OT:RR:CTF:VS H299185 RMC
[
]
Re: Ruling Request on the Valuation and Apportionment of Assists
Dear [ ]:
This is in response to your letter dated July 18, 2018, on behalf of [ ] (hereinafter, “the Company”). In your letter, you requested a binding ruling pursuant to 19 C.F.R. Part 177 on the valuation and apportionment of certain equipment assists and design assists that the Company will provide to foreign manufacturers.
You have asked that certain information submitted in connection with this 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 in this ruling or in the attachments to this ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling.
FACTS:
The company is a firm that designs, manufactures, and sells networking and communications products, and provides services associated with these products and their use. The Company states that its products transport data, voice, and video in various environments around the world and that its customers include small, medium, and large businesses, public institutions, telecommunications companies, and personal residences. Under its current supply chain, the Company purchases products for importation into the United States directly from related affiliates abroad. These related affiliates purchase products designed by the Company from a series of unrelated manufactures.
The Company is now reorganizing its supply chain and requests confirmation that its proposed methodology for the valuation and apportionment of assists is consistent with U.S. Customs and Border Protection (“CBP”) regulations. Under the new supply chain, the Company will provide two types of assists to unrelated foreign manufactures. The first is research and development that occurs outside the United States and is necessary for the production of the imported merchandise, which the Company refers to as “non-U.S. research and development.” The second is equipment that the Company will provide free of charge to the manufacturers for use in the manufacturing process (“equipment”). The manufacturers use the equipment to check the progress of products at various stages of the manufacturing process.
Proposed Valuation and Apportionment of Non-U.S. Research and Development Assist
As set forth below, the Company has provided details on how it proposes to calculate the value of non-U.S. research and development incorporated into products imported to the United States as well as how to apportion that value to the imported merchandise.
Proposed Valuation
The Company states that related entities provide non-U.S. research and development assists to the manufacturers abroad. As a related party provides the assists, the Company proposes to appraise the assists based on their costs of production plus, if applicable, any transportation costs to the manufacturing site. The Company notes that the vast majority of non-U.S. research and development assists relate to software that does not have associated transportation costs because the software is delivered electronically to the manufacturing site. For the small portion of non-U.S. research and development assists that concern prototypes, the Company states that it will book the total landed costs, which includes transportation to the place of manufacture.
The Company does not capture non-U.S. research and development assists by product because much of the research and development costs relate to software engineering and design that can apply to multiple products. Other research and development costs are attributable to completely new products or for upgrades of existing software. Furthermore, non-U.S. research and development assists are used to make both products imported into the United States and products for other markets. Accordingly, the Company proposes a three-step methodology to properly capture the value of non-U.S. research and development assists incorporated into products that will be imported into the United States.
First, the Company will determine the total costs of global research and development for the fiscal year. The Company states that this amount will be determined in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and listed under “Operating Expenses, Research and Development” on the Form 10-K filed with the U.S. Securities and Exchange Commission each year.
Second, as research and development will take place both in the United States and abroad, the Company will determine the amount of global research and development that was incurred outside the United States. The Company states it will calculate this figure using the general ledger account compilation, which captures the research and development expenses by region (the United States is listed as a separate region). The Company states that two adjustments to the general ledger will be necessary—the first will account for the transfer of equipment between the Company’s entities at other-than-book value. This adjustment will ensure that the global research and development expense matches the figure listed on the Form 10-K. The second adjustment involves reducing the U.S. research and development figure by the amount that the Company pays to contract workers located abroad. By completing the second step of the methodology and making these two adjustments, the Company states that it will be able to demonstrate the global research and development expense as well as the portions of that expense that occur in the United States and outside of the United States.
Third, the Company will determine the amount of non-U.S. research and development that relates to U.S. imports. As noted above, the Company uses non-U.S. research and development to make both products imported into the United States and products for other countries. The Company proposes to determine the amount of the research and development applicable to U.S. imports by calculating the ratio of U.S. import purchases to global purchases for the same fiscal year.
