OT:RR:CTF:VS H293638 JMV
Mr. Christopher H. Skinner
Squire Patton Boggs, LLP
2550 M St. NW
Washington, DC 20037
Re: Apportionment of Honda Aircraft Assists; 19 C.F.R. § 152.103(e)
Dear Mr. Skinner:
This is in response to your January 12, 2018, request for a ruling on behalf of your client Honda Aircraft Company, LLC (“Honda Aircraft”). Specifically, you ask whether your proposed method of apportioning assists that Honda Aircraft pays to foreign suppliers is acceptable to CBP.
FACTS:
To build and service the HondaJet, Honda Aircraft relies on both U.S. and non-U.S. third party aircraft parts and components suppliers. These suppliers provide a range of parts and components of the aircraft, from sophisticated avionics equipment to fuselage materials and simple fasteners. Honda Aircraft imports many of these parts and components from non-U.S. suppliers through numerous U.S. customs ports. The majority are stated to be eligible for duty free treatment under subheading 8803.30, Harmonized Tariff Schedule of the United States (“HTSUS”), NAFTA, or under the Agreement on Trade in Civil Aircraft.
In most instances, Honda Aircraft enters contracts with its non-U.S. suppliers. Throughout the course of its contractual engagement of a foreign supplier, Honda Aircraft may provide various goods or payments to aid in development or production, including the following:
Consumables: Materials, such as adhesives and tapes, and other consumables provided free of charge, for use in the manufacture of or incorporation into finished aircraft parts or components that Honda Aircraft imports (accounted for as a credit to the supplier, resulting in a lower amount owed on the customs invoice).
Tooling: Forms, molds, jigs, or other devices provided to the foreign supplier (Free of charge) for use in the manufacture of particular aircraft parts or components.
Material Variance: Payments related to one-time changes in the cost of the imported item, such as where the foreign supplier changes a source for a material or component resulting in a temporary increase in cost.
Non-Recurring Engineering: Payments to cover research, design, development, or testing of a part or component.
Other Non-Recurring Costs: Other direct payments to cover costs incurred by the supplier to start-up, upgrade, or re-engineer production lines or equipment to meet demand or Honda Aircraft engineering modifications, including costs for manufacturing tooling required to produce imported items.
Honda Aircraft furnishes these goods and payments typically at irregular intervals and in varying amounts. In the case of materials, consumables and tooling, Honda Aircraft provides these materials upon request, and they may vary in terms of quantity, cost and frequency.
Honda Aircraft may also furnish milestone payments recognizing that the supplier reached a certain production goal (e.g., quantity or value). These payments are ordinarily determined according to terms set forth in supply agreements with individual foreign suppliers.
Honda Aircraft has found it difficult to accurately allocate the value of payments and assists to individual shipments of finished goods that it imports. Many of the materials and payments furnished to foreign suppliers are due to ongoing improvement efforts, and can be expected to occur throughout the life of the contract. For example, periodic payments required by some suppliers can be calculated only after the actions required by Honda Aircraft are completed. Organizing, allocating and linking these payments to individual shipments is complicated by the volume of shipments being received, the number of suppliers in need of management, as well as certain payments being for broad efforts rather than improvements or upgrades to single, unique parts. Further, while the value of materials and payments furnished to foreign suppliers is captured in the company's data management systems, it is not always possible to trace materials or payments to specific finished goods Honda Aircraft ultimately imports. Honda Aircraft therefore requests a valuation ruling from CBP to confirm its proposed valuation methodology, including a methodology for apportioning of assists.
Honda Aircraft proposes to apportion those assists as follows: Honda Aircraft will identify the cost of all materials, including freight, and payments furnished to the foreign supplier over the previous quarter that relate to imported merchandise and that are not captured on customs invoices. Those materials and payments shall include consumables, tooling, material variance payments, non-recurring engineering payments, and other non-recurring payments described above. Honda Aircraft will apportion the value of these assists on a pro-rata basis to the total value of goods entered under each HTSUS subheading from that vendor for the previous quarter. Honda Aircraft will then report the additional value either on the next customs entry filed using each applicable HTSUS provision from that vendor, or through a post entry adjustment filed on an entry including that tariff provision occurring during the previous quarter.
Regarding the milestone payments, Honda Aircraft proposes to apply the value of any milestone payments issued to a foreign supplier to the first shipment of goods imported after the payment. This would be in the form of an addition to the price actually paid or payable for the imported goods to which the milestone payments directly correspond. Honda Aircraft would apply the value of the milestone payment to goods imported from the recipient of the payment on the first customs entry or entries following the payment. Honda Aircraft would allocate the value of the milestone payment to all imported merchandise in that customs entry that relate to the payment, such as merchandise produced from the same product lines or activities that triggered the milestone payment.
When Honda Aircraft’s foreign suppliers receiving milestone payments produce only a single aircraft part or component, Honda Aircraft would assign the full value of the milestone payment to the price actually paid or payable for the imported goods, under the single relevant tariff code.
When Honda Aircraft issues a milestone payment to a foreign supplier of multiple aircraft components, it will allocate the value of the payment pro rata to all relevant imported goods. To ensure that the value of the milestone payment is applied fairly to all classes of imported goods, Honda Aircraft proposes to allocate the value of the payment among the affected HTSUS codes proportionally, according to the value of imports of items under those HTSUS codes. Honda Aircraft would determine the percentage of the value of the milestone payment to apply to each tariff code by comparison of the aggregate values of imports during the previous year and all outstanding orders at the time of the milestone payment, under each tariff code. It would then use these totals to determine the percentages (by value) of imports under each tariff code to total imports, and apply those percentages when allocating the value of the milestone payment to imported goods. Honda Aircraft would thus make additions to the price actually paid or payable in the customs entry or entries for all affected imported goods.
