Getting Products to China: Avoiding Tariff Classification Traps in Uncertain Times

Chinese law requires companies to accurately classify and declare goods imported into or exported out of China under its version of the Harmonized System (HS). Importers and exporters who fail to properly classify products may be e subject to criminal or civil penalties. Tariff misclassification in China has become a flashpoint for multinational companies due to uncertainty caused by the convergence of the following events:

US-China Trade War: Over the past year, the US and the People’s Republic of China (PRC) have imposed substantial, retaliatory tariffs on goods coming from each country. Tariff classification is critical in determining whether affected products fall within the tariff lists issued by the two countries.. Many multinational companies have been re-examining the HS codes of their products in an effort to assess whether there are opportunities to mitigate the impact of the tariffs resulting from the trade war. In some cases, this has resulted in the declaration of different HS codes for the same product – which can be flagged by the customs authorities of either country. Multinational companies need to be prepared for inquiries or investigations from China Customs and have a strategy to mitigate potential penalties.

China Customs Reform: The General Administration of Customs of the PRC (“China Customs”) implemented a series of trade facilitation reforms over the past few years. For example, prior to the reforms, China Customs would verify the HS code declared by the importer before subject goods were released. After the reforms, China Customs stopped conducting such verifications, which effectively shifts the burden to the importer to ensure that the goods are correctly classified. Thus, the release of goods by China Customs does not mean that China Customs views the corresponding tariff classification declarations as accurate. China Customs may initiate a post-clearance audit on tariff declarations anytime up to three years after release of the corresponding goods. China’s trade facilitation reforms in this area may actually increase noncompliance risk for importers. Without shipment-by-shipment verification by China Customs at clearance and release of goods, a relatively minor mistake could result in severe consequences for companies.

Restructuring of China Customs: The merger of the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) into China Customs, and the subsequent rotation of officers between the two agencies, has created an uneven level of expertise in handling issues such as tariff classification across the combined agency. The differing levels of experience and expertise of China Customs officers are bringing more uncertainty, risks and challenges for multinational companies.

Generally, China Customs’ initial approach to tariff classification is to determine whether an imported product satisfies the explicit provisions of the PRC tariff classification rules. If the product classification is not consistent with the classification rules, China Customs deems the classification to be a regulatory violation. Generally, the explicit classification rules cover the following circumstances:

1. The product in question is expressly described in the headings or subheadings or the explanatory notes to the sections, chapters or (sub)headings of the PRC Tariff Schedule.
2. The product in question is a commodity specifically provided for in the Explanatory Notes to Headings of the PRC Tariff Schedule. 
3. The product in question is identical to a commodity as described in the Explanatory Notes to Subheadings of the PRC Tariff Schedule. 
4. The product in question is identical to those which have been covered in the classification rulings or decisions issued by China Customs.
5. There is evidence showing that China Customs has made a pre-classification ruling or decision on the product and has sent such ruling or decision to the company engaged in the import or export activity.

Where a misclassification constitutes a regulatory violation, the violating company may be subject to confiscation of illegal gains (if any) plus a fine ranging from 30% to 200% of the underpaid import taxes. An intentional misclassification may expose the violating company to a smuggling charge, which is a criminal offense.

A misclassification would not be deemed as a regulatory violation (and thus no penalty would be imposed) if the misclassification does not fall within any of the above circumstances, and meets any of the following requirements:

1. The misclassification arose from an incorrect pre-classification ruling issued by China Customs.
2. The product in question has been substantively reviewed by China Customs in the past, but the HS code declared by the company has never been challenged by China Customs. Substantive review includes laboratory testing, physical inspection, or a request for the company to file a supplementary declaration or revised declaration of HS code.
3. The classification of the product in question is technically difficult and has been submitted to GAC’s Technical Committee on Tariff Classification for its review.

For companies involved in exporting components and parts or newly developed products, it is essential to develop an in-depth understanding of Chinese tariff classification issues, including effective communications with China Customs. Strategic legal and operational perspectives are essential in determining the HS codes and duty rates applicable to products in the current international trade environment, particularly given the possible civil and criminal liability.

From a compliance perspective, multinational companies should seek pre-classification rulings from China Customs for their most significant products as well as actively monitor changes to the Subheadings and Headings of the Explanatory Notes of the PRC Tariff Schedule.