TN VED Customs Classification in Russia and the EAEU: A Legal Guide

 

April 19, 2024

BRACE Law Firm ©

 

The development of foreign economic ties leads to an increase and diversification of goods moved across the border, frequently causing disputes with customs authorities regarding classification. The primary reason for these disputes is the incorrect determination of the code under the Commodity Nomenclature of Foreign Economic Activity (the "TN VED"). This occurs because goods moved across the customs border possess various characteristics and properties that are difficult to understand without professional training.

The Customs Code of the Eurasian Economic Union (the "EAEU Customs Code") attaches significant importance to the correct classification of goods during customs declaration. The classification code directly determines the rates of import and export customs duties, taxes, and consequently, the amount of customs payments. It also dictates the application of non-tariff measures, prohibitions, and restrictions, which in turn determines the permits required to move goods across the customs border of the Eurasian Economic Union (the "EAEU"). Furthermore, accurate classification is essential for objective foreign trade statistics, which inform the customs policy of EAEU member states.

Since the declarant bears the responsibility for correct classification, various problems may arise when determining the TN VED code, often leading to litigation with customs authorities.

Classification of Goods under the TN VED

Before examining the problems of determining a TN VED code, it is necessary to study the theoretical basis and structure of the nomenclature. According to Article 19 of the EAEU Customs Code, the TN VED is a system of description and coding used to classify goods for the application of customs tariff regulation measures, export duties, prohibitions and restrictions, market protection measures, and the maintenance of customs statistics.

When filing a customs declaration, the declarant independently classifies the goods in accordance with the TN VED approved by Resolution of the Board of the Eurasian Economic Commission No. 80 dated September 14, 2021.

The TN VED is based on the Harmonized Commodity Description and Coding System of the World Customs Organization (the "Harmonized System"). It includes headings and subheadings, corresponding numerical codes grouped into chapters and sections, notes, and the General Rules of Interpretation of the Harmonized System. The Harmonized System is an annex to the International Convention on the Harmonized Commodity Description and Coding System (Brussels, June 14, 1983). The Russian Federation has been a party to this convention since January 1, 1997. The Harmonized System is built on the principle of mandatory comparability of national and international trade data. It aims to simplify international trade procedures, overcome tariff and non-tariff barriers, standardize documents, improve statistical objectivity, and enable electronic data exchange.

Classifying goods under the TN VED means determining their numerical classification codes — assigning goods to specific headings, subheadings, and items with corresponding ten-digit codes.

Pursuant to the Instruction on the Procedure for Filling Out a Declaration for Goods, approved by Resolution of the Commission of the Customs Union No. 257 dated May 20, 2010, the declarant must specify this ten-digit code in Box 33 of the declaration for goods (the "Declaration" or "DT"). The classification code must correspond to the information provided in Box 31 of the Declaration.

In Box 31, the declarant provides details about the moved goods: name (trade, commercial, or traditional), manufacturer information, trademarks, brands, models, articles, grades, technical and commercial characteristics, and composition data, provided such information is necessary for calculating customs payments.

The description in Box 31 must be sufficient for classification under the TN VED, specifying mandatory and additional characteristics required for such classification.

If a customs authority identifies incorrect classification either before or after the release of goods, the authority independently classifies the goods (Article 20(2) of the EAEU Customs Code).

In addition to classification decisions made due to incorrect code declarations, customs authorities also decide to amend the information in the declaration upon identifying incomplete or unreliable data. If an incorrect code results in underpayment of duties or taxes, or avoids prohibitions and restrictions, the customs authority issues a demand for payment. It may also take measures based on the nature of the restrictions and may hold the declarant administratively liable.

Preliminary Classification Decisions

Upon application by interested parties, customs authorities may classify goods prior to declaration by issuing preliminary classification decisions (the "PKR") in accordance with the TN VED. They may also issue decisions for goods moved in unassembled, disassembled, incomplete, or unfinished form (Article 21(1) of the EAEU Customs Code).

