Introduction To HS Codes and FTAs - 10 Sep 20

INTRODUCTION
TOOLS IN A VIRTUAL CLASSROOM – WEBEX TRAINING
1 FCX-T | Min Khai Ng | Introduction to HS codes and Free Trade Agreements | Sep 2020
INTRODUCTION TO HS CODES AND FREE TRADE
AGREEMENTS
10 Sep 2020
AGENDA
1 HS CODES
- What are HS code - Structure of HS code
2 FREE TRADE AGREEMENTS

– What are FTAs – Benefits of FTAs – What is on a Certificate of Origin
– Challenges of using FTAs
3 ONLINE RESOURCES
- Where to find more information
HS CODES
01
WHAT IS HS…WHAT?
WHY IS TARIFF CLASSIFICATION IMPORTANT?
• Customs laws require that all imported merchandise be

“classified” or assigned a code that indicates the kind of
product being imported.
• What is the classification code used for:
 To assess correct amount of duty and other import taxes
 To determine whether special permission is needed to
import goods (e.g. quota and license restrictions)
 To determine the criteria under which the goods are eligible
for reduced duty rates under trade preferences
 To collect trade and economic statistics
WHY IS TARIFF CLASSIFICATION IMPORTANT?
• Assigning an incorrect classification may lead to:

 Overpayment or underpayment of duties by the importer
 A failure to satisfy import restrictions
 Shipment delays resulting from product examinations by
customs officials
 Fines and penalties
INTRODUCTION TO THE HARMONISED SYSTEM
• The Harmonized Commodity Description and Coding Systems is generally referred to as

“Harmonized System” or simply “HS”
• Implemented internationally in 1988 by the HS Convention
• Developed by WCO and maintained by WCO through the HS Committee
• Updated approximately every 5 years (1996 , 2002, 2007, 2012, 2017)
• 212 territories using the HS (> 98% of world trade)
• 159 Contracting Parties to the HS Convention as of 21 February 2020
COMMON TERMS FOR HS CODES
- HS codes
- HS classification
- Tariff code
- Tariff classification
- Commodity code
THE HS STRUCTURE
• 21 Sections
 In general, the sections of the HS group together
articles from the same industry
• 97 Chapters plus 2 Chapters
 Chapter 98 and 99 are reserved for special uses by
individual countries
• Over 1,200 4-digit Headings
 Within chapters, generally in order of degree of
processing of goods
• Over 5,000 6 digit Subheadings
 Headings are divided into Subheadings which form the
final part of a full six digit HS classification
STRUCTURE OF A HS CODE
The first 2 digits refer to the chapter. The 3rd and 4th digits refer to the heading within that
chapter, and the 5th and 6th digit refer to the subheading.
04 -Dairy produce; birds' eggs; natural honey; edible
040721xx products of animal origin, not elsewhere specified or

included
04.07 - Birds' eggs, in shell, fresh, preserved or cooked.
Chapter Heading Subheading Country-specific -Fertilised eggs for incubation:

0407.11 - - Of fowls of the species Gallus domesticus
0407.19 - - Other
-Other fresh eggs:
0407.21 - -Of fowls of the species Gallus domesticus
0407.29 - -Other
0407.90 - Other
EXAMPLE - HEADINGS, SUBHEADINGS AND EXPLANATORY NOTES
4 digit heading;
04.07 - Birds' eggs, in shell, fresh, preserved or cooked. Terms of
-Fertilised eggs for incubation:
heading
0407.11 - - Of fowls of the species Gallus domesticus
0407.19 - - Other
-Other fresh eggs: 6 digit subheading; Terms of

0407.21 - -Of fowls of the species Gallus domesticus subheading
0407.29 - -Other
0407.90 - Other
Different types of subheadings
This heading covers fertilised eggs for incubation and other fresh  One-dash subheadings; &
(including chilled) eggs of all birds. It also covers preserved or cooked  Two-dash subheadings -are
eggs, in shell. actually further divisions of the
one-dash subheading.
Explanatory Notes
CHINESE HS CODES
Observe the number of dashes
ACTIVITY
ACTIVITY
Instant Coffee
Fine powder or a mass of tiny crystal balls produced by
dehydration from strong concentrates of brewed coffee and
used for the quick preparation of beverage coffee without
brewing.
What is the correct 4-digit heading?
Please refer to materials and answer

the poll
ACTIVITY
Instant Coffee
Fine powder or a mass of tiny crystal balls
produced by dehydration from strong
concentrates of brewed coffee and used for
the quick preparation of beverage coffee
without brewing.
ACTIVITY
Chapter 22 - for coffee which is

ready for drinking
ACTIVITY
FREE TRADE AGREEMENT
02
FREE TRADE AGREEMENT (FTA)
• Free trade agreements (FTAs) are treaties between two or more economies to reduce or
remove trade barriers and bring closer economic integration.
Sales Price In a typical pricing model like this,

