FTA knowledge

$272.11MILLION DOLLAR LOSS due to inadequate HS classification

2025年9月3日 by TaichiKawazoe(河副太智) Leave a Comment

The worst scenario of inadequate HS classification from a judicial example.
With this real example, you can see how HS misclassification is horrible and could lead to MULTI-MILLION DOLLAR LOSS.

The fact is that Thailand Supreme Court ordered the Japanese top car maker “Toyota” to pay $272.11 million due to the inadequate HS classification.

Source: Reuters

In the beginning, TOYOTA intended to export Automobiles to Thailand.
In this case, the tariff rate for Automobiles(HS:8703.23) is 80%(see the image)

The duty rate of 80% is very high and there is no FTA preferential treatment between Thailand and Japan for Automobiles(HS:8703.23).

On the other hand, FTA between Thailand and Japan, there is preferential treatment for “Automobile parts” (HS:8708) 60% to 30%.

Toyota came up with an idea that they disassemble the Automobiles, ship them to Thailand and declare them as “Automobile parts”, and after clearance, they reassemble them to complete the car in Thailand.

If Toyota had exported Automobiles to Thailand, the duty rate would be 80% but if they disassemble them into Automobile parts, the duty rate would be 30%, literally, they succeeded to reduce 50% of customs duty.

It seemed it works, so they continued this Tariff Engineering from 2010 to 2012 for more than 20,000 vehicles assembled at Toyota’s Gateway factory.

But this is a double-edged strategy.

After that, Thailand customs pointed out that they are not Automobile parts because after importing those items to Thailand, they can be reassembled to be a complete automobile.

It’s nothing other than “Completely Knocked Down”, Thailand customs thought.

To understand why Automobile parts are regarded as complete automobiles by customs, we need to refer to the “General Rules of Interpretation (GRIs)”

GRI 2(a) states below

2. (a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article.

It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this Rule), presented unassembled or disassembled.

It means an unassembled or disassembled product is regarded as a completed product.

That’s the reason why Automobile parts are regarded as complete automobiles by Thailand customs.

The argument between Thailand customs and Toyota had taken a long time and it was brought to Court.

Sept 15, 2022 – Thailand Supreme Court on Thursday upheld a lower court ruling that the local unit of Toyota Motor Corp owed the government 10 billion baht ($272.11 million) in extra taxes for importing components not subject to a reduced tariff.

Here is The link to Thailand Supreme Court judgment

Below is translated judgment.
(Sorry it’s hard to read due to machine translation.)

Today at 11:00 a.m., the Supreme Court of Justice Department of Tax Cases read the verdict.
The Supreme Court means transmitting images and sounds via electronic media to the Central Tax Court.

Cases between Toyota Motor Thailand Company Limited, the plaintiff, the Customs Department, the 1st defendant, and the Revenue Department
The 2nd defendant, a total of 10 cases, accounted for total assets of 10 million baht, In all ten cases, plaintiffs sued that between 2010 and 2012, the plaintiff imported the friend’s car parts used to produce Toyota Prius models by the notification of the Ministry of Finance Regarding the reduction of duty rates and the exemption of customs duties under Section 12 and Section 14 of the Royal Decree on Customs Tariffs B.E. between the Kingdom of Thailand and Japan For the Economic Partnership (JTEPA), the plaintiff asked.

revoke the assessment of the assessment and make an appeal decision of the Appeal Committee.

Both defendants testified that the assessment and The appeal ruling are lawful.

Central Tax Court adjudged to revoke the assessment and Appeal Court of Appeal The special judges returned.

to dismiss the plaintiff’s petition with permission from the Supreme Court
The Supreme Court’s Tax Litigation Division found that the plaintiff’s car parts are to be imported when assembled having a material nature It is important for the Toyota Prius model and can be assembled into Toyota cars.

Prius immediately, so it must be classified into the coordinate type of the complete part or for the successfully imported either disassembled or not assembled as a complete set of parts.