A PKR is issued by the customs authority of the member state where the goods will be released under a customs procedure (excluding customs transit) (Article 23(3) of the EAEU Customs Code).

A PKR is issued for each item name, including a specific brand, model, article, and modification (Article 23(4) of the EAEU Customs Code).

The form, filing procedure, and amendment process for a PKR are defined by Resolution of the Board of the Eurasian Economic Commission No. 58 dated April 17, 2018.

Under Article 24(1) of the EAEU Customs Code, the customs authority issues a PKR based on the declarant's application, submitted electronically or in hard copy.[1]

The application must contain the full commercial name, brand name (trademark), primary technical and commercial characteristics, and other information allowing for unambiguous classification. If necessary, the applicant must provide samples, photographs, drawings, blueprints, product passports, and other supporting documents (Article 24(2) of the EAEU Customs Code).

If necessary, the customs authority may request additional information, which the applicant must provide within 60 calendar days. Failure to provide this information or providing insufficient data will result in a refusal to issue the PKR (Article 24(3) of the EAEU Customs Code).

Under Article 25 of the EAEU Customs Code, the PKR must be issued no later than 90 calendar days from the registration of the application. This period is suspended if additional information is requested.

Under Article 26 of the EAEU Customs Code, the customs authority may amend, terminate, or revoke a PKR.

Amendments are made if errors are identified that do not affect the classification code.

A decision to terminate a PKR is made if:

• The applicant provided documents containing unreliable or incomplete information or forged documents;
• The customs authority identifies errors that affect the classification code.

A decision to revoke a PKR is made if:

• Amendments are made to the TN VED affecting the classification;
• The Eurasian Economic Commission adopts a classification decision for specific types of goods that changes the classification;
• Customs authorities issue decisions or clarifications changing the classification;
• The World Customs Organization adopts classification decisions applicable to member states.

If the declarant disagrees with a PKR, they may appeal to a higher customs authority or a court.

General Rules of Interpretation of the TN VED

Resolution of the Council of the EEC No. 80 established the General Rules of Interpretation of the TN VED (the "GRI").

The classification rules are divided into six parts:

• GRI 1–5 regulate the sequence for determining the four-digit heading code;
• GRI 6 applies after the four-digit code is determined to provide further classification.

The application procedure is regulated by the Regulation on the Procedure for Applying the Unified Commodity Nomenclature of Foreign Economic Activity of the Customs Union, approved by Resolution of the Commission of the Customs Union No. 522 (the "Regulation No. 522").

According to paragraph 6 of Regulation No. 522, the GRI apply uniformly and sequentially: GRI 1 is applied first; GRI 2 applies if classification under GRI 1 is impossible; GRI 3 applies if GRI 1 and 2 are impossible; GRI 4 applies if GRI 1, 2, and 3 are impossible; GRI 5 applies as needed after other rules; GRI 6 applies to determine the subheading code.

GRI 1 provides that titles of sections, chapters, and sub-chapters are provided for ease of reference only. For legal purposes, classification is determined according to the terms of the headings and any relative section or chapter notes.

Classification must be conducted according to the heading names (four-digit code) and section/chapter notes. Since headings and notes have equal status, priority is given to the most accurate description. If the terms of headings and notes do not require otherwise, GRI 2, 3, 4, and 5 are applied. GRI 1 is used for goods that can be unambiguously identified based on the heading text and notes.

GRI 2 consists of two independent parts, 2(a) and 2(b), which are applied sequentially. This rule expands heading texts to include goods with specific characteristics.

GRI 2(a) states that any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that the incomplete or unfinished article has the essential character of the complete or finished article. It also includes articles presented unassembled or disassembled.

Thus, this rule applies to goods:

• In disassembled form;
• Lacking elements of a finished product;
• Requiring further technological operations to be ready for use.

Under GRI 2(b), any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall include a reference to goods consisting wholly or partly of such material or substance. Classification of goods consisting of more than one material is governed by GRI 3.

