AEB White Paper

Five myths about commodity codes and product classification And 3½ reasons to get the facts straight.

Contents Executive summary

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Classification – more than just another tool

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Ten-step process: structure of commodity codes

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Five myths about commodity codes

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1. The commodity code is not all that important. We only export.

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2. We’ve already assigned commodity codes to our products – that should do it.

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3. The responsibility for classifying new goods lies with someone else – it’s not my problem.

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4. There isn’t any commodity code that matches our products, so there’s no point in looking.

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5. Even if the commodity code is in the enterprise-wide ERP system, each country must classify products on its own.

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3½ reasons to get the facts now.

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1. Ignorance of the law is no defense.

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2. Businesses seeking AEO status must document their product classification process.

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3. Ditto if you want to keep your simplified customs procedures.

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3½. The bonus half-reason: software solutions from AEB

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What is a white paper?

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About AEB

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Executive summary Commodity codes are an important component in international trade. And they are complex: Anyone classifying products today must sift through a nomenclature of 21 sections, 96 chapters, and over 5,000 subheadings to find the right code. This is typically a complicated process that requires a high level of expertise.

Incorrect product classification can have severe consequences, so businesses are well advised to incorporate error-minimizing measures into their risk management strategy. Support is available from softwarebased solutions that automate the process of product classification as much as possible.

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Classification – more than just another tool value-added taxes on imports, and excise duties but also bans and restrictions, import/export licensing and permit requirements, special foreign trade statistics (supplementary unit), documentation requirements, and the obligation to report certain measures.

Cars, machinery, chemical products, and even daily consumer goods such as coffee, food, and textiles: Eurostat (the statistical office of the European Union) reports that total EU-27 trade with the rest of the world (the sum of extra-EU exports and imports) was valued at EUR 2 850 539 million in 2010. These movements of goods were and are monitored by the customs offices in each member state.

One more reason to give some serious thought to the commodity code, index of goods, and Combined Nomenclature (CN): commodity codes must be reported in conjunction with both the movement of goods within the EU and trade with “third countries” outside the EU. Moreover – and this gets to the heart of the business issues – the customs tariff codes play a key role in the authorization of simplified customs procedures. The Combined Nomenclature is even applicable outside the European Union: countries such as Turkey that have bilateral trade agreements with the EU also use the CN.

This means complying with a host of legal regulations based on the nature of the goods and implementing various import- and export-related measures. To ensure a uniform procedure, all goods are assigned commodity codes. Commodity codes are the key classifier in international trade, and they carry more weight than many suspect. Commodity codes determine the customs duties to which imports are subject, for example, as well as import and export restrictions and documentation requirements. Entering the wrong commodity code in an electronic customs system can have far-reaching consequences due to the interlinked nature of the system. The commodity code affects not only fiscal matters such as customs duties,

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Ten-step process: structure of commodity codes Individual numerals and combinations of numerals in the commodity code have specific meanings and are “read” by the customs office. In general, exports require an eight-digit commodity code or CN (Combined Nomenclature) code. This is uniform throughout the EU.

Perform the following steps for optimal results in determining the commodity code:

Imports are subject to additional regulations based on national law, such as those governing the value-added tax on imports. That’s why imports require a ten-digit (or, in some countries, 11-digit) commodity code known as a customs tariff code. The first eight digits are the same as the commodity code required for exports. The ninth and tenth digits are TARIC subheadings that determine the customs duty levied on certain goods imported into the EU based on their origin. These digits also contain information on EU measures such as anti-dumping regulations, customs exemptions, or customs contingents. The eleventh digit used in some countries, is for domestic purposes. You can search for the right commodity code in the European Commission’s online customs tariff database (TARIC), in national systems such as Germany’s electronic customs tariff (EZT) or the UK’s online Integrated Tariff, or by applying for a Binding Tariff Information (BTI) decision.

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Step 1: Evaluate the attributes of the goods. This means above all the material attributes and the designated use and purpose of the goods.

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Step 2: Check the precise language and comments. This is necessary to properly take into account specific descriptions and remarks.

