Our team recently concluded an industry study of Customs broker competency in HS code classification. We reached out to 16 different Customs brokers (all in different brokerages) we had worked with over the past few years in Singapore, Vietnam, Thailand, Philippines and Indonesia to get the data needed for our research.
Our findings suggest that…
There is a good chance the Customs broker classifying your product was never properly trained, does not know enough about your product and does not have the necessary tools needed to classify your products for import correctly.
A quick summary of findings…
- 12% had not received any training in HS classification but were expected to classify products for clients
- 43% did not know how many General Interpretative Rules there were
- 87% had no access to World Customs Organization’s Explanatory Notes
- 34% could not accurately describe the 6th General Rule of Interpretation (basically how to read the tariff book correctly)
- 60% had never received any form of product training from clients they classify imports for
- 33% had received less than half a day of training in HS classification
- 71% had at some point resorted to guessing HS codes for clients as they did not have time to work on them
- 22% had attended extensive training in HS classification that included a testing or qualifying exam
- 23% rated themselves as “Good” in HS classification
- 58% rated themselves as “Average” in HS classification
- 7% worked in brokerages that audited their classifications
The findings can be broadly grouped into 3 categories:
1. Training in HS Classification
In order to operate a Customs brokerage in many of these countries, licensees must first pass a qualifying examination. However, in many countries the licensee can choose to hire unqualified employees to handle import/export activities for clients. In many of the brokerages included in our study – the average was 1.2 trained Customs brokers for every 10 employees expected to handle HS classification in some way or another. While most brokerages did have some form of in-house training or on the job training for new hires, these usually did not include a qualifying test. It was noted that in most firms, qualified brokers assumed a supervisory role over untrained (or just barely trained) employees who were responsible for HS classification of day to day imports.
Sometimes supervisory responsibilities included a random audit of classifications done for the day while in other cases formally trained brokers only addressed complex cases that were brought to their attention.
2. Product knowledge
In several cases, brokers admitted to classifying products simply based on the product name appearing on the invoice. Most brokers also admitted to making guesses about the product to determine HS codes quickly.
A few specific examples quoted were:
- Classifying self tapping screws without knowing what kind of metal composition they were made of or specific dimensions
- Classifying wires without knowing what conductors or insulators they were made of
- Classifying IT equipment as computers without knowing exactly what these gadgets did
- Classifying chemicals as miscellaneous chemicals without asking for the CAS identification number
Several brokers mentioned that they would also make assumptions about any abbreviations appearing in the invoice if necessary. Common reasons for not following through to properly understand products was a lack of time and not getting support from the client on product queries, unless the query came directly from Customs!
A common train of thought identified was that if the HS code determined based on assumptions made was of higher than average duty than usual, the risk for Customs raising a challenge would be low.
3. Tools and resources for HS Classification
A surprising number of brokers had no access to the World Customs Organization’s explanatory notes. Many of them also were unaware that a large database of US rulings could be easily found online. A surprising number of brokers were using hard copy print-outs of tariff books for daily classification work and some were even using previous versions of the tariff nomenclature. In such cases, they would depend on the Customs import entry system triggering an error before they would source for the updated version for that particular sub-heading.
Costs were the most quoted reason for not having access to resources or updated references.
Many participants also stated that they would occasionally do searches on the Internet to get ideas about HS classification but would not validate the source of information although they were likely to use it.
What does this mean to traders?
The standard recommendation is for traders to own the process of HS classification for their products. It must be mentioned that any erroneous HS code used for import may result in a penalty or fine from Customs. It is also possible for Customs to claw back any short paid duties for past imports – with interest owed. Traders must also realise that the regulatory liabilities always rest with the importer, not the broker, regardless of any contractual agreements in place.
However, if you really must outsource HS classification of your imports to a Customs broker, you need to do due diligence in ensuring that they are able to classify your products accurately.
Here’s a few ways traders can drive quality in the HS classification of their products:
- Check if the person/s doing HS classification for your imports has:
- received formal training in HS classification
- experience in classifying products in your industry
- has had his/her classification audited by Customs in the past
- Train your broker to understand your products
- give them all relevant technical documents
- proactively engage them for questions
- conduct refresher product trainings every year
- Ensure your broker has access to basic resources necessary for HS classification
- WCO’s Explanatory notes (this is a must have)
- WCO’s Compendium of Classification Opinions (this is a bonus)
- Latest version of the local tariff book (a must have!)
Businesses should also have the HS classifications of brokers independently audited at least annually to ensure that the tariff codes used will stand up to some level of scrutiny; i.e. nothing should be glaringly wrong.
A brief note on how this survey was conducted.
All participants interviewed were aware that their responses would be used anonymously in conduct of an industry study. Based on responses received from participants, the Globalior interview team assigned values between 0 – 5 to draw final conclusions. It is not recommended to take this survey as an accurate reflection of industry standards.