Proposed Apportionment
In order to apportion the assist, the Company proposes to add the value of the assist, as determined under the three-step methodology above, to U.S. entries during the next fiscal year by establishing and applying an “uplift factor.” The uplift factor will be calculated by dividing the non-U.S. research and development assist amount by the total price paid to the manufacturers for products imported into the United States during the fiscal year. The Company then proposes to multiply this figure by 110% to ensure that the non-U.S. research and development assist will be paid in full well before the end of the fiscal year.
As an example, in FY 2017, the Company’s figures show $[ ] as the value of the non-U.S. research and development assist and $[ ] as the total value of U.S. importations. Dividing these figures results in an uplift factor of 18.43%, which is then multiplied by 110% to calculate the final uplift factor of 20.27%. The Company would then add 20.27% to the price actually paid or payable to the manufacturer in exchange for products imported into the United States until the total value of the assist that is related to U.S. imports, $[ ], is accounted for.
The Company notes that the relevant figures for yearly non-U.S. research and development costs and the total value of U.S. importations are not available in real time. Accordingly, the Company states that the determination of the non-U.S. research and development assist amount and uplift factor will be made as soon as practicable after the conclusion of the Company’s fiscal year, which is a 52-to-53 week period beginning approximately [ ] of every year. If there is a balance remaining at the end of the fiscal year, the Company proposes that the uplift factors cumulate until the balance is paid off. If there is a delay that results in more than 12 months passing between calculations, the Company states that it will apply the prior year’s non-U.S. research and development assist uplift factor until new figures are available, at which time the new assist uplift factor will come into effect for the current year.
Proposed Valuation and Apportionment of Equipment Assist
In addition to non-U.S. research and development, the Company will also provide free equipment to foreign manufacturers for use in checking the progress of products at various stages of the manufacturing process. As set forth below, the Company has provided details on how it proposes to calculate the value of the equipment provided free of charge to foreign manufacturers as well as how to apportion that value to the imported merchandise.
Proposed Valuation
The Company states that it purchases equipment for non-related third parties. Accordingly, the Company proposes to appraise the equipment based on the purchase price of the equipment, plus the cost of transportation to the manufacturer. The Company states that it tracks the specific amounts spent on equipment and transportation to every manufacturing location and proposes to declare the equipment assist value on the first entry of products made in the following fiscal year.
As the Company makes products at each manufacturing plant that may be destined for multiple markets, the Company states that if more than 50% of the manufacturing location’s production was shipped to the United States during the most recently completed fiscal year, it will be treated as if all production went to the United States. Therefore, the entire value of the equipment assist will be declared. If, however, less than 50% of the manufacturing location’s production was shipped to the United States during the more recently completed fiscal year, the total value of the equipment assist will be multiplied by the percentage of the production from the manufacturing location that was exported to the United States during the same fiscal year.
Proposed Apportionment
Unlike the methodology applicable to the non-U.S. research and development, the Company does not propose to declare the equipment assists over many entries during the course of the fiscal year. Accordingly, even though 99% of its products by value were unconditionally duty free during the first three quarters of fiscal year 2018, the Company proposes a three-step methodology to account for differences in duty rates.
First, the Company will calculate the percentage of products that were produced at the plant and exported to the United States during the prior year which entered the United States duty free.
Second, the Company will calculate the average duty rate of the dutiable products that were produced at the plant and exported to the United States during the prior year.
Third, the Company will declare the value of the assists. On the first entry of non-dutiable products produced at the manufacturing location, the Company will declare the equipment assist value for that manufacturing location multiplied by the percentage of duty-free products on the first duty-free line item of an entry. If all products exported to the United States during the prior year were duty-free, the entire equipment assist will be declared on the first entry. The remaining equipment assist value, which is attributable to dutiable products, will be declared on the first entry line item that has a duty rate in excess of the average duty rate of dutiable products calculated in the second step above.
