9 reasons why tariff classification is complicated

Providing the right HS codes for Canadian imports prevents delays and extra costs, but determining accurate tariff classification codes can be complicated.

Issues such as ambiguous wording, changing regulations, and differing interpretations by customs authorities can get in the way of a clear and concise compliance process. Becoming more familiar with tariff classification challenges and strategies can help you clarify some of the complexity of HS code compliance. 

1. Ambiguous or overlapping categories

Many products can reasonably fit into multiple tariff classifications. HS codes use broad and sometimes vague descriptions, which can lead to disputes over the correct classification. Ensuring accuracy often requires a detailed product description and an understanding of classification precedents.

2. Changes in tariff codes

The HS is updated every five years, but Canada’s tariff schedule may change more frequently. Importers must stay informed about these modifications to avoid misclassification. Regularly reviewing tariff updates and consulting with experienced customs brokers can help businesses stay compliant.

3. Interpretation of classification rules

The General Rules of Interpretation (GRIs) govern classification, but applying them correctly requires knowledge and benefits from experience. Misinterpretation of these rules can lead to incorrect tariff classifications.

4. Composite or multi-use goods

Products with multiple materials or multiple functions can be difficult to classify. The harmonized system requires classification based on the item’s essential character, which can lead to subjectivity. Importers should document their rationale for their classification decisions and seek binding rulings when necessary.

5. Regional variations in interpretation

Different customs authorities may interpret classification rules in their own way. A product classified under one code in Canada may receive a different classification elsewhere. Importers trading across multiple regions should ensure that they have the correct classification for each jurisdiction.

6. Binding rulings vs. discretionary decisions

Importers can request a binding ruling from the Canada Border Services Agency (CBSA) to ensure classification certainty. Without a ruling, CBSA may reclassify goods, leading to unexpected duties, penalties, or shipment delays. Obtaining rulings for high-value or complex items is the best way to prevent misclassification.

7. Technological and new product challenges

Industries such as biotech and renewable energy can introduce products without clear HS classifications. Customs authorities may reclassify such goods over time, creating unpredictability for importers. Staying informed on industry-specific classification trends can help businesses anticipate and adapt to changes.

8. HS codes and free trade agreements (FTAs)

Tariff classification plays a key role in determining FTA eligibility. Misclassification can disqualify products from preferential duty rates. Importers should verify that their classifications align with the rules of origin to maximize trade agreement benefits and avoid problems.

9. Valuation and tariff engineering issues

Tariff engineering is the act of modifying products in an attempt to qualify for lower duties. Customs authorities scrutinize importers that appear to engage in this questionable classification practices. Importers must ensure their classifications align with both tariff and valuation rules to avoid disputes that arise from tariff engineering and manipulation of valuation.

Minimize the risk of incorrect tariff classification

Incorrect classification can result in fines, penalties, and even seizures. Additionally, misclassified products may be ineligible for preferential duty treatment under trade agreements such as CUSMA/USMCA.

In addition to regular changes to HS codes every five years, different regions can also enact their own modifications. Staying updated and conducting internal audits of tariff classifications in use with these changes is essential to prevent errors. Don’t hesitate to train employees responsible for tariff classifications on the correct way to apply GRIs.

Some imported items may not require preclearance for HS codes, but for high-value or high-risk imports, it’s worthwhile to secure binding rulings. Collaborating with customs brokers or trade consultants can make it much easier and more efficient to interact with the CBSA for tariff classification.

Get tariff classification right and avoid import complications

By proactively addressing these classification challenges, Canadian importers can reduce their exposure to penalties, prevent costly disputes, and take full advantage of preferential trade agreements.

An experienced customs broker handles the details and makes the import process easier. Connect with Cole today.

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