HS Codes in China – FAQs for Foreign Investors, Trading Entities

By Matthew Grandage at Chamber International

• Before goods are exported to China, it is essential that the correct Harmonized System (HS) Code (or “commodity code”) has been determined – that code may not be exactly the same as in other countries, including the exporting country.

Internationally traded goods are classified using a system of six-digit commodity codes, also known as “Harmonized System” (HS) codes.

This system of coding is administered by the World Customs Organization (WCO) and revised by them every five years; the current version came into effect on January 1, 2017.

For trading companies, determining the correct HS code that applies to your product the first-time round is vital, as the HS code will impact the tariff classification, customs declaration process, and the export VAT refund that applies to your product. As a result, any mistakes or inconsistencies with the code may lead to disputes or non-compliance issues – which may result in costly consequences for businesses.

To help businesses avoid these mistakes, below, we answer some frequently asked questions regarding the application of HS codes in China.

What are HS codes?

HS codes are used to gather trade data. For a specific import of goods, they are also used to determine:

• Tariff to be applied;
• Exact customs declaration process;
• CIQ inspection and quarantine supervision requirements; and
• Regulatory authority requirements for pre-market approval.

If goods arrive at China customs with an incorrect HS code, this may result in:

• Delays in the clearance process;
• Fines;
• Seizure of shipment;
• Credit downgrade;
• Suspicion of smuggling; and
• Addition to a Customs watchlist.

Are HS codes the same across the world?

These six-digit codes are fixed, and constitute a worldwide standard, adhered to by most countries including, since 1992, China.

However, the following observations are noteworthy:

• Customs officials in different countries may occasionally have different views on which HS code a certain type of goods should be assigned to, even though all parties are supposed to follow the same rules for classification (the Six General Rules for Interpretation, “GRI”).
• Countries are free to add further numbers to the HS code to provide further levels of differentiation for their own purposes.

Most countries add two or four extra numbers to the HS code (making a total of either eight or 10 digits) – the UK and EU, for instance, use eight digits in total. The USA uses 10 digits.

In 2018, China increased the total number of digits in its commodity codes from 10 to 13. The first eight digits are based on the WCO HS code plus the Commodity HS code of “Import and Export Tariff of the People’s Republic of China”; digits nine and 10 are additional “customs supervisory numbers”, and digits 11, 12, and 13 relate to inspection and quarantine (CIQ).

Complete lists of HS codes can be found on government websites (for example, the UK Government Website), but discerning the correct code for your goods is often tricky, even for seemingly simple items.

For this reason, businesses often choose to turn to Chamber International or other specialist service providers for help. It is important to remember that as the importer or exporter, you are legally responsible for the correct HS code being applied to your goods.

Should the HS codes be stated on commercial invoices?

Because countries may apply different digits at the end of the code, and interpretations may even vary between customs offices in a large country like China, some importers prefer not to show the HS code of the goods on the commercial invoice, but rather prefer a detailed description instead.

This avoids the goods being “locked” into a code that could harm the importer in some way – for instance, resulting in them paying either too much or too little tax.

Note that if the freight forwarder requires extra information, which the exporter would rather not include on the commercial invoice for whatever reason, then it may be possible to communicate that information in another way, for instance, by using an Export Cargo Shipping Instruction (ECSI).

This is a shipping document that provides instructions from the exporter to the forwarder or logistics carrier (shipping line, airline, road hauler, etc.). It may contain information about the goods and the route to their destination, any transport requirements, customs information, who is to receive what documents, and the cost allocation.

How is import duty calculated in China?

Unlike some other countries, China calculates ad valorem import duties based on cost, insurance, and freight (CIF) value, that is, after shipping and insurance have been added.

If the commercial invoice “hides” the cost of shipping and insurance inside the unit cost for the goods, rather than making them explicit, then Customs will assume that these costs have not been included, and will calculate the duty based on the cost of the goods plus their assessment of the cost of shipping and insurance. 

In other words, they will assume that the terms are “Freight Collect”, and add again the real cost that the freight forwarder has input, so that the duty is paid on a greater total than it should have been.

For this reason, it is important to make shipping and insurance costs explicit in the commercial invoice – when exporting to China.

Why are HS codes critical when setting up a Chinese entity?

In addition, it is often critical to identify correct HS codes for the process of registering a legal business entity in China.

When a foreign investor is planning to set up a trading company in China, it is necessary to provide a list of HS codes of the products that the proposed entity is planning to import, export, or trade domestically.

Since foreign investors must comply with the Foreign Investment Catalogue, lawyers will need to identify whether it is necessary to obtain additional licenses in order for the new company to be able to trade in those product types, based on the list of HS codes submitted.

Companies are only permitted to operate within a fixed business scope approved by the authorities.

This means that, for instance, if you initially registered a trading company for the import of children’s toys, but later wish to also begin importing furniture, you will first be required to modify the registered business scope of the company to reflect this, and then amend the additional HS codes for the new products that fall outside the original scope.

The process will involve amending the business license, and updating all the certificates and approvals obtained during the incorporation.

The business scope should be deliberately configured in order to be broad enough to cover the intended business activities and goods, but the list of HS codes should also be no more than is required, in order to avoid unnecessary costs and procedures, which can be both complex and time-consuming.