VAL CO:R:C:V 545635 CRS
Mr. Rudy A. Pina
William F. Joffroy, Inc.
P.O. Box 698
Nogales, AZ 85628-0698
RE: Article 509; NAFTA; regional value-content; net cost method; total cost; value of materials;
customs value; value of indirect materials, section 6(12); section 7(1)
Dear Mr. Pina:
This is in reply to your letter, dated April 26, 1994, on behalf of Whitney Blake Company of
Vermont, Inc., in which you requested an advance ruling pursuant to section 181.92, Customs
Regulations, concerning the regional value-content of a good under the North American Free Trade
Agreement (NAFTA). We regret the delay in responding.
FACTS:
Whitney Blake (the "buyer") imports electrical wire harnesses produced in Mexico by its
wholly-owned subsidiary (the "producer"). The buyer provides the producer, on consignment, with
originating and non-originating materials. These include wire and electrical connectors, and general
purpose machinery and equipment, tools, dies, molds and similar items. The producer uses these
items together with other originating and non-originating materials to produce finished wire
harnesses.
The applicable rule of origin for the good, which you state is imported under tariff item
8544.41.000, Harmonized Tariff Schedule of the United States, provides that the good will be
considered to originate for NAFTA purposes if it satisfies: (a) a change in tariff classification; or (b)
meets an alternative change in classification requirement and satisfies a regional value-content test.
Although some of the non-originating materials consigned to the producer do not undergo the change
in tariff classification for the good to be considered originating under the first of these alternatives,
the good may nevertheless satisfy the second rule of origin which requires both a change in tariff
classification and a regional value-content requirement. In regard to the latter requirement, you
believe that the buyer may qualify under the net cost method.
However, you have advised that the cost of the wire and electrical connectors consigned to
the producer remains on the books of the buyer, rather than on the producer's books. You have
therefore asked whether, in calculating the regional value-content of the good, the cost of these
materials is included in the determination of total cost. Similarly, you have advised that the cost of
the general purpose machinery and equipment, tools, dies, etc., is carried on the buyer's books.
Accordingly, you have inquired as to whether the cost of these items is included in the determination
of total cost.
Finally, in respect of the regional value-content determination you have advised that the buyer
has recorded on its books in the U.S. certain other costs related to the production of the good
produced in Mexico. These costs include: research and development; engineering; salaries of U.S.
personnel visiting or working in the producer's plant; and material acquisition costs. You have asked
whether, in calculating the regional value-content cost of the good, the above costs are included in
total cost.
ISSUE:
The issue presented is whether the costs described above are included in the calculation of
total cost in determining the regional value-content of the good under the net cost method.
LAW AND ANALYSIS:
The Appendix to section 181.131, Customs Regulations, (19 C.F.R. 181.131; the NAFTA
Rules of Origin Regulations (the "Regulations")), sets forth, at Part IV, section 4, the bases for
determining whether a good originates in the territory of a NAFTA country. Section 4(2)(b) of the
Regulations provides that a good originates in the territory of a NAFTA country where each of the
non-originating materials used in the production of the good undergoes the applicable change in tariff
classification, set forth in Schedule I of the Regulations (Annex 401 of NAFTA), as the result of
production occurring entirely in the territory of one or more of the NAFTA countries, and the good
satisfies the applicable regional value-content requirement. In accordance with Part III, section 6(1)
of the Regulations, you have requested that this determination be made under the net cost method.
Pursuant to Part III, section 6(3) of the Regulations, the regional value-content of a good is
equal to the net cost of the good less the value of non-originating materials, the difference being
divided by the net cost. The net cost of the good is determined in accordance with section 6(11),
pursuant to which there are several options for determining the net cost of a good, all of which
involve a calculation of the producer's total cost. For example, the producer may choose to calculate
net cost by calculating the total cost incurred with respect to all goods it produces, less any "excluded
costs" included in total cost. Then, to determine the total cost of the good, the difference should be
reasonably allocated to the good, in accordance with Schedule VII.