The Company also states that the new supply chain model will not come into effect at the beginning of its FY 2019. Because the effective date is anticipated later in the year, the Company also requests approval of its methodology for allocating the assists to imports during the transition year of FY 2019. With respect to the non-U.S. research and development assists, the Company states that the uplift factor will be calculated based on FY 2018 numbers and that the total amount of the non-U.S. research and development assist to be paid to CBP will be pro-rated based on the number of days remaining in FY 2019 when the new supply chain goes into effect.
As for the equipment assist, the Company states that FY 2019 reporting will require two modifications. First, to account for equipment assists currently in place at each manufacturing location, the Company will treat the net book value of the equipment assist at the specific manufacturing location as the basis for reporting on the first FY 2019 entry after the new supply chain goes into effect for that location. As with the Company’s proposal for ongoing reporting, it will treat locations which shipped 50% or more of production to the United States during FY 2018 as receiving a 100% allocation of the net book value of equipment at the manufacturing location. For manufacturing locations that supply less than 50% of their production to the United States, the Company will multiple the net book value of equipment by the FY 2018 percentage of production sold to the U.S. market. Consistent with the procedures described for ongoing reporting, the reporting will take place on the first entry.
The second modification involves assist reporting for the next fiscal year, FY 2019. The Company states that all net book value up to the time of the transition to the new supply chain will have been reported on the FY 2019 first entries from the various manufacturing locations. Accordingly, only the equipment assist expenditures after the transition date will be included in the report for FY 2020. For FY 2021 and beyond, the equipment assist will be reported under the general procedures described above.
ISSUE:
Whether the proposed methodologies for the valuation and apportionment of the non-U.S. research and development assists and equipment assists are acceptable under 19 U.S.C. § 1401a(b) and 19 C.F.R. §§ 152.102(a) and 152.103.
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) codified at 19 U.S.C. § 1401a. The preferred method of appraisement under the TAA is transaction value, 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, apportioned as appropriate, of any assist.” 19 U.S.C. § 1401a(b)(1)(C).
Proposed Valuation and Apportionment of Non-U.S. Research and Development Assist
Section 402(h) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a(h), provides, in relevant part:
(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:
* * *
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.
No service or work to which subparagraph (A)(iv) applies shall be
treated as an assist for purposes of this section if such service or work –
is performed by an individual who is domiciled within the United
States;
is performed by that individual while he is acting as an employee or agent of the buyer of the imported merchandise; and
is incidental to other engineering, development, artwork, design work, or plans or sketches that are undertaken within the United States.
See also 19 C.F.R §§ 152.102(a)(1)(iv) and 152.102(a)(2).
With regard to determining the value of an assist described in 19 U.S.C. § 1401a(h)(1)(A)(iv), 19 U.S.C. § 1401a(h)(1)(C) provides, in relevant part:
(ii) If the production of an assist occurred in the United States and one or more foreign countries, the value of the assist is the value thereof that is added outside the United States.
The statute is silent on apportionment of assists. However, the CBP Regulations, 19 C.F.R. § 152.103(e), provide the following with regard to apportionment:
(1) 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.
With regard to the use of transaction value, 19 U.S.C. § 1401a(b)(1) states that “[i]f sufficient information is not available, for any reason, with respect to any amount referred to in the preceding sentence, the transaction value of the imported merchandise concerned shall be treated, for purposes of this section, as one that cannot be determined.”
