The Importance of Tax Classification
The Tax Classification is one of the most important steps in Foreign Trade, as all the tax matters involved are based on it. In addition, there are restrictions on the entry and circulation of certain types of goods also defined by their Tax Classification.
This subject requires special attention, as a wrong classification can lead to fines and delays in proceedings. In the event that the goods are reclassified, for example, a certain tax benefit may be lost and results in a process financially unfeasible.
The classification of a commodity takes place through the Mercosur Common Nomenclature (MCN), which is nothing more than a code composed of 8 digits, created based on the Harmonized System (the HS Code) and adopted by Mercosur countries since 1995.
To find out which code is correct, it is necessary to consult the Common External Tariff, a document prepared by Mercosur member countries in order to unify the information determined by the bloc. Another way to consult the classification is the Brazilian IPI Tax List, known as “TIPI”.
As it is related to the taxes that should or should not be collected, it is advisable that the Tax Classification is carried out assisted by specialized professionals equipped with all the necessary information about the product, as any inconsistency can change the disposition.
Consenting Bodies
Certain MCN require an Import License to be nationalized in Brazil. This Import License is granted by consenting bodies, which are responsible for controlling the entry of these materials.
Chemical materials, pharmaceutical products, heavy equipment for civil construction, toys, among others, require authorization to be imported and agencies such as ANVISA and INMETRO supervise the quality of such products.
Because of this, the Tax Classification is a matter of extreme importance. Since some MCN demand special attention from customs.
Cost Reduction
The tax burden of an import can be one of the biggest difficulties for companies that intend to start or already operate in Foreign Trade. Therefore, knowing the legal mechanisms that exist to reduce these taxes is an important step towards maximizing your profits.
Planning and executing efficient tax management can alleviate cash flow and even reduce the final value of goods. In this way companies can save millions of reais a year, expand their operations and profit from it.
The proper tax classification of a particular asset can bring several benefits to the company. The most common are tax incentives, which in certain cases can even reduce tax rates to zero.
Tax benefits
There are several tax benefits aimed at Brazilian importers and exporters, usually linked to Special Customs Regimes. These incentives determine that some products, under specific NCMs, may be subject to a reduction in their tax rates.
Usually linked to the Import Tax, as for example in the Ex-Tarifário Regime, but not limited to it, tax benefits are a tax reduction tool by the Federal Government to stimulate the economy so that products transit and enter the country.
Companies can and should take advantage of this government tool to increase the competitiveness of their goods. Especially because some cases can be more complicated than it seems to apply for these benefits, which is why the company must pay attention to the nuances of the process.
Error Reduction.
In order to reduce possible mistakes in classification, it is important the company to have the necessary information for an adequate framework. Depending on the type of merchandise, the information may vary between:
- Type
- Ingredients
- Formulation
- Destination
- Quantity; and
- Technical Specifications (pressure, power etc.).
To identify a particular item in the MCN table, attention must be paid to the chapter titles, linked notes, chapters, and subchapters so that the classification is in accordance with the product.
Given the complexity of the process, having a qualified technician or a specialized cargo agent and/or forwarding agent to provide support in tax classification is the most viable alternative to minimize possible errors and consequently increase in costs that may encumber the process.
Measures to be Taken After Identifying an Error
Once a misclassification in tax is identified, the company can admit the fault and seek correction, thus being able to regularize the situation and avoid penalties imposed by the Brazilian Federal Revenue Service.
In cases where the Federal Revenue Service identifies the mistake, the penalties can be more severe. The application of penalties can occur if a mistake is found, but a compulsory error increases the severity of the process as we will see in the next section.
Expected Penalties
The penalties that can be applied, both in the import and export process, are provided for in Decree 6,759/09, which establishes the Brazilian Customs Regulation.
In the importation of products, Article 711, item I, informs that: when classifying incorrectly in the Mercosur Common Nomenclature, a fine of 1% will be applied on the customs value of the goods, with a minimum of R$ 500.00 and a maximum of 10% of the total value of the products.
Article 718, item II, in turn, defines the penalty applicable to exports by providing that in case of misclassification, a fine of 20% to 50% of the customs value will be applied. With a minimum of R$ 500.00 in the case of special customs regimes for temporary export, or for temporary export for outward processing (Article 723, paragraph 1).
Every day, several companies are summoned for tax classification errors. In addition to the penalties provided by law, such an error can lead to a delay in release and generate extra storage costs. Additionally, it can also lead to the review of all processes carried out in the last five years and, consequently, retroactive costs for the importer or exporter.
Conclusion
By avoiding unnecessary fines and fees, proper classification can reduce expenses and bring peace of mind to processes. If defined correctly, even if there is a challenge on the part of the IRS, it provides proper arguments in case it is necessary to defend against possible reclassifications. It is worth remembering that, in these cases, all inherent costs shall be bear by the person responsible for the merchandise.
Having adequate support is highly relevant for efficient tax management based on the correct tax classification of your product, whether importing or exporting.