HS code engineering or tariff engineering is the term used to describe a broad set of activities undertaken to change the way a product is classified under WCO’s harmonized system nomenclature for the classification of products. It must be mentioned that by no means does it do away with the 6 general interpretative rules of classification. Instead the intent of tariff engineering activities is to legally allow an importer or exporter to use the 6 rules of classification to determine a different HS code for their product.
There are several reason why tariff engineering might be done:
- To avoid paying higher import duties
- To work around licensing requirements
- To enjoy the use of Free Trade Agreement
Despite the notoriety surrounding the term “tariff engineering”, there are plenty of ways in which it can be done that are perfectly legal.
Let’s look at some of these ways:
- Changing the packaging condition of the material. If you refer to the Heading and Chapter notes for several parts of the tariff nomenclature you may realize that some HS codes only apply to products that have been packaged for “retail sale”. Hence, by importing in bulk and doing retail sale packaging activity after importation, the trader may be able to use a different HS code.
- Changing the specifications of the material imported. Some HS codes only apply if the material being imported fits a specific dimension in terms off factors such as weight, width, length, thickness, size or shape. Especially in the case of raw materials, it may be the case that the importer does not really need the parts to arrive in a specific configuration. By changing the state of the material being imported, there may be opportunity for duty savings.
- Importing sets as separate components or bundling components to make a set. Especially for intercompany orders, this can be a very effective way to do tariff engineering. Customs in different parts of the world have varying approaches to how sets should be treated. Traders can explore the opportunities available for duty savings by importing high duty components separately. For example, a set consisting of several parts may be worth 100 USD. However, the value of the part giving the set its essential character may be worth 30 USD. The HS code for that particular part may attract a duty of 10%, while the HS code for the rest of the parts may attract 0% duty. By importing the essential character part on its own, trader avoid the situation where Customs authorities insist they have to pay 10% duty on the full value of the set.
- Reviewing product information to reassess essential character. It is not uncommon for Customs authorities in different parts of the world to have differing views on HS code determination. Traders can attempt to check for rulings in other countries to gain supportive documentation of alternate classification approaches for the same product, then use these documents to put up a case to local authorities. Although countries do not have jurisdiction across boundaries, proving to Customs authorities that they are holding a conflicting view with the rest of the world can be a strong influencing factor.
- Dis-assembling parts for independent import. There may be opportunities for tariff engineering if finished goods can be taken apart and shipped in incomplete states such that the essential character of the goods is not present in any 1 shipment.
A final note
Tariff engineering methods cannot be taken too far to appear illogical or absurd. For example, traders should not install foam wings on a motorcar and attempt to pass it off as an airplane, neither should they hang a firearm on an expensive gold chain and attempt to pass it off as an ornament, on the basis that the gold chain gives the product its essential character. Customs laws in most countries give authorities the power to penalize importers who attempt to illogically change the nature of the product they are trying to import against what they are truly trying to import.