In Headquarters Ruling (“HQ”) H031244, dated April 10, 2009, CBP approved a methodology for valuing design assists that is similar to the methodology that the Company proposes. In that case, the importer provided design assists for garments manufactured in Asia and Africa. The importer stated that approximately 80% of the garments produced in Africa were entered duty-free under the African Growth and Opportunity Act. Because the provider of the assist did not maintain records of design work by product, the importer proposed to value the assist by allocating the total annual salaries paid to its employees engaged in design work to all relevant products produced during a calendar and adding courier charges for transporting the artwork and technical specifications packages to the producers. CBP approved this method as reasonable, so long as the methodology was consistent with GAAP. As for apportionment, CBP rejected the importer’s proposal to allocate the entire value of the assist to the first duty-free entry during each calendar year. Instead, because the value of imports were subject to different rates of duty, CBP approved an alternative proposal to apportion the assist in accordance with the percentage of the total value of the imported goods for each duty rate during that calendar year. As an example that was “purely illustrative in nature,” CBP explained that:
If the value of the assist for a year is determined to be $50,000, and the total value of imports for the year is $1,000,000, with $500,000 at a zero duty rate, $300,000 at a five percent duty rate, and $200,000 at a ten percent duty rate, USPC would allocate $25,000 of the assist’s value to the duty-free entries, $15,000 to the five percent duty entries, and $10,000 to the ten percent duty entries.
In HQ H231836, dated June 19, 2014, CBP approved the apportionment of design assists via a “cost factor,” which is similar to the “uplift factor” that the Company proposes here. In that case, the importer divided the actual costs of non-U.S. engineering service 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.
Here, in terms of valuing the valuation of the research and design assist, we agree that, as parties related to the Company will provide the assists, the total value of the assists must be based on their costs of production plus any transportation costs to the place of production. See 19 C.F.R. § 152.103(d)(2) (“If the assist were produced by the buyer or a person related to the buyer, its value would be the cost of its production. In either case, the value of the assist would include transportation costs to the place of production.”). However, as design work undertaken in the United States may not be added to the price actually paid or payable as an assist, we agree that the Company must subtract U.S research and development from its global research and development costs to determine the value of the assist.
With respect to apportionment, under 19 C.F.R. § 152.103(e)(1), the method of apportionment will depend on the documentation submitted by the importer if “the anticipated production is only partially for exportation to the United States.” As noted above, the Company will use non-U.S. research and development assists to make both products imported into the United States and products for other countries. Therefore, we hold that it is reasonable for the Company to determine the amount of non-U.S. research and development applicable to U.S. imports by calculating the ratio of U.S. import purchases to global purchases for the entire fiscal year (i.e., non-U.S. research and development multiplied by U.S. import purchases divided by global purchases). Payment of this amount using the proposed “uplift factor” on an entry-by-entry basis (i.e., non-U.S. research and development divided by total U.S. sales), multiplied by 110% to ensure accelerated payment, is analogous to the “cost factor” that CBP allowed the importer to apply on an entry-by-entry basis in HQ H231836. This methodology will ensure that the Company pays the entire amount of non-U.S. research and development applicable to U.S. imports before the end of each fiscal year. Moreover, as in H231836, where the importer stated that 99% of the importations to be covered by the ruling were duty-free, here the Company’s importations are “primarily duty-free” (i.e., 99% of its products by value were unconditionally duty free during the first three quarters of fiscal year 2018). Under these circumstances, we find that the Company’s proposed application of an uplift factor to apportion the assist and the proposed “payment mechanics” are reasonable.
Proposed Valuation and Apportionment of Equipment Assist
Section 402(h) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a(h), provides, in relevant part:
(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:
* * *
Tools, dies, molds, and similar items used in the production of the imported merchandise.
A threshold issue with respect to the equipment that the Company will provide to manufacturers abroad is whether it is “used in the production of the imported merchandise” and thus properly considered an assist under 19 U.S.C. § 1401a(h)(1)(A)(ii). In HQ 544315, dated May 30, 1989, CBP held that certain “test equipment” that a U.S. company provided free of charge to a foreign manufacturer was not an assist. The manufacturer used the “test equipment” to “check the integrity of the finished instruments before shipment to the United States.” Because the test equipment was used to test the merchandise after manufacturing operations had been completed, CBP held that it was not “used in the production of the imported merchandise” and therefore fell outside the scope of 19 U.S.C. § 1401a(h)(1)(A)(ii).