FTAs can potentially reduce one of
CIF Value of Product the cost components - import duties.
FTAs This makes exports more competitive,

reduce/
Import Duty eliminate as compared to exporters from non-
duties
Paid by FTA partner countries.
importer to
importing Imposed on
Sales Tax / Value-added Tax both locally
customs
authority produced and Preferential duty treatment is
foreign
produced dependent on HS code declared.
Excise Tax goods
• Documents to prepare to obtain preferential duty treatment

 Preferential Certificate of Origin
 Form E, Movement Certificate etc
 Declaration of origin on trade document e.g. commercial invoice
 Korea-EU FTA, EU-Vietnam FTA
• Active FTAs:
 China-Australia FTA
 China-ASEAN FTA
 China-Korea FTA
 China-New Zealand FTA
 European Union–South Korea Free Trade Agreement
 European Union–Vietnam Free Trade Agreement
• Not applying correctly / not having the Preferential CO in time may result in not being able to
enjoy preferential duty treatment
• Country of Origin ≠ Country of departure
 Rules of origin are in place e.g. simply repackaging in a third country does not
change the country of origin
• Lower duty paid = higher gross profit!
FREE TRADE AGREEMENT (FTA) – CASE STUDY
• Country of origin of goods: China

• Shipped from country: China
• Destination: Thailand
• HS Code at destination: 42021990
• CIF value USD10,000
How much is the saving on import duty?
• HS Code at destination: 42021990

• Country of origin of goods: China
• Shipped from country: China
• Destination: Thailand
• CIF value USD10,000
How much is the saving on import duty?
Import duty savings = 10,000 x (20%-

0%) = USD2,000
FREE TRADE AGREEMENT (FTA) – ACTIVITY RECAP
• FTA is not just depending on the country of export

 There are other Rules of Origin to consider (RVC is just one of the few rules)
E.g. Shipped from China does not mean country of origin of goods is China
• Eligibility of goods for FTA must be determined prior to shipment
ACTIVITY
Go to:
https://findrulesoforigin.org/
a) Select Export from: China

b) Select Import to your
country
c) Select HS code 842430
(ending with any digits)
• What do you see?

• What is the import duty
Displays the
rate without FTA? applicable FTA
• What is the import duty
rate with FTA?
“Preferential”
treatment = with
FTA
MFN = Most Favoured

Nation. Just think of this
as without FTA
ASEAN-CHINA FREE
TRADE AREA (ACFTA)
ASEAN-CHINA FREE TRADE AREA (ACFTA)
Form E
CLOSER LOOK
Marks and numbers Origin criteria Invoice number and date
Item number Number and type of packages, Quantity

description, 6 digit HS code
CLOSER LOOK
ACFTA – WHICH ORIGIN CRITERIA IS APPLICABLE
Check if your good is

If no, does your good
Wholly
fall under the If no, a good shall be treated as
Produced/Obtained
Product Specific an originating good if:
or Produced Entirely
Rules (PSR)?
within China
i) 40% of its content originate
from the ASEAN-China
Region; or
ii) Change in Tariff Heading
(CTH) for a good classified in
Chapters 25, 26, 28, 29, 31,
39, 42-49, 57-59, 61, 62, 64,
66-71, 73-83, 86, 88, 91-97
If yes, Wholly
(Exclusions apply to some
Obtained/Produced If yes, only PSR headings, please refer to
rule or Produced applies Paragraph 4)
Entirely applies
RULES OF ORIGIN (ROO)
Article 2
Originating Goods
For the purposes of this ANNEX, a good shall be treated as an originating good and eligible for
preferential tariff treatment if it is either:
(a) wholly produced or obtained in a Party as provided in Article 3 of this ANNEX;
(b) produced in a Party exclusively from originating materials from one or more of the Parties;
(c) produced from non-originating materials in a Party, provided that the good has satisfied the
requirements of Article 4 of this ANNEX and meets all other applicable requirements of this
ANNEX.
(a) wholly produced or

Does
obtained in anot satisfy
Party as
provided in Article
Article33 of this
ANNEX;
(b) produced in a Party

exclusively from originating
materials from one or more of
the Parties;
Article 4
Goods Not Wholly Produced or Obtained
1. For the purposes of Article 2(c) of this ANNEX, except for those goods covered under
Paragraph 2, a good shall be treated as an originating good:
(a) if the good has a regional value content of not less than 40 per cent of FOB calculated using
the formula as described in Article 5 of this ANNEX, and the final process of production is
performed within a Party; or
(b) for the purpose of goods classified in Chapters 25, 26, 28, 293, 314, 395, 42-49, 57-59, 61, 62,
64, 66-71, 73-83, 86, 88, 91-97 of the Harmonised System if all non-originating materials used in
the production of the goods have undergone a change in tariff classification (hereinafter referred
to as “CTC”) at the four-digit level, which is a change in tariff heading, of the Harmonised System.
2. In accordance with Paragraph 1, and unless otherwise provided for in the Product Specific
Rules as specified in Attachment B, a good shall be treated as an originating good if it meets a
regional value content of not less than 40 per cent or those criteria in the Product Specific Rules.