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Step 3: Apply other regulatory content. This means taking into account so-called general guidelines that may be applicable to unfinished goods or special containers, for example, but also the aforementioned special cases.

Although the significance of commodity codes is beyond question, they are frequently disregarded or underappreciated in day-to-day business. In this white paper, we have put together the five most common myths about commodity codes and their significance.

Five myths about commodity codes 1. The commodity code is not all that important. We only export. Unfortunately, it’s not at all that simple. Proper classification of goods by customs tariff is the foundation of all import and export processes. This means that product classification is a key component of risk management.

Businesses that apply for the status of Authorized Economic Operator (AEO) or authorized exporter are also obligated to document how they manage their customs-related master data.

Businesses that assign the wrong commodity codes may suffer far-reaching consequences. That’s because the commodity code determines the applicability of bans, restrictions, and foreign trade measures such as licensing requirements. The commodity code even determines which documents need to be submitted. Providing the wrong commodity code may result in an unauthorized export or payment of the wrong customs duty. Businesses may overpay their taxes and duties as a result – or worse yet, underpay.

It may also qualify as negligent or even punishable conduct, by the way, to simply accept the customs tariff data from an upstream supplier without verifying it. The declarant or exporter is responsible for providing the correct commodity code. For this reason alone, businesses seeking the AEO status must document how they determine customs tariff data. You should also keep in mind when determining the commodity code that giving the wrong information to your business partners can have consequences for them – at least if they accept it without verification.

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2. We’ve already assigned commodity codes to our products – that should do it. assigning incorrect commodity codes – with the aforementioned consequences.

Sadly, it does not. The number of goods and commodity groups is constantly shifting. As a result, commodity code updates are regularly announced on October 31 with effect from January 1. Often, goods are consolidated under a (sometimes new) commodity code or split up into multiple commodity codes. It’s also common for CN headings to be discontinued altogether. This requires that you reclassify your goods. It may also result in a need to adjust the authorization for simplified customs procedures.

That’s why you need to regularly review your master data to make sure your products are properly classified. This is the only way to be sure that you’re in compliance with all customs regulations, your goods will flow smoothly, and the correct duties will be paid. By the way, the current Combined Nomenclature is published annually in the Official Journal of the European Union.

What this means for you is that if you fail to update your master data at the start of a new year, you may be

3. The responsibility for classifying new goods lies with someone else – it’s not my problem. 

Large enterprises typically leave the classification of new products to their local entities. In smaller businesses, however, it is often an individual with experience and familiarity with the product who manages this task from one central location. But here, as elsewhere, a team with collective knowledge is often a quicker route to success than a solo effort. That’s why it can’t hurt to bring coworkers on board when it comes to product classification.

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The complexity of assigning commodity codes to products means that product classification is still not seamless, but every effort should be made to bring transparency and accountability to the process – whether it is managed by a team or an individual. Sadly, this is seldom the case, even though businesses that aspire to the AEO status are required to document their product classification process.

This is especially true when different divisions and sites work with commodity codes. Large enterprises face the following challenges in structuring their product classification processes: 

Centralized global product classification (multilingual, international content providers, etc.) Integration of product classification into various system environments (ERP and customs systems) Accommodation of special provisions at the regional and national level

Support for – automatic – product classification

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4. There isn’t any commodity code that matches our products, so there’s no point in looking. Did you know that the commodity code for shoes begins with 63 09 ... if the shoes are used? If the shoes contain asbestos, however, the commodity code begins with 68 12. Orthopedic shoes are classified under 90 21. In short: there is a commodity code for everything. To find out what it is, businesses need to compare the language of the national tariff/EC TARIC to the material attributes. And the remarks appended to the sections, chapters, headings, and subheadings in the national tariff/EC TARIC are also relevant, as they often describe the details and exceptions that make the difference.

A variety of special cases complicates the classification process. Textiles are a good example: The choice of a commodity code depends on whether the clothes or bed linens are part of a set, and even the size of an article of clothing can have an effect. The classification of alcohol depends on the type of packaging, among other factors. And parts of assembled products may be classified under the finished product. Businesses can find more information on bans, restrictions, and export authorizations from the EU dual-use list, the relevant national authority such as Germany’s Federal Office of Economics and Export Control (BAFA) or the UK’s Export Control Organisation, and other sources.