Here, by contrast, the Company states that the foreign manufactures will use the test equipment to check the progress of products at various stages of the manufacturing process. Unlike in HQ 544315, the manufacture will use the equipment in the production process rather than as test equipment for products that are already completely manufactured. As a result, the test equipment in this case is properly considered an assist under 19 U.S.C. § 1401a(h)(1)(A)(ii).
In terms of the equipment assist’s valuation, we agree that, because the Company will purchase the equipment from unrelated parties, the value of the assist must be based on the Company’s cost of acquisition. See 19 C.F.R. § 152.103(d)(2) (“If the assist consists of tools, dies, molds, or similar items used in the production of the imported merchandise, acquired by the buyer from an unrelated seller, the value of the assist is the cost of its acquisition.). The value of the assist must also include any transportation costs to the place of production. See id. In accordance with GAAP, the Company states that it expenses equipment costing $5,000 or less, and capitalizes, as assets, equipment costing more than $5,000.
With respect to apportionment, under 19 C.F.R. § 152.103(e)(1), the method of apportionment will depend on the documentation submitted by the importer if “the anticipated production is only partially for exportation to the United States.” Similar to the non-U.S. research and development assists, the Company will use the equipment assists to make both products imported into the United States and products for other countries. As a result, we hold that it is reasonable for the Company to determine the portion of the equipment assist applicable to U.S. imports in accordance with the proposed methodology. Specifically, the Company will treat any manufacturing location that shipped more than 50% of its production to the United States during the most recently completed fiscal year as if all production went to the United States. For manufacturing locations that shipped less than 50% of production to the United States during the most recently completed fiscal year, the Company will multiply the total value of the equipment assist by the percentage of production from the plant that was exported to the United States during the same fiscal year.
Unlike the non-U.S. research and development assists discussed above, the Company does not propose to declare the equipment assists on an entry-by-entry basis over the course of the fiscal year. Instead, the Company proposes to declare the value of the assist over either the first entry (if all products from the manufacturing location are duty-free) or first two entries (if the manufacturing location produces both dutiable and duty-free merchandise) entries of the year. Although the Company states that 99% of its products by value were unconditionally duty free during the first three quarters of fiscal year 2018, the remaining 1% of products by value are dutiable. Therefore, we agree that the Company must apportion the equipment assists provided to a manufacturer to take into account differing duty rates on products. See H031244 (rejecting an importer’s proposal to allocate the entire value of the assist to the first duty-free entry during each calendar year where the importer’s merchandise was subject to differing duty rates).
As explained above, in H031244, CBP approved a proposal to apportion the assist in accordance with the percentage of the total value of the imported goods for each duty rate during that calendar year. The Company’s similar proposal involves accounting for differing duty rates by first determining, with respect to each manufacturing location’s exports to the United States during the previous year, the percentages of merchandise that entered the United States duty free and dutiable. For dutiable merchandise, the Company will also calculate the average duty rate of merchandise produced at the plant and exported to the United States during the previous year. The Company will declare the assists in the following manner: On the first entry of non-dutiable products produced at the manufacturing location, the Company will declare the equipment assist value for that manufacturing location multiplied by the percentage of duty-free products on the first duty-free line item of an entry. If all products exported to the United States during the prior year were duty-free, the Company will declare the entire equipment assist on the first entry. The Company will declare remaining equipment assist value, which is attributable to dutiable products, on the first entry line item that has a duty rate in excess of the average duty rate of dutiable products calculated above. In accordance with CBP precedent, we find that this method of apportioning the value of the equipment assist is reasonable. Furthermore, we find that the Company’s proposed procedures for transition year FY 2019 and modification for FY 2021 are acceptable.
HOLDING:
The Company’s proposed methodologies for the valuation and apportionment the non-U.S. research and development assists and equipment assists are acceptable under 19 U.S.C. § 1401a(b) and 19 C.F.R. §§ 152.102(a) and 152.103.
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 Customs Service 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 & Special Programs Branch