Customs Tariff

Tariff classifications are a cornerstone of international trade; they provide a standardised system for identifying goods imported or exported across international borders. They play an essential role in the Australian Border Force (ABF) and other Customs Authorities profiling and auditing cargo arriving or departing from the country.  

Without a universal tariff classification system, the complexities of international trade would be amplified, making it difficult for customs agents, customs brokers, Certified Customs Specialists (CCS) and freight forwarders to understand what is being sent or received. 

History and Origin

Globalising international trade required a universal language for Customs Authorities to categorise commodities being traded between countries. Before the advent of tariff classifications, there was no universal system, leading to confusion, inefficiencies, barriers in international trade and, most of all, uncertainty. Recognising this problem, the World Customs Organisation (WCO) introduced the Harmonised System (HS) in 1988.

The HS was a ground-breaking initiative that provided a common language for the international trade community. It was structured to be adaptable,  comprehensive, and capable of classifying thousands of products. Its introduction revolutionised freight management services worldwide, including those in Australia.

Freight companies started incorporating this system into their operations, leading to the development of sophisticated freight management software. These software applications leveraged the HS to streamline cargo shipping and tracking processes, making international trade more efficient and transparent.

Understanding the Harmonized System (HS)

The HS is an internationally recognised language for classifying traded goods. It is used by over 200 countries and economies – covering about 98% of the world’s trade. Freight forwarders, shipping lines and airlines rely upon the HS to profile the commodity and the risk that the HS may pose to the transportation provider. 

This structure of the HS makes it easy for freight forwarders, shipping lines and airlines that freight forward cargo to classify the goods accurately. With HS codes, Customs Authorities can quickly identify products that need special attention, such as Anti-Dumping Duties, Quarantine concerns, Prohibited Imports, CITES and Prohibited Exports. The HS code also assists the Australian Bureau of Statistics (ABS) in collating and reporting data. In recent years HS codes have become even more important as the correct HS code needs to be entered on the Free Trade Certificates (FTC) that are being relied upon to enjoy zero import duty. 

Purpose and Benefits of Tariff Classifications

Tariff classifications are pivotal in managing international trade transactions; they serve many purposes, each contributing to global commerce’s smooth and continuous function.

One of the primary purposes of tariff classifications in the Australian context is to determine customs import duties (if any), taxes such as Goods and Services Tax (GST), Wine Equalization Tax (WET), Anti-Dumping Duties (ADD), Luxury Car Tax (LCT), Excise Tax (ET) or even a Wood Levy (WL). Each product’s classification under the HS code system corresponds to specific import tariff rates set by individual countries. Therefore, an accurate HS classification is vital for calculating the correct amount of import duties and taxes that may need to be remitted to the Government, thus ensuring legal and financial responsibilities have been met for both the Australian Border Force (ABF) and the Australian Taxation Office (ATO).

Understanding and effectively using the HS tariff classification can significantly streamline freight forwarding companies’ import and export cargo operations. It simplifies the cargo shipping process by providing a universally understood language for the freight forwarder sending the goods and the freight forwarder receiving the goods. It is not uncommon for some cargo with particular HS codes to require further documentation or assurances from the sender, such as Safety Data Sheets (SDS) or Department of Defence (DoD) export permits. In the Australian context, for air freight cargo, this can translate into the freight forwarder being more efficient, effective and diligent in their logistics chain, leading to fewer errors and a higher level of customer service.

Key Considerations for Accurate HS Classifications

Accurate HS classifications are required before any cargo departs a country; the first six (6) numbers of the HS classification are universal worldwide. Suppose the sender of the goods can classify the goods before the goods depart Australia accurately. In that case, this correct HS classification will then assist the receiver with the HS classification that is needed to have the cargo released through their own Customs Authority. The starting point is 1) always understanding what the item is, 2) how the item operates, 3) what family of commodities the item may belong to and then 4) what the item is made from – before a six (6) digit HS classification can be allocated. 

The HS classification explanatory notes are an invaluable resource in this process. They provide detailed guidance on interpreting the various categories and subcategories within the HS system. Customs brokers, customs agents, Certified Customs Specialists (CCS) and freight forwarders refer to these notes to determine the correct HS classification.

In considering these factors, customs brokers, customs agents, Certified Customs Specialists (CCS), and freight forwarders can avoid a HS misclassification; they can assist the receiving customs broker or freight forwarder in understanding what commodities are about to arrive in their country, which can lead to high compliance with their own Customs Authorities. It is now obvious why ‘getting the HS classification correct’ in the first place is so important; it supports a smooth and compliant international trade process.

Common Mistakes and Their Implications

Misclassification of goods is one of the most common mistakes customs brokers, customs agents, Certified Customs Specialists (CCS), and freight forwarders make in international trade. This can happen for various reasons – misunderstanding the commodities, how they operate, what they are made from, lack of education or time constraints. Whatever the reason, the consequences of an incorrect HS classification can be severe.

Firstly, a HS misclassification can lead to an incorrect tax assessment; in Australia, the customs entry stays ‘alive’ for five (5) years, which means that at any time up to five (5) years after the first error, the importer may be required to repay the loss and may receive a penalty. If the HS classification was incorrect and tax was paid when it should not have been paid, the importer may be able to claim a refund. 

Secondly, a HS misclassification can disrupt the smooth flow of goods across the border; it will affect an importer’s compliance record. A cargo shipment might be held by the Australian Border Force (ABF) due to discrepancies in classification, causing costly financial impacts. These delays can have ripple effects throughout your supply chain, resulting in missed deadlines, unhappy customers and storage costs.

It is crucial for all importers who import goods to Australia that they feel confident that the customs broker who is actually submitting their customs declaration is ‘awake at the wheel’. The customs broker preparing your customs declaration needs to be fully versed in HS classifications and focused on minimising your ABF exposure to future compliance audits. 

Navigating Changes and Updates

Tariff classifications are not static; they evolve alongside product changes, technologies and trade practices. The WCO reviews the HS every five years, making amendments as necessary to reflect these changes. Staying updated with these revisions is crucial for customs brokers, customs agents, Certified Customs Specialists (CCS) and freight forwarders.

International customs organisations play a significant role in disseminating these updates to local Customs Authorities; these updates inform the customs industry of new classifications and new opinions, assisting customs brokers, customs agents and Certified Customs Specialists (CCS) to remain compliant. 

Local Variations and Additions

While the HS classification provides a global framework for classifying commodities, it is important to note that individual countries will add digits seven (7) and eight (8) for their local tariff. These local variations reflect national needs and can cover detailed product descriptions, tax rates and statistical reporting requirements.

Understanding these local variations is crucial for businesses, particularly those involved in international freight forwarding. It influences how they classify goods, calculate tariffs and report trade statistics. Without this understanding, they risk misclassification, legal non-compliance and potential disruption to their operations.

Therefore, businesses should stay informed (via their customs brokers, customs agents, and Certified Customs Specialists (CCS)) about the HS tariff classifications in their target markets. Businesses should consult their local Customs Authorities or rely upon local experts like Platinum Freight Management; by doing so, importers and exporters can navigate the complexities of international trade more effectively and maximise their chances of business success.