For many products, tariff classification can be technically complex, confusing, and subject to multiple interpretations. Often several different Harmonized System Codes (“HS Code”) may seem applicable for one given product with different tariff rates. Tariff classification is indeed a process of application of customs classification rules, including customs rulings and decisions, and misclassification may trigger severe legal consequences. The sad fact is, unfortunately, that many companies rely on non-legal professionals to determine the HS Codes for imports or exports. A recent interpretation issued by the General Administration of Customs of China (“GACC”) (Circular No. [2012] 495 Shu-Fa-Fa) (the “Interpretation”) reinforces the process of tariff classification as a legal matter, and formulates the test as to what counts for regulatory violation if tariff classification rules are improperly applied by the importer or exporter in a given case. If the legal defense is successful, misclassification may only be treated as a non-violation misclassification, with the possible obligation to pay up additional customs duties, if any, but without administrative or criminal consequences. The Interpretation took effect as from February 1, 2013.

Basically, as implied by the Interpretation, the test is whether the existing classification rules for a given product are clear or not. Where the existing rules are clear, any classification inconsistent with such rules will be held as an instance of regulatory violation by way of improper declaration, subject to administrative fines prescribed under Section 15 of the PRC Implementing Rules for Customs Administrative Penalties. Further, the Interpretation sets out the following scenarios where the classification rules are deemed clear for a given product:

  1. the product is expressly described in the headings or subheadings or the explanatory notes to the sections, chapters or (sub)headings of the PRC Customs Import and Export Tariff Schedule;
  2. the product falls into the scope as definitely provided for in the Explanatory Notes to Commodities and Their Headings in the PRC Customs Import and Export Tariff Schedule;
  3. the product is identical to the one as described in the Subheading Notes and Interpretations to Commodities and Their Headings in the PRC Customs Import and Export Tariff Schedule;
  4. the product is identical to those which have been covered in the classification rulings or decisions as announced by GACC; or
  5. any evidence shows that the customs has made a pre-classification decision or the like regarding the product and has notified such decision as a whole in writing.

On the other hand, it seems that GACC sets a high bar for non-violation misclassification. The Interpretation indicates that misclassification would not be counted as non customs violation unless the classification rules thereunder are not clear and such misclassification arises in the following situations:

  1. misclassification arose from a wrong pre-classification decision rendered by the customs;
  2. misclassification was found in customs’ post-clearance review (e.g., customs audit) or in a subsequent declaration for another shipment of the same products after the previous classification has gone through customs’ substantial review and the relevant products thereunder have been cleared and released. Customs’ substantial review includes running a lab exam with no challenge against the previous classification, on-site inspection of imports/exports to verify the classification, or demanding supplementary declaration regarding or amendment to the previous classification; or
  3. the product under misclassification is so difficult to classify that the Classification Department of GACC has set the relevant classification issue on the agenda of the HS Code Technical Committee for the final decision.

However, as addressed by the Interpretation, the above non-violation misclassification will not apply if any misleading or deceptive conduct is found during the process of the application for pre-classification, classification rulings or customs clearance. In such case, an act of smuggling would likely be established given such false conduct may evidence the intent to evade tax or customs control.

In conclusion, GACC’s new Interpretation shows that for a given product, when reviewing its classification, the customs tends to start from whether the relevant classification rules are clear or not, which is the basis to determine whether a misclassification constitutes a regulatory violation. In practice, misclassification can lead to costly delays, service failures, seizure of goods, possible fines and even criminal penalties. Given potential legal risks, international trade practitioners must be knowledgeable about the classification rules relating to their imports/exports, including customs decisions and rulings, and strictly comply with them during customs declarations. Further to access to classification rules, international trade practitioner must have legal defense in place for each HS Code declared to China customs. Only in this way can the compliance with China customs regulations be ensured, and the serious, accumulative exposures to regulatory violations and smuggling be eliminated or considerably reduced.