GRI 2(b) applies when:

• Goods consist of more components than specified in the heading;
• The heading refers to the material or substance from which the product is made.

If an article cannot be classified by its specific name, one must determine its primary material and search for a heading covering articles of that material. If the primary material cannot be determined, this rule is inapplicable.

If goods are prima facie classifiable under two or more headings, preference is given to the heading providing the most specific description ( GRI 3(a)).

According to GRI 3(b), mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character.

Goods which cannot be classified by reference to 3(a) or 3(b) shall be classified under the heading which occurs last in numerical order among those which equally merit consideration ( GRI 3(c)).

Under GRI 4, goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin.

This rule applies to goods that cannot be classified under GRI 1–3. Similarity may depend on factors such as type, property, and purpose.

GRI 5 applies in addition to the previous rules and has two sections:

(a) Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases, and similar containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long-term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind normally sold therewith. This rule does not apply to containers which give the whole its essential character.

(b) Subject to the provisions of Rule 5(a) above, packing materials and packing containers presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. This is not binding if the packing is clearly suitable for repetitive use.

GRI 6 states that for legal purposes, the classification of goods in the subheadings of a heading shall be determined according to the terms of those subheadings and any related subheading notes and, mutatis mutandis, to the above rules, on the understanding that only subheadings at the same level are comparable.

After determining the four-digit heading, further detailing at the six- and ten-digit levels is required. Rule 6 indicates that GRI 1–5 apply to subheadings within the same heading.

Subheadings are comparable only at the same level: those with one dash (level 1) or those with two dashes within a one-dash subheading. Once the most specific one-dash subheading is chosen, then and only then is the two-dash subheading selected.

Customs Classification Disputes

In 2022, arbitration courts of first instance considered 5,120 customs dispute cases (compared to 4,247 in 2020 and 4,858 in 2021). Decisions were made in favor of foreign trade participants in 2,261 cases (44%), which is slightly lower than the previous two years (49% in 2021, 48% in 2020). The percentage of successfully challenged additional assessments also decreased. In 2022, participants challenged assessments totaling 670 million rubles (up from 232 million in 2021), but the total amount of satisfied claims was only 23 million rubles (3.5%). This is significantly lower than in 2021 (44 million rubles or 19.1%) and 2020 (33.2% or 66 million rubles). The record for successfully challenged assessments was in 2019, with over 80% of challenged amounts satisfied. [2]

The wide range of decisions made by customs authorities regarding incorrect classification determines significant differences in the subject matter of litigation.

These disputes include challenges to classification decisions or PKRs.

Note that assigning a specific TN VED code does not fall within the competence of an arbitration court. If a court finds that classification was incorrect, it declares the customs decision invalid. The court is not entitled to independently assign goods to a specific nomenclature code.[3]

Under Article 22 of the EAEU Customs Code, the Eurasian Economic Commission adopts classification decisions for specific goods to ensure uniform application of the TN VED. However, these decisions do not always reflect established practice. Let us consider some examples.

The first example involves oral irrigators. Customs officials note that litigation regarding the classification of irrigators shows a negative trend for the authorities. Most disputes are resolved in favor of the declarant because customs officials cannot prove the code they consider correct. Participants argue that irrigators are not for free home use but must be used according to a dentist's recommendations after training.[4]

When declaring these goods, participants typically used TN VED item 9019 10 900 9 (0% import duty): mechano-therapy appliances; massage apparatus; psychological aptitude-testing apparatus; ozone therapy, oxygen therapy, aerosol therapy, artificial respiration or other therapeutic respiration apparatus: mechano-therapy appliances; massage apparatus; psychological aptitude-testing apparatus: -- other: --- other.

Customs authorities assigned the goods to subheading 8509 80 000 0 (5% duty): electro-mechanical domestic appliances, with self-contained electric motor, other than vacuum cleaners of heading 8508: - other appliances; or subheading 8509 90 000 0 (5% duty): electro-mechanical domestic appliances, with self-contained electric motor...: - parts.