Despite all that, precise classification is a complex task – and not just for used orthopedic shoes containing asbestos. So the rule of thumb is that when two headings apply, choose the more precise. If none of the descriptions matches the goods, choose the heading that is the closest match.

Those seeking a certain measure of legal security can contact the customs authorities for binding information about the customs classification of goods.

5. Even if the commodity code is in the enterprise-wide ERP system, each country must classify products on its own. This greatly simplifies product classification – not only for new products but also for the reclassification of existing products at the start of a new year. But when all is said and done, product classification remains a very time-consuming task with an equally great potential for risk.

Fortunately, this is not the case. Global players can centralize product classification as long as they take into account national and EU-wide variances. To put it another way: the first six digits are identical worldwide. Only the seventh and eighth digits depend on EU guidelines. When it comes to imports, the same applies to the ninth, tenth, and eleventh digits, of course.

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3½ reasons to get the facts now. You can see that the eight to eleven numerals that make up the commodity code have quite an impact on businesses.

There are at least 3½ reasons to take a good, hard look at the subject of commodity codes:

1. Ignorance of the law is no defense. pay too much tax – if they’re lucky! If not, they may be guilty of tax evasion. Misclassification can also result in unauthorized exports with corresponding penalties.

Commodity codes are the basis for determining import duties, import/export restrictions, and documentation requirements. Misclassification can mean that businesses

2. Businesses seeking AEO status must document their product classification process. Commodity codes are the central taxonomy of international trade. This means proper product classification is critical, which is why businesses seeking to attain the status of

Authorized Economic Operator (AEO) must document their product classification process.

3. Ditto if you want to keep your simplified customs procedures. Businesses that – knowingly or unknowingly – fail to comply with current law run the risk of missing out on simplified customs procedures. Using the incorrect commodity code can quickly lead to delays in the supply chain – often at considerable cost. The wrong eight-digit code can result in an export ban, preventing your goods from shipping. This

can be a painful lesson for businesses. Because more than ever before, business success depends on efficiency, flexibility, and on-time performance. And these are precisely the competitive advantages you jeopardize when you lose your special customs privileges.

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3½. The bonus half-reason: software solutions from AEB and reliable, so you’ll never miss another deadline. All product classifications are embedded in a transparent, fully documented workflow.

Electronic customs clearance offers many benefits to businesses. Now there is one more benefit: softwaresupported classification. ASSIST4 Classification will accelerate your classification process – and largely automate it. Seamlessly: All the necessary sources of information – legislation, EU dual-use list, database links – are just a mouse-click away. Businesses are alerted when new commodity codes come into effect at the start of a new year, and reclassifications based on legacy data are quick

Like all the products in the ASSIST4 series, ASSIST4 Classification can be adapted to meet the specific needs of your business without compromising your ability to upgrade linked applications.

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What is a white paper? analyzed and explained by our experts. A white paper reflects current understanding at the time it is written – subsequent changes in the underlying circumstances cannot be ruled out.

AEB defines a white paper as a document providing qualified, unbiased information on a particular topic. White papers may deal with laws and regulations, standards, technologies, solutions, or processes –

About AEB: Expertise for SCM, customs, and IT AEB is a global enterprise with over 400 employees and 5,000 customers. AEB helps businesses standardize and automate supply chain processes with the ASSIST4 integrated software suite and through consulting and other professional services. AEB solutions integrate global trade and logistics processes, embedding customs clearance, export controls, and preference management in solutions that manage the global supply chain. The result is a faster, smoother, more efficient flow of goods. ASSIST4 also brings greater transparency

to the supply chain and makes it possible to monitor and control shipments all the way to their final destination. AEB is headquartered in Stuttgart, with offices in Hamburg, Düsseldorf, Munich, and Soest and development centers in Mainz and Lübeck. AEB has international offices in the United Kingdom (Leamington Spa), Singapore, Switzerland (Zurich), Austria (Salzburg), Sweden (Malmö), the Netherlands (Rotterdam), the Czech Republic (Prague), France (Paris), and the United States.

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