In regard to the calculation of total cost, section 6(12), provides, in pertinent part, that for
purposes of determining the net cost of a good under section 6(11):
(a) total cost consists of all product costs, period costs and other costs that are
recorded, except as otherwise provided in paragraphs (b)(i) and (ii), on the books of
the producer without regard to the location of the persons to whom payments with
respect to those costs are made;
(b) in calculating total cost,
(i) the value of the materials, other than intermediate materials, indirect
materials and packing materials and containers, shall be the value determined
in accordance with section 7(1),
(ii) the value of intermediate materials shall be determined in accordance with
section 7(9),
(iii) the value of indirect materials and the value of packing materials and
containers shall be the costs that are recorded on the books of the producer
for those materials, and
(iv) product costs, period costs and other costs, other than costs that are
referred to in subparagraphs (i) through (iii), shall be the costs thereof that are
recorded on the books of the producer of those materials....
19 C.F.R. 181.131, NAFTA Rules of Origin Regulations, Appendix, part III, section 6(12).
You have asked whether the cost, recorded on the books of the buyer, of certain wire and
electrical harnesses (the "materials") can be included in total cost. For NAFTA purposes, the term
"material" is defined as "a good that is used in the production of another good." Regulations, section
1. The wire and electrical harnesses are goods used in the production of the good at issue and,
therefore, constitute materials for NAFTA purposes.
Total cost is determined with respect to the books of the producer, except that, in the case
of materials, pursuant to section 6(12)(b)(1), total cost is determined in accordance with section 7(1)
of the Regulations. Under section 7(1), except as otherwise provided, the value of a material
imported by the producer of the good into the territory of the NAFTA country in which the good is
produced, is its customs value. In the instant case, the consigned materials are imported by the
producer into Mexico. Accordingly, for purposes of the net cost determination, the total cost of the
materials consigned to the producer should be based on their customs value.
You have also asked whether the cost, recorded on the books of the buyer, of certain items
supplied by the buyer including general purpose machinery and equipment, tools, dies and molds (the
"indirect materials"), can be included in the determination of total cost. The term "indirect material"
is defined in relevant part for NAFTA purposes as "a good used in the production, testing or
inspection of a good but not physically incorporated into the good." Regulations, section 1. Section
6(12)(b)(iii) of the Regulations provides that, in calculating total cost, the value of indirect materials
shall be their cost as recorded on the books of the producer. In the instant case you state that the cost
of the indirect materials consigned to the producer remains on the books of the buyer. Consequently,
the cost of these items is not included in the calculation of total cost.
Finally, you have asked if the cost of research and development, engineering and the salaries
of U.S. personnel, recorded on the buyer's books, but attributable to the production of the good, are
included in total cost. Once again, we note that in accordance with section 6(12), the determination
of total cost is made in respect of the producer's books. Since the costs of the items in question are
not on the producer's books, they are not included in the calculation of total cost.
HOLDING:
In calculating the total cost of the good for purposes of determining its net cost, the cost of
the materials consigned to the producer and used in the production of the good is the customs value
of the materials. The costs, not on the producer's books, of the indirect materials and other items
described above, are not included in total cost.
This holding applies only to the specific factual situation and merchandise identified in the
ruling request. This position is clearly set forth in section 181.100(a)(2), Customs Regulations, which
states that a NAFTA ruling letter is issued on the assumption that all the information furnished in
connection with the ruling request and incorporated therein, directly, by reference, or by implication,
is accurate and complete in every respect. Should it subsequently be determined that the information
furnished is not complete and/or does not comply with 19 C.F.R. 181.100(a)(2), this ruling will be
subject to modification or revocation. In addition, any change in the facts furnished in connection
with this ruling may affect the outcome of the regional value content determination. In such a case,
it is recommended that a new ruling request be submitted in accordance with 19 C.F.R. 181.93.
Sincerely,
John Durant, Director
Commercial Rulings Division