Customs argued that irrigators are intended for individual home use for oral hygiene via a water jet and are therefore domestic electrical appliances.

Established court practice confirms the declarants' position that oral irrigators registered as medical devices should be classified under code 9019 10 900 9. This position was expressed in rulings of the Supreme Court of the Russian Federation in Case No. A56-24796/2021, Case No. A51-377/2021, and by the Arbitration Court of the North Caucasus District in Case No. A63-7730/2021.

However, with the adoption of Resolution of the EEC Board No. 131 dated September 28, 2022 (the "EEC Resolution No. 131"), oral irrigators and their handles became classified under subheadings 8509 80 000 0 and 8509 90 000, adopting the position of the customs authorities.

The Arbitration Court of the Stavropol Territory expressed an interesting position in its decision dated October 17, 2022, in Case No. A63-14492/2021. The court noted that the adoption of EEC Resolution No. 131 evidenced the validity of arguments for classification under 9019, and suggested a "deliberate intent by the FCS of Russia to change the existing regulation" to ensure irrigators are classified differently. This decision was upheld on appeal and cassation.

After the adoption of EEC Resolution No. 131, customs authorities cited it in pending cases. However, courts rejected these arguments because "decisions of the commission that worsen the position of individuals or legal entities do not have retroactive effect". Thus, the Resolution did not apply to actions taken before it entered into force.[5]

An attempt was made to challenge EEC Resolution No. 131 in the Court of the Eurasian Economic Union, arguing it violated requirements for certainty, clarity, and unambiguous regulation. However, the Resolution was found compliant with the Treaty on the Eurasian Economic Union and international treaties. [6]

Another example involves technical goods such as drills and screwdrivers. A drill's primary purpose is drilling holes, while a screwdriver's is tightening/loosening fasteners. Both require specific rotation speeds and torque. A screwdriver may also have a torque regulator. The primary criterion is purpose.

Participants declared these goods under code 8467 21 100 0 (drills of all kinds, for working in the hand, with self-contained electric motor, capable of operating without an external source of power) with an 8.5% duty. Customs officials argued for code 8467 29 200 0 (other tools with self-contained electric motor) with a 10% duty. [7]

The primary classification features of heading 8467 are tool type, motor type, power source capability, and purpose. Heading 8467 excludes tools that cannot be held in the hand due to weight or size.

Subheading details include:

• 8467 21: drills of all kinds;
• 8467 22: saws;
• 8467 29: other.

Court practice regarding drills and screwdrivers has favored declarants. In Case No. A45-29637/2021, a company declared drills under 8467 21 100 0. Customs changed this to 8467 29 200 0 because the drills could also be used as screwdrivers. The court of first instance supported the declarant. The appellate court reversed, citing GRI 3(c). However, the Economic Dispute Collegium of the Supreme Court of the Russian Federation overturned the appellate ruling, reinstating the first instance decision.

The Supreme Court noted that the ability of consumers to choose between drilling and screwing functions did not justify applying GRI 3(c), as the GRI must be applied strictly sequentially. GRI 3(c) only applies if a product cannot be unambiguously classified under GRI 1, 2, 3(a), or 3(b). The court found that "drills of all kinds" and "other" are not equal subheadings, and the nomenclature does not differentiate between drills based on their screwdriver function. [9]

Similar conclusions were reached in other Supreme Court rulings (e.g., Case No. 309-ES21-18263, Case No. 310-ES19-24856).

The dispute was finally settled by EEC Board Resolution No. 141 dated October 11, 2022, which assigned cordless drill-screwdrivers to code 8467 21 100 0, supporting the declarants' position.

Another problem involves insufficient data for classification. Accurately determining a code requires a thorough description of the goods, including composition, application, and the technological function of each component. All characteristics must be considered collectively; ignoring some may lead to erroneous decisions.

