Customs classification and its tax implication

Last week, we shared with you 7 ways to choose the best customs agency since an alliance with brokers can facilitate the success for your business.  

But first, there are some things you need to understand before entering into foreign trade. We are talking about customs classification, a necessary topic because you will need to pay some taxes depending on the specific code.

Every product crossing a border is subject to specific customs codes that determine its classification and, consequently, the duties and taxes it incurs. Understanding this process is essential for businesses to optimize their supply chain operations, minimize costs, and ensure compliance with relevant regulations.

In this article, the team of the best customs agency in Nuevo Laredo will share information about customs classification and its direct impact on taxation. Whether you’re an experienced importer/exporter or just stepping into the world of international commerce, here you will find the knowledge and insights needed to navigate customs classification effectively and confidently manage its tax implications.

What is the customs classification?

Customs classification, also known as tariff classification, is the process of assigning a unique code to goods that are being imported or exported. It was developed by the World Customs Organization. This code helps customs authorities and other regulatory entities identify and categorize products based on their characteristics, composition, and intended use. But it is not the only function of the classification since it also serves several purposes, such as:

  • International trade facilitation: By standardizing product classifications globally, the customs classification system simplifies importing and exporting goods across different countries. It provides a standard coding for trade transactions, reducing misunderstandings and facilitating smoother trade flows.
  • Regulatory compliance: Some products may be subject to various regulations, duties, and taxes based on their classification. Properly classifying goods ensures compliance with national and international trade laws, customs regulations, and tax requirements.
  • Tariff assessment: Customs duties, tariffs, and other trade-related fees are often based on the classification. The assigned code determines the applicable tariff rates, allowing customs authorities to assess duties accurately.
  • Statistical analysis: Customs classification data is valuable for statistical purposes, such as monitoring trade patterns, analyzing economic trends, and formulating trade policies.

Workers identifiy customs classification

How does the HS work?

Now that you know about customs classification, we would like to share with you how the Harmonized System (HS) works to standardize products worldwide. It works through a hierarchical structure of codes, with each code representing a specific product or group of products based on their characteristics, composition, and intended use.

  • Structure: The HS is organized into six digits. Each number provides detailed information about the product. The more digits in the code, the more specific the classification becomes.
  • Sections: It is also divided into 21 sections, each representing a broad category of goods. The range goes from live animals and animal products to machinery and transportation equipment.
  • Chapters: Each section is further divided into chapters. There are 97 chapters in total.
  • Headings: Chapters are divided into headings. There are over 1,200 headings in the HS.
  • Subheadings: Some headings are further subdivided into subheadings; they are optional. 
  • Codes: The summary of all the above forms the unique six-digit code based on its characteristics and the product’s intended use. The first two digits represent the chapter, the next two are the heading, and the last two represent the subheading (if applicable).

This way, the HS provides a common language for trade, ensuring consistency and uniformity in customs procedures across different countries.

How does the customs classification affect your taxes?

Last but not least, as you may infer, customs classification impacts the taxes by assessing customs duties and other import/export fees. But how do the authorities know how to calculate them?

Each product classification is associated with specific tariff rates, which vary depending on factors such as the country of origin and destination and any trade agreements in place. 

Customs duties, also known as import duties or tariffs, are taxes levied on imported goods. The customs classification determines the duty rate applied to a particular product. Import duties are typically calculated as a percentage of the product’s customs value (the value of the goods plus shipping and insurance costs).

Employee checks customs classification

In addition to import duties, certain products may be subject to other taxes and fees upon importation, such as value-added tax (VAT), excise taxes, or anti-dumping duties. The customs classification determines whether these additional taxes and fees apply and at what rates.

Customs classifications may also affect taxes through trade agreements and preferences. Some countries offer preferential tariff rates or duty-free treatment for products from certain trading partners. 

We highlight that incorrect or incomplete customs classification can lead to delays, penalties, and additional compliance costs. Ensuring accurate classification is essential to avoid potential fines and mitigate the risk of audits or disputes with customs authorities.

To avoid this, we recommend you ally with a specialized customs agency in Mexico so your business trades are in safe hands. If you like this article, don’t forget to share it on social media and stay tuned to our blog for more information.