Tariff 8703.23.41 or 8703.23.51(according to the time of import) according to the tariff interpretation rules
Customs Clause 1, *Article 2 (a) and Article 6 in Part 1 annexed to the Royal Decree on Customs Tariffs, B.E. 2530 (1987)

*Guess it means GRI 2(a)

Therefore, it is not exempt from duty and reduces the duty rate according to the notification of the Ministry of Finance issued to comply with
the JTEPA agreement and is not entitled to exemption from duty according to the Ministry of Finance’s notification regarding the reduction of duty rates and exemption of customs duties under Section 12 of the Royal Decree on Customs Tariffs, B.E. 2530
(No. 18) dated October 13, 2010, neither has the right to reduce the duty rate at the import duty rate of 30 percent.

under the Notification of the Ministry of Finance Re: Reduction of Duty Rates and Exemption of Customs Duty under Section 12
of the Royal Decree on Customs Tariffs, B.E. in the appellate decision to charge the rate 80% of the import duty was approved, while other issues were not accepted by the court, and the verdict was confirmed.

Sometimes I hear that “to reduce duty rate, disassemble the commodity into parts to import and reassemble them in the targeting country, Wow this is a smart way of Tariff Engineering”

But this is the inadequate solution for reducing the duty rate that most people easily come up with.

In short term, it might work I admit, but customs officers are not foolish in overlooking this behavior. Therefore it turned out to be a nightmare one day.

It does not mean disassembling the commodity into parts to import is not a bad way. Sometimes depending on the commodity, disassembling is required.

But please keep in mind that customs seek the possibility to adopt GRI 2(a) to disassembled commodity to reclassify to another HS code.
Don’t underestimate GRI 2(a), it is very important.

If there is a need for disassembling commodities, I recommend consulting customs that the HS code is appropriate in a wide range of views.

As a Japanese, I am personally proud of Toyota’s international business.
Hoping Toyota overcomes this incident and develops more.
This incident must be a great guideline for many traders worldwide.

This post is written based on translated judgment. If I misunderstand the content, please let me know.

The actual case of applying FTAs to reduce tariffs on Neckties

2024年6月25日 by TaichiKawazoe(河副太智) Leave a Comment

A trading company in Importing Country A is attempting to import neckties from Italy, an FTA Contracting Country. These neckties are manufactured in Italy. In the production process of the neckties, materials sourced from non-FTA countries including:

WOVEN FABRIC/MAIN
INTERLINING
BRAND LABEL
CARE LABEL
SEAMTHREAD

Are used. Will these neckties qualify for tariff reduction under the FTA’s rules of origin when imported in this manner?

2. Ruling Issuance Date

May 21, 2024

3. Product Name

Necktie

4. HS Code

6215.10

5. Product-specific Rule of Origin

“Weaving combined with making-up including cutting of fabric; or…”

Note: This rule is found in one of the agreements concluded by the EU among various FTAs. The rules may vary depending on each FTA. The product-specific rules do not use the change in tariff classification (CTC) or value-added (VA) criteria but specify only certain manufacturing processes.

6. List of Raw Materials

No	Material Name	HS Code	Description	Origin Determination
①	WOVEN FABRIC/MAIN	Ch.50	Woven fabric	Non-Contracting Country
②	INTERLINING	Ch.55	Interlining	Non-Contracting Country
③	BRAND LABEL	Ch.58	Polyester brand label	Non-Contracting Country
④	CARE LABEL	Ch.58	Polyester care label	Non-Contracting Country
⑤	SEAMTHREAD	Ch.54	Seam thread	Non-Contracting Country

7. Manufacturing Process

① WOVEN FABRIC/MAIN

Cutting
Weaving
Finishing the fabric
Sewing into the shape of a tie
Final finishing and inspection

② INTERLINING

Cutting
Weaving
Finishing the fabric
Sewing into the shape of a tie
Final finishing and inspection

The following three items have not undergone significant processing changes in Italy:

③ BRAND LABEL
④ CARE LABEL
⑤ SEAMTHREAD

8. Certification Reason

The necktie’s HS code is 6215.10, therefore the product-specific rule of origin is “Weaving combined with making-up including cutting of fabric.” An interesting aspect of the product-specific rules of origin applied in this agreement is that they do not use the change in tariff classification (CTC) or value-added (VA) criteria. Instead, they specify only certain manufacturing processes. This makes it challenging to meet the origin criteria when using non-originating materials that do not undergo significant processing in Italy, an FTA signatory country.

