Harmonized Commodity Description and Coding System

Harmonized Commodity Description and Coding System

The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products developed and maintained by the World Customs Organization (WCO) (formerly the Customs Co-operation Council), an independent intergovernmental organization with over 200 member countries based in Brussels, Belgium.

Structure:

Under the HS Convention, the contracting parties are obliged to base their tariff schedules on the HS nomenclature, although parties set their own rates of duty. The HTS is organized into 21 sections and 96 chapters, accompanied with general rules of interpretation and explanatory notes. The system begins by assigning goods to categories of crude and natural products, and from there proceeds to categories with increasing complexity. The codes with the broadest coverage are the first four digits, and are referred to as the heading. The HTS therefore sets forth all the international nomenclature through the 6-digit level and, where needed, contains added subdivisions assigned 2 more digits, for a total of 8 at the tariff-rate line (legal) level. Two final (non-legal) digits are assigned as statistical reporting numbers if warranted, for a total of 10 digits to be listed on entries.

To ensure harmonization, the contracting parties must employ all 4- and 6-digit provisions and the international rules and notes without deviation, but are free to adopt additional subcategories and notes. The two final chapters, 98 and 99, are reserved for national use. Chapter 77 is reserved for future international use. Chapter 98 comprises special classification provisions, and chapter 99 contains temporary modifications pursuant to a parties' national directive or legislation.

Applications :
More than 200 countries, customs and economic unions, representing more than 98% of world trade, use the HS as a basis for:
  • Customs tariffs
  • Collection of international trade statistics
  • Rules of origin
  • Collection of internal taxes
  • Trade negotiations (e.g., the World Trade Organization schedules of tariff concessions)
  • Transport tariffs and statistics
  • Monitoring of controlled goods (e.g., wastes, narcotics, chemical weapons, ozone layer depleting substances, endangered species)
  • Areas of Customs controls and procedures, including risk assessment, information technology and compliance.

Codes have been revised through the years. If it is necessary to reference a code related to a trade issue from the past, one must make sure the definition set being used matches the code.

Standard International Trade Classification (SITC) is a classification of goods used to classify the exports and imports of a country to enable comparing different countries and years. The classification system is maintained by the United Nations. The SITC classification, currently at revision three is to be standard. The last revision, revision four, was made in 2006.

The following excerpt was taken from the United Nations Statistics Division, international trade statistics branch:

"For compiling international trade statistics on all merchandise entering international trade, and to promote international comparability of international trade statistics. The commodity groupings of SITC reflect :
(a) The materials used in production,
(b) The processing stage,
(c) Market practices and uses of the products,
(d) The importance of the commodities in terms of world trade, and
(e) Technological changes

Frequently Asked Question

Harmonized System FAQ

Q: What is the HS?

A: HS stands for Harmonized Commodity Description and Coding System. The HS is the international standard for reporting goods to customs and other government agencies. It is a numeric language that is used by more than 180 countries worldwide, and almost 100% of international trade. The HS was created and is administered by the Brussels-based World Customs Organization (WCO).

Q: What are HS Codes?

A: HS codes are essentially the language of international trade. They are the numerical codes that describe "what" is being shipped to and from countries worldwide, and they form the basis upon which all modern customs management systems operate. The first 6 digits of the HS are used universally. Each country may then add to the original 6 to suit its own tariff and statistical needs, creating 8, 10, and sometimes 12 digit national codes.

Q: What is HS classification?

A: HS classification is the process of assigning numerical HS codes to products for import or export.

Q: Why is HS classification important?

A: Importers and exporters are legally required to declare their products to Customs by means of HS codes. HS classification determines a product's rate of duty, its import and export admissibility, and whether or not it should be physically examined. In some countries, importers are required to report HS codes to Customs before their products are loaded for export. In the United States, this mandatory advanced cargo reporting program is called "ISF", or "10+2" (an explanation of ISF / 10+2 is provided below).

Q: How do companies use HS codes?

A: HS codes are used by companies to comply with trade regulations, to calculate the true and total landed cost of imported articles and components, to identify selling and sourcing opportunities abroad, and to link the procurement and compliance elements of the supply chain.

Q: Is HS classification difficult?

A: HS classification is extremely difficult. Several government studies have shown that 30-50% of all Customs entries are misclassified (depending on the industry examined).

Q: Do HS codes ever change?

A: Yes, they can and do get revised. With the thousands of codes available staying on top of revisions is essential.

Q: What are the consequences of misclassification?

A: Improper classification can mean loss of profits, penalties, or worse. Most governments apply some form of monetary penalty for classification errors. In the United States, penalties are assessed based on Customs' determination of negligence, gross negligence or fraud. For the most benign kind of classification error, US Customs and Border Protection will assess a civil penalty amounting to either:

A. The lesser of -
i. The domestic value of the merchandise, or
ii. Two times the lawful duties, taxes, and fees of which the United States is or may be deprived, or

B. B. If the violation did not affect the assessment of duties, 20 percent of the dutiable value of the merchandise.

Q: Who is responsible for HS classification?

A: In most countries, the importer of record is solely responsible for the accuracy of the HS codes declared to customs. Many companies rely entirely on third party experts for HS classification, but this does not relieve them of liabilities associated with commodity reporting errors.

Q: Why is HS classification so difficult?

A: HS classification is difficult for two main reasons.

First, the HS itself is very complex. Product descriptions are distributed among more than 5,000 headings and subheadings. The HS also contains section and chapter notes, which must be consulted in order to assign a proper HS code. Finally, classification is governed by a strict set of rules called the "General Rules of Interpretation" (GRI). It is hardly surprising then, that the average national tariff schedule is more than 2,000 pages.

Second, product descriptions in the HS do not usually match everyday product descriptions. For example, in order to properly classify an "electric toothbrush", it must somehow be matched to "Electro-mechanical domestic appliances, with self-contained electric motor, other than vacuum cleaners of heading 85.08. Other."

Problems Importers / Exporters May Experience.

A) You are overpaying duty because of inaccurate classification of your imports.

B) You need to identify legal or financial liabilities of classification discrepancies. You bear the risk of legal liabilities associated with any misclassification of products that you bring into the country as the importer of record, even if your HS Classification is actually done by a third party.

C) You need to identify business opportunities to source or sell your products with countries offering preferential tariff arrangements.

D) You need to reduce the likelihood that shipments will be delayed at customs because of improper or untimely product information.

E) You need to meet government requirements to participate actively and use diligence in preparing your customs declarations.

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