Wholly
Produced/Obtained
Rules (PSR)?
within China
Region; or
Chapters 25, 26, 28, 29, 31,
39, 42-49, 57-59, 61, 62, 64,
66-71, 73-83, 86, 88, 91-97
If yes, Wholly
Entirely applies
PRODUCT SPECIFIC RULES (PSR)
PSR:
FOB value is required

as we are using RVC
under PSR
PRODUCT SPECIFIC RULES (PSR)
Refer to 8424.89
the PSR.isCan
not in
youPSR
locate 8424.89?

Wholly
Produced/Obtained
Rules (PSR)?
within China
Region; or
Chapters 25, 26, 28, 29, 31,
39, 42-49, 57-59, 61, 62, 64,
66-71, 73-83, 86, 88, 91-97
If yes, Wholly
Entirely applies
Article 5
Calculation of Regional Value Content
1. The Regional Value Content (RVC) shall be calculated as follows:
𝐹𝑂𝐵 − 𝑉𝑁𝑀
𝑅𝑉𝐶 = × 100%
𝐹𝑂𝐵
where:
RVC is the regional value content, expressed as a percentage;
VNM is the value of the non-originating materials.
(a) if the good has a regional

value content of not less than
40 per cent of FOB
calculated using the formula
as described in Article 5 of this
ANNEX, and the final process
of production is performed
within a Party; or
CLOSER LOOK
Box 13:
QUESTION
What is the movement of the goods?

Physical
movement
Invoice
Which entity is issuing the commercial

invoice?
CLOSER LOOK - THIRD PARTY INVOICING
10. THIRD PARTY INVOICING: In cases where invoices are issued by a

third country, “the Third Party Invoicing” in Box 13 shall be ticked (√). The
invoice number shall be indicated in Box 10. Information such as name and
country of the company issuing the invoice shall be indicated in Box 7.
CLOSER LOOK
THIRD PARTY INVOICING: In cases where invoices are

issued by a third country, “the Third Party Invoicing” in
Box 13 shall be ticked (√). The invoice number shall be
indicated in Box 10. Information such as name and
country of the company issuing the invoice shall be
indicated in Box 7.
CHINA-KOREA FREE
TRADE AGREEMENT
KOREA-CHINA FREE TRADE AGREEMENT
Article 3.2: Originating Goods
Except as otherwise provided in this Chapter, a good shall be considered as originating in a Party
where:
a) the good is wholly obtained or produced entirely in a Party as specified in Article 3.4;
b) the good is produced entirely in a Party, exclusively from originating materials; or
c) the good is produced entirely in a Party using non-originating materials and conforms to Annex
3-A;
and the good meets the other applicable provisions of this Chapter.
ANNEX 3-A - PRODUCT SPECIFIC RULES OF ORIGIN (PSR)
CC means that all non-originating materials used in the

production of the good have undergone a change in tariff
classification at the first two-digit level;
CTH means that all non-originating materials used in the

classification at the first four-digit level;
CTSH means that all non-originating materials used in the

classification at the first six-digit level;
WO means that the good must be wholly obtained or produced