Upon reviewing the details of the raw materials, it is clear that the non-originating materials meet the criteria set by the product-specific rule of origin, thus the necktie qualifies as an FTA originating product. Specifically, ① WOVEN FABRIC/MAIN and ② INTERLINING are produced in non-contracting countries and undergo weaving and cutting processes in Italy, meeting these requirements.

③ BRAND LABEL and ④ CARE LABEL, being less than 10% of the total weight, comply with Article 3.6 Tolerances (often referred to as de minimis in non-EU agreements) and ANNEX 3-A Note 7-2 regulations.

ANNEX 3-A Note 7 (2)

⑤ SEAMTHREAD (Sewing Thread) was determined to meet the rules of origin despite being a non-originating material. The reason for this is that ANNEX 3-A Note 3-3 states “If a product specific rule of origin provides that a product shall be produced from a particular material, this does not prevent the use of other materials which cannot satisfy the requirement because of their inherent nature.” It was determined that SEAMTHREAD falls under this exception.

9. Conclusion

This case is intriguing because ③ BRAND LABEL and ④ CARE LABEL, being less than 10% of the total weight, are passed through applying tolerances (de minimis) to meet the rules of origin, and ⑤ SEAMTHREAD, despite not meeting the rules of origin, qualifies under ANNEX 3-A Note 3-3 which states that “The use of certain materials is not prevented if due to their inherent nature they cannot meet other rules.” This is due to their critical role in the product’s manufacturing process and the impossibility of their substitution.

Additionally, in cases like the current example where the product-specific rules do not use the change in tariff classification (CTC) or value-added (VA) criteria but specify only certain manufacturing processes, the provision allowing non-originating materials to be deemed as originating if they “cannot meet other rules due to their inherent nature” is a fascinating relief measure with potential broad applications. However, determining whether such conditions are met is crucial and requires thorough consultation with customs authorities. Applying this relief measure necessitates meticulous discussions with customs to ensure compliance. FTAs’ rules of origin contain various types of relief measures, so even if it appears that the rules of origin are not met at first glance, there may be hidden provisions that provide relief. It is important not to overlook these possibilities.

FTA Terms and Abbreviations

2024年6月23日 by TaichiKawazoe(河副太智) Leave a Comment

This table provides a comprehensive list of terms and abbreviations related to Free Trade Agreements (FTA). These terms and abbreviations are useful for understanding FTA rules and procedures and for applying them in practice.

