If Done Incorrectly, Customs Tariffs can be Costly

By José Luis Martínez
The Offshore Group, Tucson, Arizona

The ordinary set of eyes glimpses at a screw and sees little more. How much can be said, after all, about a piece of threaded metal with a head?

Quite a bit more it seems, especially in a world where a competitive advantage in Customs tariffs savings and preferential duty treatment separates industry leaders from also-rans.

Welcome to the world of Customs product classification, where precision is just as important as a laser cut. Among the many questions that will ultimately classify a screw for correct Customs classification:

What is its length, and its diameter? Is it stainless steel or another alloy? Where was it manufactured or were the materials sourced in one nation, and the product manufacturerd in another? Once it is exported from the United States, will it be coming back or staying abroad? Is it being used in a capital improvement or will it be utilized in production? Does a particular country have a specific program with Customs tariff reductions for certain kinds of manufacturing?

These classification considerations are vital to all other products, and to industry worldwide. An error in classifying merchandise for Customs purposes can cause manufacturing lines to come to a halt, cause companies to add cost to their assembly-line activities for no good reason. Once production is completed, an incorrect Customs classification can result in damaging delays in shipping end products to customers.

The system that provides a common language for the manufacturing industry worldwide is the Harmonized Commodity Description and Coding System. It is overseen by World Customs Organization, or WCO, a 170-member independent agency based in Brussels. The harmonized system is organized into 21 sections and 9 chapters, accompanied with guidelines for interpretation and explanatory notes. Under the system, all products are assigned a six-digit number and, where necessary for product subdivisions, another two digits, for a total of eight. In some countries like the United States, two final digits may also be added to a product for statistical reporting purposes, for a total of 10.

Prior to importing, accurate Customs classification is vital for a number of reasons:

For example, Customs duties may vary widely on products such as machinery used to make prepared foods versus those for domestic use. In addition to duties, special health or agriculture permits may be required on some items. In Mexico, a special program known as PROSEC, the Spanish acronym for the Sectorial Promotion Program, created 24 priority categories in which Customs tariffs on certain products have been eliminated or reduced to five percent, when products are transformed into certain industrial goods. Those categories include manufacturers made in the following industries: steel, chemicals, agricultural machinery, electronic, electric, furniture, photographic, paper and cardboard, wood products, fertilizer and coffee. Another popular Customs duty-reduction program on raw materials is known as Rule 8, or Regla Octava.

Mexico is strict about proper Customs classification and holds importers responsible for accuracy. There are no mitigating factors in for Mexican customs, when an error is committed. That is, it will not matter that a customs broker has explained the source or nature of the error in an effort to have a penalties reduced or eliminated. In the case of goods imported into Mexico, the importer of record is held responsible for classifying for goods entering the country correctly, even though the legal responsibility lies with the Mexican customs broker. Financial penalties for are imposed when classifications are in error.

The Offshore Group has dedicated staff and significant resources to making sure that its clients' imports into Mexico are classified correctly, with the goal of saving them as much as possible on Customs tariffs, as well as avoiding the levy of fines upon them. Approximately fifty professionals are employed in activities aimed at making sure that imports and exports flow to and from The Offshore Group's 59 manufacturing firm clients as smoothly and cost-effectively as possible. The company keeps apprised of all regulations, and has staff at corporate offices in Tucson as well in other locations that include: Mission, Texas; Empalme, Sonora; and Saltillo, Coahuila.

Tens of thousands of dollars in tariffs sometimes can be saved by recognizing an instance in which PROSEC or Rule 8 can be applied. In one instance, an Offshore Group company client in the medical industry, was under the impression it would be paying a five percent tariff on a very expensive component. Trained company professionals found that Rule 8 was applicable. The result was that the company saved a large amount of money in Customs tariffs. The Offshore Group's standard practice is to strive for an application of a 0 percent rate if Customs duties for its customers in Mexico.

Even though an ordinary set of eyes can glimpse at a screw and recognize it as such, it takes a trained professional to get it classified correctly for Customs tariff purposes.