Showing posts from tagged with: US

Customs Classification – the What? Why? & How?

Traders who import or export goods into or out of the EU and following Brexit, the UK are required to provide a classification code for the customs clearance of each of their goods being shipped. When asked to supply a classification code by a clearance agent a number of questions arise, namely;

  • What are customs classification codes?
  • Why do traders need to be aware of them?
  • How do you classify goods for customs declarations?
  • What to do if there is uncertainty regarding the correct classification?

So what are customs classification codes?

Customs classification codes are often referred to as HS / HTS Codes, commodity codes or tariff codes. They consist of a 10 digit code for imports or an 8 digit code for exports. There is a worldwide Harmonised System which around 180 countries apply, which aims to harmonise the first 6 digits of the code across these countries. However, the interpretation of the legislation can differ between countries, so if a US supplier has a HS code on the commercial invoice it may be dangerous to assume that this code will also apply when importing into the EU.

Why do traders need to be aware of them?

Traders need to be aware of the correct classification of their products for a number of reasons;

  • Determines Rates of duty and other taxes at import – the classification of an imported good drives the customs duty rate for the imported goods. The duty rates can vary between 0% up to 25% for certain food items.

The classification of the good also determines if anti-dumping duty or agricultural levies will apply.

  • Origin requirements/benefits for preferential trade – this is particularly important when considering the post BREXIT era. Many traders believe that if a Free Trade Agreement (FTA) is in place then customs duties and declarations will no longer apply. However, the reduction of customs duties in a FTA are conditional, with the condition rules differing between classification headings. Therefore, it is required that the imported goods are correctly classified and a customs declaration is lodged even when a FTA exists.
  • Whether goods are subject to restrictions at import or export
  • Avoid delays or seizures
  • To avoid penalties and post-entry audit issues

The Importer is responsible for correctly classifying their goods on import and export.

Many traders rely on their clearance agent or HTS codes on the supplier invoice to classify their products. However, as an international trader you should be aware of the significance of the data on the customs clearance declaration or the Single Administrative Document (SAD). In the event of a post clearance check some of the more obvious information that a customs official may look out for is consistency of the information provided in the SAD. Take for instance a manufacturing company which imports plastic pipes as part of its operations. In box 31 of the SAD the product description is “Pvc plastic piping 50mm” then the Revenue officer would expect to see a tariff heading 3917 …., In box 33 of the SAD indicting that the product is “tubes, pipes and hoses of plastic”. However, if it is found that the tariff code provided is 4006 …., which covers “tubes … of rubber” this would be a red flag and could result in a post clearance customs audit.

Taking the above example, tariff heading 4006 which the importer has been using, attracts a 0% duty rate upon import into the EU. The correct tariff heading 3917 attracts 6.5%, so if Revenue go back 3 years (further in cases of suspected fraud) then 6.5% of the total shipments of plastic piping could mount up to a significant unbudgeted expense.

Regardless of how the error occurred, it is the importer who will be assessed for this duty which is generally not recoverable, so is a dead cost to the business. Furthermore, if the importer had been aware that the import of this product would have a duty impact prior to commencing importation, they may have been about to avail of customs economic (or special) procedures to suspend or eliminate the duty on import.

How do you classify goods for customs declarations?

The legal document which is used for classification in the EU is called the Combined Nomenclature (CN);

It is made up of:

-21 Sections

-99 Chapters

-960 pages

-Approximately 5,000 headings and subheadings

Classification is determined according to the terms of the headings and is subject to the Section and Chapter notes which are legally binding.

When classifying the product it is important to understand; the make-up of the product, its function, how it is presented at import, if it is an unassembled or unfinished product and the essential character of the product.

There are also guides to assist with the classification process such as the WCO Explanatory Notes and databases such as the eBTI database and TARIC in the EU and CROSS rulings in the US.

What to do if there is uncertainty regarding the correct classification?

There may be times when the classification of a good could fall between two or more headings. In other cases the risk of getting the classification incorrect could be too great in terms of extra customs duty or if one heading applied anti-dumping duty whilst another did not. Additionally, diverging codes could lead to falling foul of import/export restrictions if the classification of a product was deemed incorrect post clearance.