One dispute arose from a customs claim that "forged articles of iron or steel: reactor vessel and upper unit cover forgings – flange (blank)" were incorrectly classified under code 7326 90 920 9 (other articles of iron or steel; forged; other; other) with a 9% duty and 20% VAT. Customs changed the code to 8401 40 000 0 (nuclear reactors; non-irradiated fuel elements (fuel rods) for nuclear reactors; apparatus for isotopic separation: parts of nuclear reactors) with a 15% duty and 20% VAT.

Customs argued that a flange blank intended for a nuclear reactor is a recognizable part of a reactor. The fact that it undergoes further processing (including heat treatment) for two years does not mean it lacks the essential character of the finished article. Customs also argued the declarant failed to prove the blank could be used for other purposes.

The court satisfied the applicant's claims to cancel the customs decision. The court found that the goods were merely starting materials for manufacturing. During a cycle of operations (machining, coating, welding, heat treatment), the mass, characteristics, and temperature properties change. Furthermore, the customs expert failed to answer key questions but still categorized the blank as a reactor part.

Courts noted that for an item to be a "part of a nuclear reactor", it must be a finished part or, under GRI 2(a), possess the essential character of the finished item. These goods were not finished parts. [10] Thus, the court agreed the flange blank should be classified under heading 7326.

Case No. A56-56037/2022 involved the classification of an oil mixture (99% sunflower and 1% rapeseed oil). The declarant used code 1517 90 990 0 (margarine; edible mixtures or preparations of animal, vegetable or microbial fats or oils). Customs classified it under 1512 19 900 2 (sunflower, safflower or cotton-seed oil and fractions thereof, whether or not refined, but not chemically modified).

The dispute concerned heading 1512 vs. 1517. Two lower courts supported customs, citing the lack of chemical modification. However, the cassation court noted that the distinguishing feature is the presence/absence of an oil mixture. Customs experts admitted they could not detect the rapeseed oil due to a lack of equipment. The court found insufficient evidence to determine if the product was a mixture. The case was remanded for a new trial and is currently suspended pending court expertise.[12]

Case No. A56-14195/2023 involved different interpretations of technical documentation regarding the function of agricultural machines. The declarant used code 8432 29 100 0 (agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground rollers: - harrows, scarifiers, cultivators, weeders and hoes: -- other: --- scarifiers and cultivators) with 0% duty.

Customs classified it under 8701 10 000 0 (tractors (other than tractors of heading 8709): - pedestrian-controlled tractors), resulting in a 10% duty.

Notes to heading 8432 indicate that motor cultivators are small self-propelled machines with one axis and an engine, where rotors (cutters) are permanently installed. Notes to heading 8701 cover pedestrian-controlled tractors, which are small tractors with one axle and wheels designed to work with interchangeable attachments.

EEC Board Resolution No. 25 identifies "pedestrian-controlled tractors" by features like a power take-off (PTO) or pulley for attachments. The cassation court clarified that Resolution No. 25 does not imply that any cultivator with a pulley is a tractor; it must be capable of transferring power to interchangeable attachments.

The declarant argued the PTO or pulley was not included. No customs or court expertise was conducted. The court found the previous rulings premature due to incomplete circumstances and remanded the case.[16]

These cases demonstrate that classification often requires specialized knowledge and expertise regarding technical characteristics, functions, and manufacturing methods. The burden of proof in these cases rests on the customs authority to document the characteristics justifying their classification. If the customs expertise is flawed, it loses its evidentiary value in court.

Court expertise is a right, not an obligation, of the court. If specialized knowledge is required but no party requests expertise, the court evaluates the claims based on the burden of proof and the principle of adversarial proceedings. [17]

Criminal Liability for Incorrect TN VED Codes

Changing a TN VED code may lead to additional assessments and risks of administrative or criminal liability.

Criminal liability is provided by Article 194 of the Criminal Code of the Russian Federation (the "Criminal Code") — evasion of customs payments in a large or especially large scale. A large scale exceeds 2 million rubles, and an especially large scale exceeds 6 million rubles.

