For any company importing or exporting goods, tariff classifications play a vital part in the cost management of its supply chain. Our classification system is arranged in a systematic numerical fashion, with unprocessed agricultural products grouped together in one end, moving towards more sophisticated and processed goods on the other end. It is “classification” of a good that essentially determines the correct tariff rate to be imposed on a product.
Being a member of the World Customs Organization (WCO), the Philippines uses basically the same tariff nomenclature as 169 other member countries. This contributes to a great deal of convenience, transparency and predictability in classifying goods for customs purposes around the world. It is the WCO that oversees the implementation of the Convention on the Harmonized Commodity Description and Coding System (HS), upon which our tariff classification is based.
Dynamism of tariff classification
The tariff headings are harmonized and uniform to all members at the level of the first six digits. Further than that, at the 7th to 8th digits, are more specific national subheadings which account for product peculiarities in particular countries. Companies used to importing goods may have already grown overly familiar with their assigned tariff lines (e.g. 4901.10 for books, 0901.11 for coffee) and may fall into the trap of making their tariff declarations in a near mechanical fashion.
However, inasmuch as the tariff lines and corresponding technical descriptions were painstakingly organized to facilitate trade, it is not possible to erase all ambiguity and doubt. The sheer volume, diversity, and variability of products known to the commerce of man have made any effort to classify each under precise and watertight nomenclatures very difficult. Thus, it remains highly plausible for businesses to run into some snags and disputes as to the proper classification of their products. This is especially true for those who import multifunctional and sophisticated products which may be covered by more than a single description. Nevertheless, efforts continue to improve on the nomenclature to make it more responsive and aligned with the realities of international trade.
In a previous column, we touched upon the complex, fluid, and technical nature of tariff classification. We mentioned there that because of regular technological advancements and innovations taking place on products traded across borders, the classification nomenclature is also regularly updated to catch up. As products become obsolete, more sophisticated, or simplified, old tariff lines and descriptions are deleted and replaced by newer ones as determined by the WCO. The most recent update is the HS 2007 Amendments, which replaced the HS 2002 Amendments.
The HS 2007 Amendments have made the nomenclature much leaner by 22 percent, bringing down the total number of tariff lines from 10,689 to 8,329. This new number is the product of eliminating obsolete tariff lines, clumping old ones together, and inserting newer ones. Tariff lines that were stricken off the nomenclature are of those products whose total trade values have dropped below set threshold levels. Additional ones were included for those newly introduced into the market whose descriptions do not yet fall under existing lines. The new nomenclature therefore is expected to be more reflective and indicative of the present market.
AHTN 2007
As mentioned earlier, the HS nomenclature is universal only up to the first six digits. Beyond this, individual member countries that are signatory to the HS Convention are given the liberty to assign specific subheadings to accommodate products that are of particular interest and value to them. In the case of the Philippines, however, and for all members of the Association of Southeast Asian Nations (ASEAN), this endeavor has been elevated to a regional level. Since 2003, ASEAN has been implementing the ASEAN Harmonized Tariff Nomenclature (AHTN), bringing the initiative to establish a more uniform system to a higher plane. The AHTN, which is used by all members of ASEAN, is standardized at the eight digit level. This bridges gaps or ambiguities in product descriptions and specifications even further.
The AHTN does not conflict with the HS and is, in fact, based on it. Any amendments to the HS nomenclature are likewise effected faithfully on the AHTN. Thus, when the HS 2007 Amendments took effect, the same were incorporated into the AHTN. The latest version is now known as the AHTN 2007.
Philippine implementation and implications
It was only last month when the Tariff Commission released the new tariff book containing the AHTN 2007 nomenclature. It is ostensibly less voluminous than the previous tariff book, indicating substantial revisions. By carving out of as much as 22 percent of the previous tariff book, the direct and immediate effect on some 2,360 products is well worth examining. This may necessitate the implication that each and every product still declared under any of those 2,360 tariff lines to the possibility of now being technically misdeclared or non-compliant (whether deliberate or not). Along with this possible risk of non-compliance is the further possibility of losing out on opportunities to have a product reclassified under a line with a lesser duty rate to realize savings on customs duties.
Action needed
Companies would do well, therefore, in undertaking the necessary due diligence to keep track of opportunities to lessen its duty costs, as afforded by the AHTN 2007, as well mitigate any risks of non-compliance. Now would be the best time for companies to act.
The process would not be simple though. A thorough and correct analysis of your tariff classification scheme would involve extensive reference to local and international rules, such as the General Rules of Interpretation (GRI), the Explanatory Notes (EN), and the Supplementary Explanatory Notes (SEN). In a number of cases, conflicting interpretations as to which tariff heading to apply on a particular product are elevated for the determination of the appropriate administrative or judicial bodies.
A recommended first step is to conduct a reexamination of tariff classification declarations, check whether the tariff lines used still exist, and see whether new tariff lines were created that suits your product better. It is also advised that old tariff classification rulings be updated or new applications be made to provide certainty and security in your future declarations.
(Jeremy I. Gatdula is a Principal for the International Trade and Customs Services of Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email manila@kpmg.com.ph or jgatdula@kpmg.com).