group represented the Chapter (01.01) in which the heading appeared, while the second indicated its position in that Chapter (01.01). • Until 1987, fifty-two (52) countries were Contracting Parties to the Nomenclature Convention, however over 150 countries and territories used the CCC Nomenclature as a basis for their Customs tariffs. Important Notes to the CCCN: • 1950: The Explanatory Notes were created • An Alphabetical Listing was created for all goods listed in the CCCN • A Compendium of Classification Opinions was adapted as a result of classification questions
37 My Notes… NB, Important! What I must remember! A-Ha, interesting!
History of the Harmonised System (D) THE HS CONVENTION • In June 1983, during its 61st / 62nd Sessions held in Brussels, the Customs Co-operation Council approved the Harmonized System Committee's draft International Convention on the Harmonized Commodity Description and Coding System and opened it for signature. • Delays in administrative measures and in GATT Article XXVIII negotiations, necessitated by the transposition of national tariffs to the format of the Harmonized System, meant that the Harmonized System (HS) Convention, as amended, entered into force on 1 January 1988. • At the same time, the Customs Co-operation Council (CCC) became the World Customs Organisation (WCO). 38
39 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The International Convention on the HS Codified System OBJECTIVE The objectives of the HS Convention are, by harmonizing the description, classification and coding of goods in international trade: • To facilitate international trade, • To collect, compare and analyse trade statistics, • To reduce the expense of trade, • To facilitate the standardization of trade documentation and the transmission of data. 40
41 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The International Convention on the HS Codified System OTHER IMPORTANT USES • As a basis for Customs tariffs (based on a nomenclature / language of codes) • As a basis for the collection of international trade statistics • As a basis for Rules of Origin (ROO) • For the collection of internal taxes; • As a basis for trade negotiations (i.e. the WTO schedules of Tariff Concessions & Free Trade Agreements) • For transport tariffs and statistics • For the monitoring of controlled goods (i.e. wastes, narcotics, chemical weapons, ozone layer depleting substances, endangered species) • As a vital element of core Customs process areas of Customs controls and procedures, including risk assessment, information technology and compliance 42
43 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The International Convention on the HS Codified System THE ARTICLES AND THE ANNEX The HS Convention comprises a Preamble, 20 Articles and an Annex: • The Preamble sets out why the members (international community) supported and adopted the Harmonised Systems (HS). • The 20 Articles include provisions for the obligations of the members (referred to as Contracting Parties), the role of the Council and the Harmonised Systems Committee, settlement of disputes, and the amendment procedure. • The Annex is the Nomenclature (codified system) for the classification of commodities. 44
45 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The International Convention on the HS Codified System The Articles and the Annex 46 http://www.wcoomd.org/en/topics/nomenclature/instrument-and-tools/hs_convention.aspx Article 1: Definitions Article 2: The Annex Article 3: Obligations of Contracting Parties Article 4: Partial application by developing countries Article 5: Technical assistance for developing countries Article 6: Harmonized System Committee Article 7: Functions of the Committee Article 8: Role of the Council and re-examination procedure Article 9: Rates of Customs duty Article 10: Settlement of disputes Article 11: Eligibility to become a Contracting Party Article 12: Procedure for becoming a Contracting Party Article 13: Entry into force Article 14: Application by dependent territories Article 15: Denunciation Article 16: Amendment procedure Article 17: Rights of Contracting Parties in respect of the Harmonized System Article 18: Reservations Article 19: Notifications by the Secretary General Article 20: Registration with the United Nations
47 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The Harmonised System: AN INTERNATIONAL LANGUAGE • The systematic classification of all goods found in international trade. • It enables a tariff to be designed in accordance with each country’s particular economic needs (the basic international recognised structure remains the same). • It provides a common internationally accepted Customs language between member countries. The same goods are classified under the same basic heading in each country. • The terminology is readily understood by experts and the public alike, thereby simplifying the task of importers, exporters, producers, carriers and Customs administrations. • It enables every imported article to be accurately and uniformly classified by all countries using the Nomenclature. • It ensures simplicity and certainty of meaning in the negotiation, application and corrects interpretations of bilateral or multilateral Customs agreements. • Assists in the ability to internationally collect and collate data to facilitate analysis and comparison of world trade statistics. 48
49 My Notes… NB, Important! What I must remember! A-Ha, interesting!
The Harmonised System: GLOBAL SAFETY & SECURITY Most often overlooked, the HS Code, Headings and Subheadings for goods classification, provide for added global safety and security. • Classification Codes vs. International Carriage (transport): It is a general rule to include the 6-digit Tariff Heading on international transport documents. This falls in line with the WCO SAFE Framework of Standards pertaining to end-to-end safety & security. • Classification Codes vs. Advanced Notices: The SAFE Framework insists on advance notifications of goods to be exported (prior to carriage) and many countries have adopted the rule to know in advance what is to be shipped to them. This goes hand-in-hand with the AEO Programme (Authorised Economic Operator Customs Programme). • Classification Codes vs. Prohibited Goods: These are goods prevented from international trade and includes weapons of mass destruction, or bio-goods deemed to be a global hazard to both the environment and living, breathing entities, i.e. the COVID strain. • Classification Codes vs. Restricted Goods: Goods are goods allowed to be traded with, but where certain rules and restrictions apply thereto, i.e. subject to Import & Export Control, permits and the like. 50