entirely in a Party within the meaning of Article 3.4; and
RVC (X) means that the good must have a regional value
content of not less than X percent as calculated under Article
3.5.
KOREA-CHINA FTA – WHICH ORIGIN CRITERIA IS APPLICABLE
PSR:
CHALLENGES IN USING
FTA
CHALLENGES IN USING FTA
Challenges Mitigation
Differences in HS code used by Before shipment, both exporter and importer should be
manufacturer and what importers/import aligned on the HS code to be used. If not possible to align
countries’ Customs “want” due to local regulations, then FTA might not be able to be
applied
Origin criteria is not accepted by import Origin to ensure that correct origin criteria is used, so that in
countries’ Customs case of dispute, we can reason with Customs
Importers are not tracking the savings Work with your Customs clearance agents to provide a report
from using FTAs to fully realise the benefit to you for regular review and monitoring
Importers are not fully aware of how FTA Importers to learn more about the benefits and operational
works requirements of FTAs
ONLINE RESOURCES
03
ONLINE RESOURCES SOURCES
• https://findrulesoforigin.org/
World
• https://asean.org/links-3-2/asean-related-sites/
• http://tariff-finder.asean.org/
ASEAN
• https://archive.homeaffairs.gov.au/busi/cargo-support-trade-and-goods/importing-goods/tariff-
classification-of-goods/current-tariff-classification
• https://www.abf.gov.au/importing-exporting-and-manufacturing/tariff-classification/
Australia
• https://ftaportal.dfat.gov.au/help/hs-code
• https://www.customs.govt.nz/business/tariffs/tariff-classifications-and-rates/
• https://www.customs.govt.nz/business/tariffs/free-trade-agreements/
New Zealand
• http://english.customs.gov.cn/
• http://www.customs.gov.cn/customs/302427/302442/jckszcx/index.html
• http://fta.mofcom.gov.cn/english/index.shtml
China
• http://www.transcustoms.com/HScode/
• http://www.hscode.net/IntegrateQueries/QueryYS
• https://unstats.un.org/unsd/EconStatKB/KnowledgebaseArticle10317.aspx
• https://www.customs.gov.hk/en/trade_facilitation/dutiable/types/index.html
In general, imports into HKSAR are tax-free except:
Hong Kong • motor vehicles for use on the road which are subject to a First Registration Tax (Opens a new window) administered by the Transport Department; and
• the four types of dutiable commodities which are subject to excise duties, irrespective of whether they are imported or locally manufactured. These goods are liquors,
tobacco, hydrocarbon oil and methyl alcohol.
There is no tax or excise duty on exports from HKSAR.
• https://eservice.insw.go.id/
Indonesia
• http://www.cbic.gov.in/htdocs-cbec/customs/cst1718-010718/cst1718-0107-idx
India
• http://www.customs.go.jp/english/tariff/2018_4/index.htm
Japan
• http://www.customs.gov.kh/publication-and-resources/customs-tariff-of-cambodia-2017/
Cambodia
• https://www.customs.go.kr/english/ad/ct/CustomsTariffList.do?mi=8037
• https://www.customs.go.kr/engportal/cm/cntnts/cntntsView.do?mi=7312&cntntsId=2334
South Korea
• http://www.matrade.gov.my/en/malaysian-exporters/going-global/tariff-code-references
• http://mysstext.customs.gov.my/tariff/home
Malaysia • http://www.customs.gov.my/en
• http://finder.tariffcommission.gov.ph/
• http://customs.gov.ph/
Philippines
• https://www.tradenet.gov.sg/tradenet/portlets/search/searchHSCA/searchInitHSCA.do
• https://www.customs.gov.sg/businesses/valuation-duties-taxes--fees/duties-and-dutiable-goods
• https://www.customs.gov.sg/businesses/harmonized-system-hs-classification-of-goods
Singapore
• http://itd.customs.go.th/igtf/en/main_frame.jsp
• http://en.customs.go.th/
Thailand
• http://wtocenter.vn/
Vietnam
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INTRODUCTION

TOOLS IN A VIRTUAL CLASSROOM – WEBEX TRAINING

2 FREE TRADE AGREEMENTS

• Customs laws require that all imported merchandise be

• Assigning an incorrect classification may lead to:

• The Harmonized Commodity Description and Coding Systems is generally referred to as

04 -Dairy produce; birds' eggs; natural honey; edible

040721xx products of animal origin, not elsewhere specified or

04.07 - Birds' eggs, in shell, fresh, preserved or cooked.

Chapter Heading Subheading Country-specific -Fertilised eggs for incubation:

-Other fresh eggs: 6 digit subheading; Terms of

Observe the number of dashes

What is the correct 4-digit heading?

Please refer to materials and answer

Chapter 22 - for coffee which is

Sales Price In a typical pricing model like this,

FTAs This makes exports more competitive,

• Documents to prepare to obtain preferential duty treatment

• Country of origin of goods: China

How much is the saving on import duty?

• HS Code at destination: 42021990

How much is the saving on import duty?

Import duty savings = 10,000 x (20%-

• FTA is not just depending on the country of export

a) Select Export from: China

• What do you see?

MFN = Most Favoured

Marks and numbers Origin criteria Invoice number and date

Item number Number and type of packages, Quantity

Check if your good is

(a) wholly produced or obtained in a Party as provided in Article 3 of this ANNEX;

(a) wholly produced or

(b) produced in a Party

Check if your good is

FOB value is required

Check if your good is

1. The Regional Value Content (RVC) shall be calculated as follows:

RVC is the regional value content, expressed as a percentage;

VNM is the value of the non-originating materials.

(a) if the good has a regional

What is the movement of the goods?

Which entity is issuing the commercial

10. THIRD PARTY INVOICING: In cases where invoices are issued by a

THIRD PARTY INVOICING: In cases where invoices are

Article 3.2: Originating Goods

CC means that all non-originating materials used in the

CTH means that all non-originating materials used in the

CTSH means that all non-originating materials used in the

WO means that the good must be wholly obtained or produced

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