OT:RR:CTF:VS H336382 ACH
[]
Re: Apportionment of Assists
Dear [ ]:
This is in response to your letter dated December 18, 2023, on behalf of [ ] (hereinafter,
“the Company”). In your letter, you requested a binding ruling pursuant to 19 C.F.R. Part 177 on
the apportionment of certain research and development (“R&D”) and equipment 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 U.S. importer and distributor of footwear, apparel, and accessories.
The Company purchases the subject merchandise from [ ], based in Europe [ ] which purchases
the subject merchandise from unrelated third-party manufacturers.
Parties related to the Company, including the European entity [ ], provide two types of
assists to unrelated foreign manufacturers that are used to produce the subject merchandise to be
imported both into the United States and other foreign markets:
Research and development that includes engineering, development, artwork, and
design work performed outside of the U.S. that are necessary for the production of
the subject merchandise and provided to unrelated manufacturers free of charge.
Personnel undertaking R&D activities typically work within either the (i) footwear or (ii)
apparel and accessories R&D groups. As such, relevant financial records segregate R&D
costs between (i) footwear and (ii) apparel and accessories in accordance with local
generally accepted accounting principles (“GAAP”). Similarly, all costs related to R&D
personnel assigned to general activities are accounted for and reported in the financial
records in accordance with local GAAP.
Production tooling and molds provided to unrelated footwear manufacturers for use
in the production process. Available financial records capture aggregated annual costs
of tooling and molds that are supplied and used by multiple unrelated parties undertaking
various stages of the manufacturing process. Such financial records are kept in
accordance with local GAAP.
Financial records of annual assist costs are not available in real time. After the end of
each fiscal year (“FY”), the Company captures total assist costs incurred during the relevant FY.
This involves a two-step process:
1. Financial books are typically closed, and relevant records made available within two to
three months after the end of the FY. Financial books and records are maintained in
accordance with local GAAP.
2. A review process is then undertaken to specifically identify assist costs for the subject
merchandise, confirm details with relevant stakeholders, and perform and validate all
calculations (a process taking several months to complete).
Accordingly, the Company proposes the following methodology to reasonably apportion
assist costs and fully account for the proportion of costs attributable to the subject merchandise
imported into the U.S.
The Company proposes an apportionment method that relies on an uplift factor, refreshed
annually, which is calculated based on the total assist costs and purchasing data from the most
recently completed FY. The Company proposes the use of a per-dollar percentage uplift amount
to be applied to the purchase price from unrelated manufacturers of the subject merchandise to
calculate the transaction value for U.S. Customs purposes. Uplift factors would be calculated
specific to each product category, i.e. separately for (i) footwear and (ii) apparel and accessories,
to reflect the assist costs incurred for each product category.
The uplift factor is first calculated by dividing (i) actual assist costs incurred in the most
recent FY, specific to each product category, by (ii) the total purchases of the subject
merchandise from unrelated manufacturers for the same prior-year period for each respective
product category. Specifically, the Company proposes undertaking the following approach to
calculating the relevant assist value to the subject merchandise:
1. Determine the total applicable FY assist costs based on available prior-year financial
documentation, prepared in accordance with local GAAP;
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2. Convert the value of the prior-year’s assist costs to U.S. Dollars (“USD”), where
applicable, by averaging the CBP published foreign currency exchange rate during the
FY of the assist costs;
3. Identify the portion of the assist costs relevant to U.S. imports;
4. Calculate uplift factors as a percentage of the total purchases from unrelated
manufacturers of the prior FY’s relevant Subject Merchandise, split between each
relevant product category; and
5. Apply the per-dollar uplift factor to the invoiced value for the next year’s subject
merchandise to arrive at the U.S. Customs value declared at time of entry.
Based on the estimated time needed to finalize the uplift factor calculation, the Company
anticipates applying the annually refreshed uplift factor to invoices created starting July 1 of each
year. For example, following the end of FY 2023, uplift factors would be calculated using the
most recent financial data available, i.e., FY 2023 financial data and FY 2023 purchasing data.
If the uplift factors are recalculated in line with the anticipated timeline, the uplift factors would
be applied to the subject merchandise invoiced from July 1, 2024, through June 30, 2025. If
there is a delay that results in more than 12 months passing between calculations, the Company
proposes to apply the prior year’s uplift factors until new figures are available.