As the penalties for non-compliance can be severe in both financial and reputational terms, certainty is required by traders. The solution in these instances is to obtain a decision from revenue which is known as a Binding Tariff Information (BTI).

A BTI is legally binding on the holder and on all customs administrations within the European Union. Therefore, it provides legal certainty for its validity period of 3 years. The processing time for a BTI can be up to 120 days, so it is important to plan ahead before shipping materials.

Following the introduction of the Union Customs Code, the right to be heard has been removed for BTI applications. Therefore, if a trader submits a complete application to Revenue, Revenue can issue the BTI to an alternative heading without engaging in a further consultation process with the applicant. Whilst the option to appeal the decision remains, whilst the appeal is ongoing the BTI issued will be legally binding on the applicant. We would therefore advise that professional advice is sought prior to submitting an application, to allow the best chance of a satisfactory outcome.

 

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Iran and Russia – markets to consider for Irish exporters

In previous years Russia and Iran have been highlighted for a number of negative reasons including Russia’s annexation of Crimea in 2014 and Iran’s nuclear program which resulted in embargoes and sanctions being imposed on both countries. EU restrictive measures can be imposed to further foreign and security policy, to uphold respect for human rights, democracy and the rule of law.

So why consider Iran or Russia as a potential market?

With the current protectionism stance in the US, together with developments in the EU with Brexit and the upcoming elections in the Netherlands, France and Germany, it is becoming more important for companies to seek out new and developing markets and opportunities to grow their business and limit their exposure to a dramatic change in trading terms imposed on a prime market such as the UK leaving the EU.

With a population of 80 million and a GDP of €372billion, Iran has great potential as a high-growth marketplace. Its economy is second in the Middle East behind rival Saudi Arabia. In 2016, imports from the EU included; agricultural products €728m, food and raw materials €781m, chemicals €1,829m, machinery €3,807m and textiles and clothing €75m.

Russia the world’ largest nation by area and with a population in excess of 140 million people, imported over €200billion worth of goods in 2016. The principle imports included; machinery, pharmaceuticals, medical instruments, steel/metal semi-finished products and consumer goods.

Since many of the EU sanctions on Iran were lifted by the signing of the Joint Comprehensive Plan of Action (JCPOA) which was implemented in January 2016, many EU companies have been taking advantage of the resulting trading opportunities. Some of the more high profile examples of this include; Siemens AG’s investments in the Iranian energy sector and rail network and Airbus signing a contract to supply aircraft to Iran Air.

What checks are needed?

While companies should not entirely be put off doing business in countries where sanctions exist, extra vigilance is required to ensure that they do not fall foul of control or licencing requirements as the penalties for non-compliance can be severe.

While it should be clear whether or not your product is “specially designed for military use” what may not be clear is if your product has both a civilian and a military version and therefore falls into the “dual use” regulations. Dual use items are listed under a number of categories including; Materials processing, electronics, computers, telecommunications and information security and navigation and avionics.

A comprehensive know your customer review needs to be performed. Many of the checks required here are common to the standard practice for anti-money laundering procedures and know your client risk analysis which most companies are familiar with. The current EU restrictive measures in place against Iran are contained in Council Regulation (EU) 2015/1861 and Implementing Regulation 2015/1862. If your customer raises end use concerns, i.e. listed as a denied party, requests unusual terms of business or any number of other red flags, you should consider if dealing with this customer will expose you to an end use risk. Following your due diligence you should be able to confidently say that you “did not know nor had reasonable cause to suspect” that you were dealing with a denied party.

An examination should also be carried out of the financial or economic sanctions are in place. Both Iran and Russia have been subject to economic sanctions in recent years. Therefore, while many of these sanctions have been lifted, it is important to discuss payment terms with your customer and agree this with your bank to ensure that they will accept payments from the named bank and currency. After all, you will want to get paid for providing your goods or services!

What US considerations are required?

It is also important to consider if US sanctions will have an impact on the deal. Common things to look out for here are; US subsidiary companies involved, key employees of US citizenship, sales agent or broker involved who is a US citizen, payment to be received in US dollars or if the product supplied contains any US origin materials. In the case of US origin materials a “de-minimis” rule often applies whereby a licence may not be required if the product contains less than 10% by value US materials.