Abbreviation	Meaning	Explanation
ACU	Accumulation	A provision that allows originating materials from one FTA country to be considered as originating in another FTA country.
AP	Approved Exporter	An exporter authorized by customs authorities to certify the origin of their goods themselves.
AV	Adjusted Value	The value of a product after adjustments for certain factors.
BD	Build-Down Method	A method to calculate regional value content by subtracting the value of non-originating materials from the total value of the product.
BOM	Bill of Materials	A comprehensive list of raw materials, components, and assemblies required to build a product.
BU	Build-Up Method	A method to calculate regional value content by adding the value of originating materials.
BTA	Bilateral Trade Agreement	An agreement between two countries to facilitate trade and reduce trade barriers.
CC	Change in Chapter	A change at the chapter level of the HS code.
CI	Customs Invoice	An invoice used for customs declaration that details the goods being exported.
CIF	Cost, Insurance, and Freight	The cost of goods including insurance and freight to the destination port.
COO	Certificate of Origin	A document certifying the origin of a product.
CTC	Change in Tariff Classification	A change in the tariff classification of a product.
CTH	Change in Tariff Heading	A change at the heading level of the HS code.
CTSH	Change in Tariff Sub Heading	A change at the subheading level of the HS code.
CVD	Countervailing Duties	Additional duties imposed on imported goods to offset subsidies provided to producers or exporters in the exporting country.
DVC	Domestic Value Content	The percentage of a product’s value that comes from domestic sources.
EPA	Economic Partnership Agreement	A type of trade agreement that involves not only tariff elimination but also cooperation in a wide range of areas such as investment and development.
EXW	Ex-Works Price	The price of goods at the point of origin, excluding shipping costs.
EPE	Export Processing Enterprises	Enterprises established and operating in export processing zones.
FOC	Free On Board	The cost of goods loaded onto a shipping vessel, excluding shipping costs.
FOB	Free On Board	The price of goods including transport costs to the point of shipment.
FTA	Free Trade Agreement	An agreement to reduce or eliminate trade barriers between countries.
FTZ	Free Trade Zone	A designated area within a country where goods can be imported, manufactured, and re-exported without the intervention of customs authorities.
GSP	Generalized System of Preferences	A preferential tariff system for developing countries.
HS	Harmonised System	A standardized system of names and numbers to classify traded products.
LDC	Least Developed Countries	Countries that are the least developed in terms of socioeconomic indicators.
MaxNom	Maximum Non-Originating Materials	The maximum percentage of non-originating materials allowed in a product.
MCS	Manufacturing Cost Statement	A statement detailing the costs involved in manufacturing a product.
MFN	Most Favored Nation	A status that ensures a country will not be treated less favorably than another country.
MP	Materials Produced	Materials that are produced within the FTA region.
NC	Net Cost of the Good	The total cost of the product excluding profit and other costs.
NOM	Non-Originating Materials	Materials that do not qualify as originating under the FTA.
NOC	Net Cost Method	A method to calculate the origin of a product based on net cost.
PE	Produced Exclusively	Products that are produced exclusively from originating materials.
PSR	Product Specific Rules	Rules that apply to specific products under an FTA.
PTA	Preferential Trade Agreement	An agreement to reduce tariffs for certain products between countries.
QVC	Qualifying Value Content	The value added through processing that meets the qualifying criteria for origin.
ROO	Rules of Origin	Criteria used to determine the national source of a product.
REX	Registered Exporter System	A system of certification of origin of goods that allows for self-certification by exporters registered in the system.
RVC	Regional Value Content	The percentage of a product’s value that must originate from a specific region.
SP	Specific Manufacturing	Specific manufacturing or processing operations that confer originating status on a product.
SPS	Sanitary and Phytosanitary Measures	Measures to protect humans, animals, and plants from diseases, pests, or contaminants.
TBT	Technical Barriers to Trade	Regulations and standards that act as barriers to trade.
TCI	Third Country Invoicing	Invoicing for goods shipped from a country other than the country of origin.
TRQ	Tariff Rate Quota	A system that allows a set quantity of specific products to be imported at a lower tariff.
VA	Value Added	The amount by which the value of an article is increased at each stage of its production.
VNM	Value of Non-Originating Materials	The value of materials that do not originate from the FTA region.
VOM	Value of Materials	The value of materials used in the production of a product.
VPM	Value of Processing	The value added through processing operations.
WO	Wholly Obtained	Products that are entirely sourced from the FTA region.

The actual case of applying FTAs to reduce tariffs on Nickel Powder

2024年6月17日 by TaichiKawazoe(河副太智) Leave a Comment

Introduction

An importer A is considering importing Nickel Powder from Exporting Country United Kingdom, an FTA Contracting Country. The Nickel Powder is manufactured in United Kingdom using raw materials sourced from Non-Contracting Countries. Specifically, raw materials such as crude nickel (HS 7501.20) and various gases like carbon monoxide, hydrogen, sulfur dioxide, ammonia, and oxygen (HS 28) are utilized in the production process within United Kingdom. This raises the question: Does this method of production meet the rules of origin under the FTA, allowing for reduced tariffs?

Ruling Information

Ruling Date	May 1, 2024
Product Name	Nickel Powder
HS Code	7504.00
Applicable Origin Rule	Change to Tariff Subheading (CTSH)

Origin Criteria for Nickel Powder

To qualify for preferential tariff treatment under the FTA between Importing Country A and United Kingdom, the Nickel Powder must satisfy the product-specific rule (PSR) of origin. According to the agreement, the product-specific rule for Nickel Powder under HS code 7504.00 requires a change to the tariff subheading (CTSH) during production.

