OT:RR:CTF:VS H311213 EE
Mark S. Stepien
Assistant Center Director, Automotive and
Aerospace Center of Excellence and Expertise
477 Michigan Avenue, Room 200
Detroit, MI 48226
RE: Internal Advice; Transaction Value; Allocation of Tooling Assists
Dear Mr. Stepien:
This is in response to your request, dated May 27, 2020, seeking internal advice regarding the tooling allocation methodology used by the importer [X].
We have taken into consideration the information and materials presented to us in the memorandum requesting internal advice including the Focused Assessment Pre-Assessment Survey Report Number [X] on the importer, dated March 31, 2020, prepared by the Office of Regulatory Audit; the importer’s tooling factor calculation; and the importer’s comments on the internal advice request on tooling allocations.
The importer has requested that certain information submitted in connection with this internal advice request be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets and all attachments to this internal advice request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
[X] is an importer of [X] systems and components. It is also involved in extensive engineering, industrial design research, joint ventures, and manufacturing. The importer provides tooling to its overseas manufacturers of the [X] systems and components that it imports. The methodology for the tooling factor allocates the importer’s annual tooling expenditures to imported merchandise in the same proportion as its import value to overall corporate spend. To calculate the annualized tooling factor, the importer uses the following data sources:
The importer’s total corporate material expenditures (“CMAT Spend”) associated with its U.S. business and recorded on its books;
The importer’s total entered value for all importations made into the United States during the same time period based on a review of ACE records reflecting the values declared at the time of entry; and
The importer’s total tooling expenditures (“Tooling Spend”) reflecting the cost of all tooling and tooling expenditures.
Using the sources of data described above, the importer calculates a tooling factor which is applied to imports made during the same time period at the time of reconciliation. The factor is determined as follows:
Step 1 – Calculate the ratio of total entered value to CMAT Spend to determine the ratio of international to overall purchases.
Step 2 – Apply the ratio of international to overall purchases against the Tooling Spend already adjusted to remove tooling associated with the importer’s Mexican operations.
Tooling consists of all tools and other production-related items which the importer purchases from both foreign and domestic sources for use in both internal and external production, while tooling-related expenditures consist of reimbursements and any other tooling-oriented payments made by the importer to both related and non-related vendors in furtherance to their production activities. The importer states that these costs can be isolated to solely those expenditures associated with the importer’s U.S. operations and that the total Tooling Spend is adjusted to remove all tooling associated with its Mexican operations. The importer is able to specifically identify all tooling destined to a Mexican supplier based on the need to track such tooling under Mexico’s IMMEX program.
CBP determined that using a tooling factor that prorates tooling assists across all imports rather than to the specific product(s)/product line(s) the assists were provided for, which does not take into account the actual duty rate(s) that may have been applicable, is not an acceptable method to allocate tooling. Rather, CBP found that the tooling should be applied more specifically to the imports that were manufactured using the tooling, so the appropriate duty rates and countries of origin could be applied. The purpose of this internal advice is to determine whether the use of a tooling factor to allocate tooling assists across all imports, other than from related parties in Mexico, is an acceptable method of allocating tooling assists under 19 U.S.C § 152.103(e)(1).
Whether the tooling allocation methodology used by the importer is acceptable in accordance with 19 U.S.C § 152.103(e)(1).
LAW AND ANALYSIS:
Merchandise imported into the United States is appraised in accordance with section 402 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. § 1401a). The primary method of appraisement is transaction value, which is defined as “the price actually paid or payable for the merchandise when sold for exportation to the United States,” plus five enumerated additions. 19 U.S.C. §1401a(b)(1). The price actually paid or payable shall be increased by the amounts attributable to the five statutory additions enumerated in 19 U.S.C. § 1401a(b)(1)(A) through (E) only to the extent that each such amount is not otherwise included within the price actually paid or payable. 19 U.S.C. § 1401a(b)(1).
One of the enumerated statutory additions to the price actually paid or payable is an “assist.” An “assist” is defined in 19 U.S.C. § 1401a(h)(1) as follows:
(1)(A) The term “assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:(i) Materials, components, parts, and similar items incorporated in the imported merchandise;(ii) Tools, dies, molds, and similar items used in the production of the imported merchandise;(iii) Merchandise consumed in the production of the imported merchandise;(iv) Engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.
There is no dispute in the instant case that the tooling that the importer provides to the foreign manufacturers of the [X] systems and components are assists that must be added to the price actually paid or payable. The only question is whether the importer’s proposed method of apportionment is acceptable to CBP.