The Company proposes applying the uplift factor specific to each product category until the
full value of the previous year’s assist costs for the respective product category has been fully
declared. The Company will track the total assist value declared by product category throughout
the year and will only stop applying the uplift factor when the previous year’s full assist value is
reached. Although not anticipated, if there is a balance remaining at the end of the year-long
period in which the uplift factor is applied, the Company proposes to continue applying the uplift
factor until the prior year’s assist value is fully declared, even after the Company has begun to
apply the new year’s uplift factor as well.
The Company recognizes that the uplift factors will be applied across the subject
merchandise with some variation in duty rate. Approximately 99% of the Company’s U.S.
footwear importations are subject to a 20% ad valorem duty rate. Though the Company’s goods
are not duty free, the Company proposes that the assist costs relevant for imported footwear can
be allocated evenly (i.e., via a single footwear-specific uplift factor) to all relevant imported
footwear. Only a small portion of the overall subject merchandise, approximately 4-6%
annually, are non-footwear goods. Like the approach for footwear, the Company proposes that
the relevant assist costs be allocated pro rata to apparel and accessories via consistent application
of a single uplift factor specific to accessories and apparel.
ISSUE:
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Whether the proposed methodologies for the apportionment of the non-U.S. R&D and
equipment assists are acceptable under 19 U.S.C. § 1401a(b) and 19 C.F.R. §§ 152.102(a),
152.103, and 159.31.
LAW AND ANALYSIS:
I. Apportionment of Assists
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).
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:
* * *
(ii) Tools, dies, molds, and similar items used 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.
(B) 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 –
(i) is performed by an individual who is domiciled within the United
States;
(ii) is performed by that individual while he is acting as an employee or
agent of the buyer of the imported merchandise; and
(iii) 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).
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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.” Further, 19 U.S.C. §
1401a(g)(3) states: “For purposes of this section, information that is submitted by an importer,
buyer, or producer in regard to the appraisement of merchandise may not be rejected by the
customs officer concerned on the basis of the accounting method by which that information was
prepared, if the preparation was in accordance with generally accepted accounting principles….”
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
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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 was 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, the parent company 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 apportionment method 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.
Further, in HQ H299185, dated August 24, 2018, CBP determined that a similar
apportionment method was acceptable under 19 C.F.R. § 152.103(e). In that case, CBP
determined that it was reasonable for the company at issue 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, saying that this method was analogous to
the “cost factor” that CBP allowed the importer to apply on an entry-by-entry basis in HQ
H231836.
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.” In this case, we believe the Company’s proposed
apportionment method is acceptable under the GAAP and is therefore allowed under 19 C.F.R. §
152.103(e) and 19 U.S.C. § 1401a. As in HQ H299185, the Company will 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. Further, because the Company
intends to continue applying the uplift factor until the prior year’s assist value is fully declared if
there is a balance remaining at the end of the year-long period, we are satisfied that the amount
of the assists will be fully covered using this method. Therefore, the proposed apportionment
method is reasonable.
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II. Currency Rates
19 C.F.R. § 159.31 states, “Except as otherwise specified in this subpart, no rate or rates of
exchange shall be used to convert foreign currency for Customs purposes other than a
proclaimed rate or certified rate or rates.” 19 C.F.R. § 159.32 states, “The date of exportation for
currency conversion shall be fixed in accordance with § 152.1(c) of this chapter.” 19 C.F.R. §
152.1(c) states, “’date of exportation,’ or ‘time of exportation’… means the actual date the
merchandise finally leaves the country of exportation for the United States…”
In HQ 547633, dated June 9, 2000, CBP wrote, “the price actually paid or payable for
Stanley’s importations from Japan should be the value determined based on the currency
conversion rate applicable at the time of exportation.” Therefore, instead of simply averaging
the four currency rates, the Company must average the conversion rates from [ ] to U.S. dollar in
proportion to the dates the shipments were exported. For example, if six of the shipments used
to calculate the uplift were exported on dates when the exchange rate was 1.1 and one shipment
was exported on a date when the currency rate was 1.2, the applicable currency rate would be
1.114, not 1.15 as it would be under the proposed methodology. This is similar to the method
used in HQ H031244 to determine the value of goods under each duty rate. Other methodologies
could be acceptable as long as the rates correspond to the dates the merchandise used to calculate
the uplift factor was entered.
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
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