Declaring an incorrect code alone does not constitute a crime. A crime requires intentional acts. Prosecution is only possible if the participant acted with intent, realizing the code was incorrect or the characteristics were incomplete.[18]

In practice, criminal cases are initiated based on operational search activities showing intent, such as electronic correspondence revealing knowledge of the correct code or intentional modification of technical documentation. Usually, there are no grounds for prosecution under Article 194 if a classification decision is merely a result of a different technical interpretation.[19]

In one case, an appellate court overturned a conviction because intent was not proven and the individuals were not independent subjects of the crime; their liability was limited to administrative offenses under the CAO RF. [20] The court found that the customs payments were secured by a cash deposit, meaning no damage was caused to the economic interests of the Russian Federation.

In another case, a person was convicted under Article 194(1) for intentionally using an incorrect TN VED code with a zero export duty for petrochemicals. The declarant was found to have acted with a criminal intent for enrichment through evasion. [21]

In conclusion, foreign trade involves numerous classification disputes. This article highlights key legal trends and court approaches to classifying various goods. Resolution of a specific dispute depends on correctly identifying the classification characteristics and presenting evidence to support them.

_________________________

References

[1] Order of the FCS of Russia No. 205 dated February 7, 2019, On Approval of Forms and Procedures for Filling Out Documents in Paper Form Used in Adopting a Preliminary Decision on the Classification of Goods in Accordance with the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union, in Withdrawing Such a Decision and Terminating Its Validity, as Well as the Form of Notification of the Need to Provide Additional Information.

[2] Statistics on the Consideration of Customs Disputes in Arbitration Courts for 2022. Tax and Customs Blog website.

[3] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 5 dated June 17, 1996, Review of the Practice of Considering Disputes Related to the Application of Customs Legislation.

[4] Chadova T.V., Current Problems of Classification of Technically Complex Goods Moved Through the Far Eastern Region. Bulletin of the Russian Customs Academy journal, 2024, No. 1.

[5] Resolution of the Arbitration Court of the Volga District dated May 18, 2023, in Case No. A65-15787/2022; Resolution of the Arbitration Court of the Far East District dated April 10, 2023, in Case No. A51-6762/2022.

[6] Decision of the Court of the Eurasian Economic Union No. S-5/23 dated October 23, 2023; Decision of the Court of the Eurasian Economic Union dated December 26, 2023.

[7] Chadova T.V., Current Problems of Classification... (see [4]).

[8] Resolution of the Seventh Arbitration Appellate Court dated July 8, 2022, in Case No. A45-29637/2021.

[9] Ruling of the Economic Dispute Collegium of the Supreme Court of the Russian Federation dated July 10, 2023, in Case No. A45-29637/2021.

[10] Resolution of the Arbitration Court of the North Caucasus District dated October 16, 2023, in Case No. A53-11099/2022.

[11] Resolution of the Arbitration Court of the North-West District dated June 29, 2023, No. F07-8178/2023 in Case No. A56-56037/2022.

[12] Ibid.

[13] Explanatory Notes to the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union (TN VED EAEU) (Volume IV. Sections XIV - XVI. Chapters 71 – 84).

[14] Explanatory Notes to the Unified Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union (TN VED EAEU) (Volume V. Sections XVI - XXI. Chapters 85 – 97).

[15] Resolution of the Arbitration Court of the North-West District dated February 14, 2024, in Case No. A56-14195/2023.

[16] Ibid.

[17] Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 23 dated April 4, 2014, On Certain Issues of the Practice of Application of Legislation on Expertise by Arbitration Courts.

[18] Criminal Liability for an Incorrect TN VED Code. PRAVOVED website.

[19] Ibid.

[20] Sentence of the Perm Territory Court dated July 19, 2023, in Case No. 22-3877/2023.

[21] Sentence of the Avtozavodsky District Court of Tolyatti, Samara Region, dated August 28, 2017.

 

April 19, 2024