CBP has authority to accept a method of apportionment of assists that is “[m]ade in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles.” See 19 C.F.R. § 152.103(e)(1). The total value of the assist may be apportioned over the first shipment (if the importer wishes to pay duty on the entire value at once), the number of units produced up to the time of the first shipment, or the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles.
19 C.F.R. § 152.103(e)(1) provides the following with regard to apportionment of assists:
The apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles. If the anticipated production is only partially for exportation to the United States, or if the assist is used in several countries, the method of apportionment will depend upon the documentation submitted by the importer.
In Headquarters Ruling Letter (“HQ”) H015975, dated September 13, 2007, CBP allowed an importer to declare all of its assists from a given month on the first entry in the following month. In that case, the importer provided all necessary production materials and parts for assembly to the manufacturer. The indirect materials consumed in the production of the merchandise were shipped to the manufacturer sporadically, and could not easily be allocated to individual shipments or merchandise. Additionally, the cost to transport the materials to the manufacturer were not assessed or paid on a per-unit basis. Therefore, the company could not declare the value of the assists on an entry-by-entry basis. CBP held that the company could apportion the value of the assists to the first entry of the month following the incurrence of such costs provided that such apportionment was in accordance with GAAP. In determining that this would be an acceptable method of apportionment, CBP noted that the imported goods were all classified in the same subheading and were claimed to be eligible for preferential tariff treatment under NAFTA. See also HQ H086246, dated March 2, 2010.
In HQ H231836, dated June 19, 2014, CBP approved the apportionment of foreign engineering and design assists via a “cost factor”. In that case, the importer divided the actual costs of non-U.S. engineering service and design costs by the costs of goods sold less all engineering costs to calculate the “cost factor,” which it proposed to apply on an entry-by-entry basis. The importer stated that approximately 99% of the importations to be covered by the ruling were subject to no duty. Given that the imported goods were “primarily duty free,” CBP stated that “we do not have the issue of distributing the assist over different dutiable values as in HQ H031244.” CBP therefore held that the use of the cost factor on an entry-by-entry basis or under CBP’s Reconciliation program was an acceptable method of declaring the design assists under 19 U.S.C. § 1401a.
In HQ H264394, dated May 22, 2015, CBP considered a proposal by the importer for a methodology to apportion payments and assists provided to foreign suppliers supplying parts for its aircraft. Two types of assists were at issue: 1) payments for research and development, tooling, and related support activities; and (2) material assists such as parts, fasteners, and related consumables. The importer asserted various difficulties in accurately allocating the value of these assists to imported merchandise, including that engineering, research, and development costs were ongoing over the life of each subcontract; the overall volume of imported items; and that materials were not always traceable to finished products. Addressing these circumstances, CBP approved the importer’s proposed alternate method to apportion assists, which identified all payments to foreign vendors over the previous quarter that were related to imported merchandise and apportioned the costs of the assist, including freight costs, pro-rata to the total value of goods entered under each HTSUS subheading from that vendor for the previous quarter. CBP noted that since most of the articles were eligible for duty-free treatment, there was less concern about avoiding paying duties on the assists on subsequent entries. See also HQ H293638, dated April 26, 2018.
In the instant case, the importer uses a “tooling factor” in their reconciliation process to apply tooling assists equally over all U.S. imports, other than from related parties in Mexico, regardless of whether the imports were manufactured using the tooling. The tooling assists are used in the production of the imported merchandise, but the cost is not traced to specific products or vendors. According to CBP, in 2019, the importer imported under 233 different subheadings with 42 different countries of origin. Further, although the importer claims that a majority of its imports are duty-free, the remaining products by value are dutiable and the importer paid more than $10.2 million in duties, fees, and AD/CVD in 2019 to CBP, which is based on the accurate calculation of the transaction value method. Therefore, we agree that the importer must apportion the assists provided to the foreign manufacturers for the specific product lines the assists were provided for to take into account the differing duty rates applicable to the imported merchandise. Based on the information provided, we find that the importer’s proposed method of apportionment is not reasonable under 19 U.S.C § 152.103(e)(1).
Based on the information presented, we find that the proposed method of apportioning assists is not reasonable under the requirements of 19 C.F.R. § 152.103(e)(1).
This decision should be mailed to the internal advice applicant no later than sixty days from the date of this letter. On that date, Regulations and Rulings of the Office of International Trade will make the decision available to CBP personnel and to the public via the CBP Home Page on the World Wide Web at www.cbp.gov, through the Freedom of Information Act, and by other methods of public distribution.
Monika R. Brenner, Chief
Valuation and Special Programs Branch