Raw Materials and Origin Classification

Raw Material	HS Code	Description	Origin Classification
Crude Nickel	7501.20	Sourced from Non-Contracting Country	Non-Contracting Country
Carbon Monoxide	28	Sourced within Contracting Country	Neutral Element
Hydrogen	28	Sourced within Contracting Country	Neutral Element
Sulfur Dioxide	28	Sourced within Contracting Country	Neutral Element
Ammonia, Oxygen	28	Sourced within Contracting Country	Neutral Element

Manufacturing Process

Description
Gas Production
Thermal Decomposition
Nickel Powder Production

Reason for Approval

For the application of the FTA, the first consideration is the non-originating material, Crude Nickel (HS: 7501.20). Since the HS code of the final product, Nickel Powder, is 7504.00, and there has been a change in the 6-digit level HS code during manufacturing and processing in the FTA contracting country, the product-specific rule of origin (CTSH) is met.

Here is a part of the list from the annex of the FTA agreement, which specifies the product-specific rules of origin for each HS code.

Next, regarding the presence of the non-originating materials, carbon monoxide, hydrogen, sulfur dioxide, ammonia, and oxygen (all classified under HS code chapter 28), these are considered Neutral elements under the relevant FTA agreement. Therefore, it is not necessary to consider the originating status of these materials when determining whether the Nickel Powder qualifies as an originating product from the contracting country.

In this case, the FTA agreement specifies Neutral elements in article 3.13.
in this case, these materials fall under (a) fuel, energy, catalysts, and solvents.

Summary

Therefore, the Nickel Powder is recognized as originating from the FTA Contracting Country and is eligible for tariff reduction.

A notable point in this case is that when manufacturing a product in the FTA contracting country, even if non-originating materials sourced from non-contracting countries are used, these materials can be considered Neutral elements according to the applicable agreement. Specifically, in this case, these materials fall under (a) fuel, energy, catalysts, and solvents. This means that there was no need to individually assess whether these non-originating materials met the rules of origin.

If non-originating materials are used and do not meet the rules of origin, but are classified as Neutral elements, they can still meet the rules of origin. Therefore, it is crucial to identify such exception provisions from the agreement text.

By following the above manufacturing processes, the importing company can benefit from the preferential tariff rates. Importing Nickel Powder through the usual methods incurs higher production costs, but by sourcing non-originating materials in compliance with the FTA rules of origin, the company can significantly reduce tariffs. This results in considerable cost savings, making the importation process more efficient and profitable.

The actual case of applying FTAs to reduce tariffs on shoes

2024年6月13日 by TaichiKawazoe(河副太智) Leave a Comment

The Potential for Tariff Reduction Using FTAs

An import company in Country A is attempting to import shoes from Cambodia, a contracting party of an FTA. These shoes are manufactured in Cambodia using various raw materials sourced both domestically within Cambodia and from non-contracting countries. Will such shoes, produced under these conditions, qualify for reduced tariffs under the FTA’s rules of origin?

Date of Ruling Issuance

May 8, 2024

Product Name

Shoes

HS code

6402.99-

Rules of Origin for the Final Product

Product-specific rule: “CC”

List of Raw Materials

Raw Material Name	HS code	Representative Item	Origin Certification
Upper Material	Chapter 39	Plastics	Non-Contracting Country
Upper Material	Chapter 54	Man-made filaments	Non-Contracting Country
Upper Material	Chapter 59	Coated textile fabrics	Non-Contracting Country
Midsole Material	Chapter 39	Plastics	Non-Contracting Country
Midsole Material	Chapter 48	Paper and paperboard	Non-Contracting Country
Outsole Material	Chapter 39	Plastics	Non-Contracting Country
Insole Material	Chapter 39	Plastics	Non-Contracting Country
Adhesives, etc.	Chapter 35	Glues	Non-Contracting Country

Manufacturing Process

Description
Cutting of raw materials
Sewing of raw materials
Assembly of the product

Reason for Certification

The HS code for the shoes is 6402.99-. Therefore, the product-specific rule of origin is ‘CC’, which is the applicable rule of origin in this case. Upon reviewing the details of the raw materials, the non-originating materials meet the criteria set by the product-specific rule of origin. Hence, the product qualifies as an FTA originating product.