ISSUE:
Whether apportioning the value of assists in the manner described above is acceptable for CBP appraisement purposes.
Whether milestone payments are properly accounted for as part of the price actually paid or payable of the first merchandise produced and imported following payment.
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 (19 U.S.C. § 1401a). The preferred 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 certain enumerated additions, including the value of any assist, apportioned as appropriate. 19 U.S.C. § 1401a(b)(1)(C). For the purposes of this decision, we assume that transaction value is the proper basis of appraisement.
Whether apportioning the value of assists in the manner described above is acceptable for CBP appraisement purposes
There is no dispute here that the payments and materials that Honda Aircraft provides to foreign suppliers are assists that must be added to the price actually paid or payable. The only question is whether Honda Aircraft’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, which is what Honda Aircraft requests in this instance.
CBP has previously found that apportionment methods similar to Honda Aircrafts’s proposed methodology satisfy the requirements of 19 C.F.R. § 152.103(e)(1). In Headquarters Ruling Letter (“HRL”) H015975, dated September 13, 2007, for example, CBP allowed an importer to declare all of its assists from a given month on the first entry in the following month. CBP found that this method was acceptable because the importer provided some assists “sporadically” and therefore could not easily apportion them to individual shipments and because the costs of transportation of the assists to the production facility were not paid on a per-unit basis. Similarly, in HRL H086246, dated March 2, 2010, CBP allowed an importer to use the same methodology when the value of the assists varied each month depending on the price of materials and could not be determined during any given month until the following month. See also HRL H264394, dated May 22, 2015; and HRL H031244, dated April 10, 2009.
Honda Aircraft’s proposed method of apportionment is essentially the same as the method described in HRL H264394. There, CBP considered a proposal by Lockheed Martin Aeronautics Company (“LM Aero”) 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. LM Aero 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 LM Aero’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.
Similarly, Honda Aircraft states that it cannot easily apportion its assists to specific shipments. Honda Aircraft asserts many of the materials and payments furnished to foreign suppliers are for ongoing improvement efforts and are expected to occur throughout the life of the contract. Also, the value of the assists will include the cost of shipping and will fluctuate based on the needs of the supplier and whether the supplier has met production goals. Under Honda Aircraft’s proposal the value of the assists will be pro-rated to the next quarter on goods from the same foreign vendor to which the assist was provided. Further, provided that most of the articles are eligible for duty-free treatment, there is less concern about avoiding paying duties on the assists on subsequent entries. See HRL H190269, dated February 20, 2014.
Therefore, we find that Honda Aircraft’s proposed method of apportioning assists is reasonable and consistent with the requirements of 19 C.F.R. § 152.103(e)(1), provided that it meets generally accepted accounting principles.
Whether milestone payments are properly accounted for as part of the price actually paid or payable of the first merchandise produced and imported following payment.
The price actually paid or payable for imported merchandise is “the total payment (whether direct or indirect, and exclusive of any charges, costs, or expenses incurred for transportation, insurance, and related services incident to the international shipment of the merchandise from the country of exportation to the place of importation in the United States) made, or to be made, for imported merchandise by the buyer to, or for the benefit of, the seller.” 19 C.F.R. § 152.102(f).
CBP has previously determined that bonus or milestone payments made by the buyer to the seller related to imported merchandise are part of the “price actually paid or payable” and dutiable under the transaction value. See HRL W563417, dated April 19, 2006; and HRL 544690, dated August 5, 1991.
Honda Aircraft may issue milestone payments to foreign suppliers at predetermined stages of development or production. Honda Aircraft does not dispute that these payments are part of the price actually paid or payable. Rather, Honda Aircraft asks us to confirm that the value of milestone payments may be properly accounted for as part of the price actually paid or payable of the first merchandise produced and imported following payment, allocated as appropriate to the product or products to which the payment relates.
As Honda Aircraft notes for the current production cycle, the milestone payment may not occur if the foreign supplier does not achieve the production goal for which it may earn the payment. To the extent that the production goal is met and the milestone payment is received, the payment is akin to a bonus payment in that production and the milestone payments should be considered to be part of the price actually paid or payable. Similar to the allocation of an assist, we find it acceptable for Honda Aircraft to apportion the value of the payment to all relevant goods in the first shipment of goods imported after the payment.
HOLDING:
We find that the apportionment proposed by Honda Aircraft in this case is acceptable for CBP appraisement purposes provided that the apportionment meets generally accepted accounting principles. Additionally, we find that any milestone payments are part of the price actually paid or payable and may be apportioned to the first importation after the payment in a manner that meets generally accepted accounting principles.
Please note that 19 C.F.R. § 177.9(b)(1) provides that “[e]ach ruling letter is issued on the assumption that all of the information furnished in connection with the ruling request and incorporated in the ruling letter, either directly, by reference, or by implication, is accurate and complete in every material respect. The application of a ruling letter by a CBP field office to the transaction to which it is purported to relate is subject to the verification of the facts incorporated in the ruling letter, a comparison of the transaction described therein to the actual transaction, and the satisfaction of any conditions on which the ruling was based.”
A copy of this ruling letter should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch