Entirety Rule in Customs Classification
By: Atty. Mark Anthony Tamayo on December 15,2023.
Under the HS, there are six (6) General Rules of Interpretation (GRI) that govern the classification of imported goods. These rules were adopted under Section 1610 of the Customs Modernization & Tariff Act (CMTA) as a guide for imports to the Philippines. Rules 1-4 are interrelated and applied sequentially, while rules 5 and 6 are independent and used as needed.
The applicable customs duty rate often depends on the precise description of the imported item. Factors like power source, function, capacity, and the raw materials used can all influence its classification and, consequently, the applicable duty rate.
Special considerations are required for incomplete or disassembled goods. GRI Rule 2, also known as the “Entirety Rule” or the “Chief Value Rule”, plays an important role in classifying such goods. This rule considers the goods as an assembled whole, even if they are not assembled, and ensures they are classified based on their intended purpose and final use.
Entirety Rule
The Entirety Rule, embodied in Section 1610(2)(a) of the CMTA, applies to two scenarios:
- Incomplete or unfinished articles: This includes goods not yet fully assembled or ready for their intended use. As long as they retain the essential character of the complete article, they can be classified as such (even in their unfinished state). A prime example of this is the importation of an unassembled bicycle. Despite consisting of individual components like rubber tires, rims, seats, handlebars, and others, the importation retains the essential character of a complete bicycle and therefore, will be classified as a whole rather than its individual components.
- Unassembled or disassembled articles: This applies to goods partially or fully disassembled for reasons of packaging, handling, or transportation. The rule applies if the disassembled components, when assembled, have the essential character of a complete article. For instance, power plant facility components, systems, and ancillary equipment that are imported on a staggered basis are classifiable under a single “Power Plant” HS code.
Essentially, the rule treats incomplete, unassembled, or disassembled articles (even though composed of multiple components) as a single entity for classification purposes, considering their essential character as the whole article rather than their separate components. This means the complete article’s tariff heading and duty rate are applied instead of the various rates that would apply to each component separately.
The central concept underpinning the entirety rule is the “essential character” of the goods. This refers to the characteristic that defines the primary purpose or core function of the article. Determining the essential character requires careful analysis based on the specific case. Factors like the predominant material used in the article, the component that contributes most to the bulk, quality, weight, or value, or the role of a particular component can all play a part.
The entirety rule applies to various situations, including:
- Single package or shipment: Goods imported together to save space, like a wooden bookshelf with its components imported together, are classified as a whole.
- Physically joined goods: Assembled goods like furniture are classified as a whole.
- Arranged goods forming a unity: A set of tools in a toolbox is classified as a whole.
Procedural requirements for multiple shipments
As a rule, the unassembled or disassembled incomplete or unfinished articles, which form an integral part of a finished or complete article must enter the Philippine ports of jurisdiction all at the same time to avail of the single duty rate using the entirety rule.
However, this rule is not without exception. The Bureau of Customs (BOC) in certain cases allows the application of the entirety rule even if the integral components will arrive in installments. This happens in cases where the complete article is incapable of being transported on a single conveyance due to its size or nature (e.g., power plant facility components), but is purchased and invoiced as a single classifiable entity. This is also subject to submission of certain requirements to the BOC.
For multiple shipments of parts and components that have the essential character of the complete article., two (2) steps are needed, namely a) an advance ruling from the Tariff Commission, and b) approval from the BOC.
An advance ruling from the Tariff Commission is a vital requirement that confirms the applicability of the entirety rule for the specific import case. The ruling assigns a single tariff heading to the complete article, warranting a single duty rate under a particular tariff heading.
Additionally, a BOC approval (generally, obtained before the actual series of importations) is necessary to, among others, ensure that the assigned duty rate is applied upon arrival of the imported components. For this purpose, the BOC typically issues an internal Memorandum, ensuring the effective implementation and compliance with the Tariff Commission’s ruling in all ports where the components will arrive.
Both the Tariff Commission and BOC applications must be supported by relevant documents, such as, among others, the technical description of the product, a detailed list of components to be imported, and accurate information about the product.
Conclusion
The application of the entirety rule ensures that the appropriate HS code and duty rates are applied to similar products, regardless of their import timeline or assembly state. Further, it simplifies classification procedures for complex products, eliminating the need to classify each specific component. Applying a single duty rate to the complete article can potentially lead to lower overall import costs compared to individual component classifications.
The entirety rule is an important principle of customs classification, ensuring fair and uniform treatment of imported goods. It can be a valuable tool for importers of complex products imported in multiple shipments. By understanding its basic principles, procedural requirements, and key points, importers can ensure its successful application and maximize its benefits.
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(Mark Anthony P. Tamayo is a CPA-Lawyer and a Partner of Mata-Perez, Tamayo & Francisco Law Offices (MTF Counsel). He is a professor of law, a Bar Pre-Week Reviewer, and a regular MCLE lecturer. His areas of practice include, among others, corporate, tax advisory, controversy and litigation as well as international trade & customs.)
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com.