OT:RR:CTF:VS H317569 CMR
Page • Fura, P.C.
939 W. North Avenue
Suite 750
Chicago, IL 60642
RE: Request for Reconsideration of HQ H311213, dated February 10, 2021; Allocation of Tooling Costs; Proposed Method Rejected
Dear Mr. Page:
This is in response to your letter, dated March 22, 2021, on behalf of your client, requesting this office reconsider our decision in Headquarters Ruling Letter (HQ) H311213, dated February 10, 2021. We have reviewed your request and the prior decision and maintain the position adopted in HQ H311213.
HQ H311213, an internal advice decision, rejected your client’s method of apportioning tooling costs by use of a “tooling factor” that prorates tooling assists across all imports rather than to the specific product(s)/product line(s) for which the assists were provided. Your client’s method apportioned tooling costs to all their imported articles regardless of the actual tooling assist used in the production of the articles. This method also disregarded the country of origin and applicable duty rates of the various imported articles. In this case, some of the imported articles were subject to section 232 or section 301 duties. As such, the accuracy of the value of a tooling assist which is added to the price actually paid or payable under transaction value may make a significant difference in the duties owed.
You client claims to have a practice of apportioning tooling assists based on predecessor companies’ use of this method. Your client further claims that CBP, through the Office of Regulatory Audit, was aware of this and “approved” it during three separate audits over a ten-year period. We disagree. The Office of Regulatory Audit never approved your client’s method, or its predecessor companies’ method, of apportioning tooling assists.
Rather, the Office of Regulatory Audit has informed us that the first audit, a Focused Assessment in 2003, resulted in a report stating that the predecessor company owed duties and fees associated with unreported tooling and supplemental payments. That company disclosed that it failed to report assists in the form of tooling that were provided to vendors during the previous five years. Further, that company did not have a system to identify and report these additions to value.
The next Focused Assessment in 2005, which dealt with a successor company to the first and predecessor of your client, resulted in Regulatory Audit reporting that the company did not have an effective system to track tooling expenditures and report this information to CBP. During the Focused Assessment, the company filed a prior disclosure on tooling. Regulatory Audit noted that while the reporting of tooling assists is allowed under the Reconciliation Program, Regulatory Audit did not believe that the methodology used by the company for capturing tooling was appropriate when using the reconciliation program. “When submitting the disclosure involving tooling, [the company] used an allocation method based on their overall sourcing patterns to determine the tooling amounts that should be declared to CBP.” This appears to be the same method your client continues to use. Regulatory Audit stated at the time that “[t]his methodology was accepted since an appropriate tracking system was not in place during the five-year period and accepting this methodology it (sic) expedited the completion of the disclosure. However, it is Regulatory Audit's recommendation that on a going forward basis, [the company] should develop a system to track all tooling payments, with the parts impacted, and make appropriate adjustments to their CBP entries when the adjusted amounts are determined.” The company’s response was that because the tooling was purchased/used/reimbursed by the company on a global basis and there was no means to identify where an individual tool was destined within their accounting system, the approach suggested at the time by Regulatory Audit for tracking the assist payments was not workable.
Finally, the third Focused Assessment in 2012, on a predecessor company, made no mention of tooling assists. However, the report indicated problems with the reconciliation process utilized by the company and found it to be unacceptable. Simply because tooling assists were not addressed in the audit report does not mean the company’s method of handling tooling assists was acceptable
The reports by Regulatory Audit are far from an approval of the methodology used by your client to apportion tooling assists. They reflect, in fact, a rejection of that method.
You have attempted to argue that the amount of duties at issue is de minimis. We disagree. We also disagree with the assertion that it is not possible to identify where an individual tool is located as was asserted by a predecessor company. A review of the 2018 annual 10-K report for your client provides us with information which leads us to believe not only is it possible to know the location of tooling, it is possible to know the age and useful life of the tooling.
Specifically, under the subject line, “Pre-Production Costs Related to Long-Term Supply Arrangements,” the 10-K annual report provides the following on page [X]:
[The 10-K annual report discussed the costs for molds, dies and other tools to which your client retained title and how these items were capitalized or amortized. The report discussed the periodic review of the carrying values of these assets.]
In order for your client to be able to periodically review the carrying value of molds, dies and other tools which it capitalizes within property, plant and equipment, your client must know where the molds, dies and other tools are located and the use to which they are put. At a minimum, your client should be able to identify the location of tooling it provides, that is, the plants and countries in which the plants are located, and products for which such tooling is used. However, your client claims this is not possible.
Based on the information in your client’s 10-K annual report with regard to molds, dies and other tools, your client keeps records on these for capitalization and amortizing
purposes. Therefore, just as your client is able to track its tooling assists to Mexican suppliers, your client should be able to track its tooling assists to suppliers in other countries. We affirm our decision in HQ H311213.
Sincerely,
Craig T. Clark, Director
Commercial and Trade Facilitation Division