Impact of Misclassifications in NCM (HS Code) and How to Avoid Them

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In international trade, the correct classification of goods using the NCM (Nomenclatura Comum do Mercosul) is a fundamental aspect that affects compliance, cost efficiency, and operational success. Misclassifications in the NCM not only lead to financial consequences but also pose significant legal and regulatory risks. This article explores the common pitfalls in NCM misclassification, their impact on businesses, and strategies to avoid these errors.

1. Common Pitfalls in NCM Misclassification

Misclassifying goods under the NCM system can happen for a variety of reasons, often due to ambiguity in product description or misinterpretation of NCM guidelines. Some of the most frequent mistakes include:

  • Complex Product Composition: Products made up of multiple materials or serving different purposes are often challenging to classify. For example, a product with both electronic and mechanical components might require a more specific classification, yet companies sometimes opt for a broader, incorrect category to simplify the process. This can lead to costly errors, such as paying higher taxes or facing penalties for underclassification.
  • Rapidly Changing Technologies: In sectors like technology and pharmaceuticals, products evolve quickly. NCM codes may not always reflect the latest advancements, leading to outdated classifications. Staying updated with current classifications is essential, and working with experts can help ensure businesses use the correct and most up-to-date codes to avoid issues related to product misclassification.
  • Inconsistent Descriptions in Documentation: A frequent issue is when product descriptions in invoices, shipping manifests, or customs declarations do not align with the assigned NCM code. Discrepancies between documents can raise red flags with customs officials, leading to delays and additional scrutiny. Maintaining consistency across all documentation is crucial to avoid this pitfall.

2. Impact on Businesses

The misclassification of goods can have wide-reaching effects on a business, particularly in terms of financial costs, legal exposure, and market competitiveness. The following are some critical impacts:

  • Increased Financial Burden: One of the most significant repercussions of NCM misclassification is the financial penalty. Customs duties, taxes like ICMS, and additional fees are directly linked to the NCM code. An incorrect classification can lead to overpayment or hefty fines due to underpayment. Furthermore, companies might miss out on tax exemptions or preferential tariffs, leading to higher import costs than necessary.
  • Delays in Customs Clearance: Customs authorities may hold shipments for extended periods if they suspect a product has been misclassified. These delays can disrupt supply chains, increase storage costs, and harm customer relationships. By ensuring proper classification from the outset, businesses can avoid unnecessary holdups and prevent the risk of customs-related delays.
  • Loss of Competitive Advantage: Misclassification not only results in higher costs but also diminishes a company’s market competitiveness. Companies that correctly classify their products enjoy the benefits of lower import duties and tax exemptions, allowing them to offer more competitive pricing. In contrast, businesses burdened by misclassified goods may struggle to compete, potentially damaging their reputation in the market.

3. How to Avoid NCM Misclassification

Avoiding NCM misclassification requires a thorough and strategic approach. Here are some key steps businesses should take to ensure accurate classification:

  • Detailed Product Breakdown: Begin by thoroughly analyzing each product’s materials, functionality, and intended use. This analysis should involve breaking the product down into its individual components and evaluating how each fits into the NCM structure. 
  • Consult with Experts: Navigating the NCM classification system can be complex, particularly for businesses unfamiliar with customs regulations. By utilizing Novatrade’s regulatory services, companies can confidently determine the correct NCM code for their products. This not only reduces the risk of misclassification but also ensures compliance with regulatory requirements, helping companies streamline their import processes and avoid costly penalties.
  • Use of Official Inquiries: In situations where the correct NCM code is not immediately clear, businesses can submit an official inquiry to Receita Federal for a binding decision. This provides legal protection against future disputes regarding classification. While this process can take time, Novatrade can assist in handling complex cases, ensuring that the right classification is identified upfront, and if necessary, managing the inquiry process to provide businesses with confidence in their decisions.

Conclusion

Correct NCM classification is a strategic necessity for businesses seeking to optimize their import processes and reduce costs. Misclassifications can result in significant financial losses, legal risks, and operational disruptions. However, with careful attention to detail, access to the right resources, and expert support businesses can mitigate these risks and ensure seamless import operations.

Whether through conducting detailed product analyses, staying updated on evolving regulations, or managing the classification process from start to finish, Novatrade’s services offer businesses the peace of mind that they are fully compliant with Brazilian import laws. By leveraging this expertise, companies can focus on growth and success in the Brazilian market, without the fear of costly misclassification errors.

For more information on how Novatrade can support your business, please do not hesitate to contact us.