*“CC” stands for Change in Chapter, which requires that non-originating materials used in a product must undergo a change at the 2-digit HS code level during the final production process.

Summary

In this case, importing shoes manufactured in Cambodia not only achieved tariff reductions through the application of preferential tariffs but also successfully reduced overall costs. This was accomplished by sourcing raw materials, which are the components of the shoes, from third countries at lower prices. The materials were then processed, including cutting and sewing, in Cambodia.

While determining whether the components meet the FTA’s rules of origin can be complex due to the variety of materials involved, establishing such a system allows for long-term benefits from tariff reductions. Customs specialists play a crucial role in navigating these complexities and ensuring compliance with the FTA’s rules of origin.

FTAs provide significant opportunities for reducing tariffs and enhancing competitiveness by leveraging preferential tariff rates. By understanding and applying the FTA rules, customs specialists can help companies optimize their import processes, leading to substantial cost savings. This case exemplifies how strategic sourcing and compliance with FTA regulations can lead to sustainable economic advantages and improved competitiveness in the global market.

The actual case of applying FTAs to reduce tariffs on candy.

2024年6月9日 by TaichiKawazoe(河副太智) Leave a Comment

Introduction

A trading company in Importing Country A is planning to import sugar confectionery from FTA Contracting Country B. The sugar confectionery is manufactured in FTA Contracting Country B using sugar and glucose syrup sourced from within B, and additives such as acidulants, flavorings, colorants, and water from Non-Contracting Countries. Will this manufacturing process allow the sugar confectionery to meet the FTA origin rules and qualify for reduced tariffs?

Customs Ruling Details

Issuance Date

December 28, 2021

Product Name

Sugar Confectionery

HS Code

1704.90

Origin Rule

CTH (Change to Tariff Heading)

List of Raw Materials

Raw Material	HS Code	Origin
Sugar	1701	FTA Contracting Country
Glucose Syrup	1702	FTA Contracting Country
Acidulant	2918	Non-Contracting Country
Flavoring	3302	Non-Contracting Country
Colorant	3203	Non-Contracting Country
Water	2201	Non-Contracting Country

Manufacturing Process

Preparation of raw materials

Passing through magnet

Passing through filter

Boiling

Adding raw materials

Cooling and mixing

Laminating candy base

Stretching candy base

Cutting candy base

Shaping and inserting sticks

Cooling

Inspection with metal detector

Individual packaging and tagging

Re-inspection with metal detector

Inspection with X-ray machine

Temporary storage

Packing in decorative boxes

Packing in cardboard boxes

Pallet stacking

Shipping

Reason for Approval

The HS code for the sugar confectionery is 1704.90, and the product-specific rule of origin is *CTH. Upon reviewing the details of the raw materials, the acidulants, flavorings, colorants, and water sourced from non-FTA countries meet the criteria set by the product-specific rule of origin. Therefore, the sugar confectionery is recognized as an originating product under the FTA and is eligible for tariff reduction.

*“CTH” stands for Change to Tariff Heading, which requires that non-originating materials used in a product must undergo a change at the 4-digit HS code level during the final production process.

Conclusion

In this case study, we see a strategic approach to importing sugar confectionery that not only reduces tariffs but also lowers raw material costs. The main ingredients of the sugar confectionery, sugar and glucose syrup, are sourced from an FTA signatory country, ensuring that the final product is largely considered to be of FTA origin. This high purity level of the product underscores its compliance with FTA rules.

While the primary ingredients are procured from the FTA signatory country, supplementary materials such as acidulants, flavorings, colorants, and water are sourced from non-FTA countries at lower costs. This strategy allows the company to maintain the product’s high quality and purity while significantly reducing procurement costs.

By adhering to the product-specific rules of origin and strategically sourcing non-originating materials, the company qualifies for preferential tariff rates under the FTA. This dual approach of cost optimization and tariff reduction showcases the company’s effective use of FTAs to enhance profitability.
Understanding and leveraging FTAs strategically can lead to substantial business opportunities. This case demonstrates how knowledge of FTA rules and smart sourcing decisions can create a competitive edge in international trade.