As the legislation in relation to these issues is often long and complex and is subject to change, it is important to seek professional advice when determining if your product or market will be subject to control or licencing obligations.

 

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Canada – Opening opportunities for Irish business

On the 15th February 2017, The European Parliament voted in Strasbourg for the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada, concluding the ratification process of this deal at the EU level. The deal was approved by 408 votes to 254, with 33 abstentions.

Key features of CETA include:

  • Eliminates most tariffs:On the day that CETA enters into force, it would eliminate 98 percent of all tariffs on goods and services between the EU and Canada.
  • Cuts red tape
  • Reduces barriers to trade
  • Provides access to public contracts at all levels
  • Improves access for trade in services
  • Improves labour mobility
  • Promotes and protects investment

The intention is for the agreement to be “provisionally applied” almost in its entirety after Canada has amended some of its own legislation concerning among others intellectual property, copyright and patent laws. This could take place as early as April of this year, at which time most customs duties between the EU and Canada will be removed.

If a Member State would not ratify the agreement, the European Council would then have to decide if the refusal is “permanent and definitive”. Until this happens the agreement will continue to be applied.

CETA and Brexit

As the UK will still be a member of the EU when the CETA agreement is provisionally implemented, they will be able to enjoy the benefits of tariff free trade while it remains a Member State. However, it is much less certain whether the UK will still be in the EU by the time CETA has been ratified by all Member States, as this may take a number of years. While the position is not entirely clear, it is highly doubtful whether CETA would continue to apply to the UK once it had left the EU.

This uncertainty would make Ireland an attractive alternative for Canadian companies wishing to establish an entry point into the EU market. For Canadian companies who have a UK base, it would make sense to consider establishing a presence in Ireland to ensure continued access to the EU market post-Brexit.

There are a number of advantages that Ireland offers that would be of interest to Canadian investors; English-speaking, young and educated workforce, common law system, competitive corporate tax regime and a strategic geographical location between Canada and mainland Europe.

 

Interaction with other Trade Agreements

The CETA deal now means that Ireland as part of the EU, has trade agreements in place with two out of the three participating countries of the North American Free Trade Agreement (NAFTA), as a preferential trade agreement has been in place with Mexico since 2000 (2001 for services).

Whilst the Transatlantic Trade and Investment Partnership (TTIP) won’t happen under President Trump’s tenure, forward thinking EU companies may now be able to export EU products to Canada tariff free under CETA and if they undergo sufficient working in Canada they could access the US market tariff free under NAFTA.

Currently, EU exports of some frozen beef products to the Canadian market are dutiable at 26.5%. Some food preparations that contain 50% or more by weight of dairy content are dutiable at 274.5%. Therefore, the barriers to trade can be clearly quantified for prospective exporters to the Canadian market. By removing these tariffs, Canada is opening up its market to suppliers who would have been previously deterred by the high tariffs imposed on their goods.

There is clear proof of the benefits enjoyed by the EU from free trade agreements. As an example, EU exports to South Korea have increased by more than 55% since the EU-Korea trade deal entered into force in 2011. Exports of certain agricultural products increased by 70%, and EU car sales in South Korea tripled over this five-year period. It is estimated that EU companies have saved €2.8 billion in reduced or eliminated customs duties since this agreement was applied. The Korea agreement was also provisionally applied during its ratification process which is still ongoing.

How to take advantage of tariff free trade

For the free trade agreement to apply to your imported or exported goods, they must be deemed to have “preferential origin” status.

In effect, this means that goods must be either;

  • manufactured from raw materials or components which have been grown or produced in the beneficiary country or, should that not be the case,
  • at least undergo a certain amount of working or processing in the beneficiary country. What constitutes sufficient working or processing depends on the rules applicable to the tariff heading of the product.

Therefore, it is important to be clear on the correct classification of your products. If either the classification or the origin status of your goods are unclear, it is possible to seek confirmation from Revenue by way of a binding origin or binding tariff decision.

 

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