In a country with high tax burdens and complex legislation, tax classification errors are commonplace for companies on a daily basis, and this can, of course, lead to significant tax headaches. To optimize the tax classification process, avoid errors, and keep classifications up-to-date, CH Master Data has developed a methodology, combined with proprietary technology, to reduce the hassle this issue causes its clients.

Want to learn more about this topic and how to eliminate tax classification errors in your company? Then keep reading and check out the tips below!

First, what is the tax classification of goods and what is it for?

The Fiscal Classification of Goods is a coding system used to identify and classify products based on standardized criteria, such as their nature, composition, function, and other attributes. This system is used worldwide and may vary according to each country's rules and regulations. The main purpose of the fiscal classification of goods is to allow tax authorities to accurately determine the taxation to be applied to goods. Furthermore, it also serves to collect statistical information on trade. How is this classification performed in Brazil? In Brazil and neighboring countries, the Fiscal Classification of Goods is performed by assigning a numerical code to each product, called NCM (Common Nomenclature of Mercosur). In practice, this code consists of a sequence of up to 10 digits that identifies the product family and the corresponding tax rates (IPI – Tax on Industrialized Products and II – Import Tax) that must be paid on transactions.

What are the main errors in the tax classification of goods?

Given the large number of product categories and the complexity of Brazil's customs system, making errors in the tax classification of goods is not uncommon among companies. On the contrary, these errors are very common and ultimately require more rigorous controls by those responsible. To illustrate this, we've prepared the following list of the most common tax classification errors. Check it out!

Incorrect classification according to the Common Mercosur Nomenclature (NCM) – This is certainly the most common error among companies, that is, when they classify certain products with the NCM of others;

Use of generic descriptions – Many companies use generic descriptions to classify their products ( https://chmasterdata.com.br/o-que-sao-pdm/ ), which can lead to tax classification errors. Therefore, it's important to provide detailed and accurate information about the merchandise, including materials, dimensions, and characteristics, so that it can be classified appropriately.

Lack of technical knowledge – It is important that professionals responsible for tax classification have technical knowledge of the goods and the NCM. A lack of knowledge can lead to errors and, consequently, tax and customs risks;

Classification by similarity – This can also lead to errors in tax classification, as it must be carried out in accordance with NCM rules and not based on subjective comparisons;

Lack of review – It is important that companies periodically review the tax classification of their products to ensure that the information is up-to-date and correct;

Fraud – Unfortunately, suppliers may also attempt to commit fraud in the tax classification of goods, such as declaring an incorrect classification to avoid paying taxes or obtain illegal advantages.

What are the main consequences of errors in NCM classification?

Making these common mistakes when classifying NCM goods can pose several risks to companies, such as:

Tax penalties – Errors in tax classification can lead to fines and penalties from tax authorities, resulting in additional financial costs for the company;

Customs clearance delays – If a company imports goods and misclassifies its products, it can lead to delays in the customs clearance process, which can affect the delivery of products to customers.

Compliance Issues – If a company misclassifies its products, it may be in violation of local and international regulations, which can lead to legal and reputational issues;

Loss of revenue – Incorrect classification of products can result in higher taxation than necessary, which can lead to a loss of revenue for the company;

Company Reputation – Errors in tax classification can lead to a poor company reputation, damaging the trust of customers and business partners.

Therefore, it is important that companies take appropriate steps to ensure that their products are correctly classified for tax purposes to avoid these potential risks.

How to avoid these tax classification errors in practice?

The solution for reducing errors and increasing accuracy in Tax Classification involves specialized services, technology, a content base, processes, and methodology. This is how CH Master Data has helped its clients maintain a secure Tax Classification.

In practice, the solution optimizes the following tasks:

• NCM identification support system;

• Constant updating and auditing of items with (NCM);

• System with rules that help the classification professional find the correct NCM code for each item;

• Database with histories that assist classification processes;

CH Master Data Astrein , for example, is a leading technology provider in Brazil and worldwide for Material Registration Management, providing assertiveness, efficiency, and transparency in operations and in controllingbasic supply chain information . Thus, its solutions go far beyond a simple tool; they also encompass comprehensive services and content that can help prevent merchandise classification errors, ensuring compliance with applicable tax and customs regulations and reducing the risk of penalties and fines. Want to learn more and learn how your company can optimize its tax and customs obligations by eliminating the most common tax classification errors? Then talk to one of our experts .