VAL RR:IT:VA 545977 CRS
Brian F. Walsh, Esq.
Barnes, Richardson & Colburn
200 East Randolph Drive
Suite 7920
Chicago, IL 60601
RE: Article 509; advance ruling; NAFTA; regional value content;
net cost; accumulation; waiver of documentation requirements
Dear Mr. Walsh:
This is in reply to your letter of April 27, 1995, submitted
on behalf of your client, Shure Brothers International ("Shure") of
Evanston, Illinois, in which you requested an advance ruling under
part 181, Customs Regulations (19 C.F.R. pt. 181), as to whether
certain microphones imported into the United States constitute
originating goods under the North American Free Trade Agreement
(NAFTA). Two additional submissions were made under cover of
letters dated November 20, 1996, and June 20, 1997, and several
conferences were held with members of my staff and the Regulatory
Audit Division. The ruling request raises issues relevant to
claims for post-importation NAFTA refunds filed by Shure in the
ports of El Paso, Texas and Nogales, Arizona. The claims have been
withheld pending the issuance of this decision. The cost
information furnished in connection with this ruling request will
be treated as confidential pursuant to 19 C.F.R. 181.93(b)(7).
Any information in this ruling enclosed in brackets will be deleted
from published versions of the decision. We regret the delay in
responding.
FACTS:
The instant ruling request concerns a model [*****] microphone
produced in Juarez, Mexico, by Shure's wholly-owned subsidiary,
Shure Electronica, S.A. Both originating and non-originating
materials are used in the production of the imported microphones,
including materials produced by Shure in the U.S., materials
produced by Shure Electronica at its plant in Juarez, Mexico,
materials produced by Shure de Sonora S.A. de C.V. (also a wholly-owned subsidiary of Shure) at its plant in Agua Prieta, Mexico, and
materials imported from outside the NAFTA region. The latter are
processed by Shure at its foreign-trade zone (FTZ) in El Paso,
Texas, prior to being shipped to Shure Electronica's Juarez plant
for use in the final assembly of the microphones. The applicable
rule of origin for the good includes a regional value-content (RVC)
requirement.
In your submission of June 20, 1997, you have submitted a bill
of materials and a net cost RVC calculation in respect of the
microphones produced in Mexico by Shure Electronica. The bill of
materials sets forth on a per unit basis for all four plants
(Juarez, Agua Prieta, Evanston and El Paso), all product
(materials, direct labor costs and direct overhead), period and
other costs incurred in the production of the microphones. The
labor and overhead attributable to each material used in the
production of the microphones is shown as a composite figure in the
bill of materials. While Shure Electronica is the producer of the
good, all of Shure's facilities in the NAFTA region, whether
separately incorporated in Mexico or part of the parent
corporation, are producers of components used in the production of
the microphones.
Shure has centralized its management, accounting and certain
engineering, data processing, personnel and manufacturing support
functions at its headquarters in Evanston. Some of the management
time at Evanston is therefore related to matters connected with
Shure's Mexican operations. The factories in Mexico are not
charged separately for administrative costs incurred in Evanston.
Thus, all the information necessary for the RVC calculations, viz.,
information relating to production at Agua Prieta, Evanston and El
Paso, is present at Evanston.
In determining the RVC of the microphones, Shure Electronic,
the producer of the good, proposes to accumulate the production of
its related producers. The RVC calculation you have submitted is
based on the value of materials from all four of the related Shure
entities, the direct labor costs and direct overhead incurred in
Juarez, and the labor, overhead and period costs from El Paso. To
this are added the labor and overhead costs product costs from Agua
Prieta and the period costs, i.e., the management, personnel and
other administrative costs, incurred by Shure at its Evanston
headquarters. Shure has combined labor and overhead in a single
figure based on the standard labor hours used the production of the
microphones at each of Shure's plants. The product and period
costs are accumulated without regard to whether the materials to
which the costs relate are originating or non-originating. The
calculation yields an RVC in excess of the 50 percent required
under the net cost method.
ISSUES:
The issues presented are whether: (1) the product costs
involved in the production of materials at all the related Shure
facilities and used in the production of the imported microphones
can be accumulated in determining the RVC of the microphones; (2)
the period costs incurred by Shure at its Evanston headquarters and
related to the imported merchandise can be accumulated for purposes
of the RVC calculation; and (3) whether Shure may be granted a
waiver from the requirement of having to obtain a net cost
statement relating to accumulated material costs.
LAW AND ANALYSIS:
Section 4 of the Appendix to part 181, Customs Regulations,
(19 C.F.R. pt. 181 app.; NAFTA Rules of Origin Regulations (the
"ROR")), sets forth the rules for determining whether a good
originates in the territory of a NAFTA party. For example, a good
will originate if it was "wholly obtained or produced" in
accordance with section 4(1) ROR, or if it satisfies the applicable
change in tariff classification, the applicable RVC requirement or
combination thereof under section 4(2) of the ROR, to cite but a
few possibilities.
In regard to both the change in classification and/or the RVC
rules for conferring originating status, section 14 of ROR affords
the exporter or producer of the good the option of determining the
origin of the good by accumulating the production of a material
with the production of the good in which the material is used.
Section 14 provides in relevant part:
(1) Subject to subsections (2) and (4), for purposes of
determining whether a good is an originating good, an
exporter or producer of a good may choose to accumulate
the production, by one or more producers in the territory
of one or more of the NAFTA countries, of materials that
are incorporated into that good so that the production of
the materials shall be considered to have been performed
by that exporter or producer.
The effect of accumulation is thus to treat the production
processes of the material producer(s) and the producer of the good
as one for purposes of determining whether the good qualifies as an
originating good under the ROR.
In order to accumulate the production of a material under
section 14, the exporter or producer of the good must obtain a
signed statement from the producer of the material with respect to
the net cost incurred in the production of that material. The net
cost information can be based on cost averaging of accumulated
production in accordance with section 14(3), which requires, inter
alia, that the statement set forth "any amount, other than an
amount that includes any of the values of non-originating
materials, that is part of the sum of the net cost incurred by the
producer of the material in the production of that
material...produced in a single plant by the producer of the
material...divided by the number of units of materials to which the
statement is made." 19 C.F.R. pt. 181 app., ROR 14(3)(b).
Under the ROR, net cost is determined in accordance with
section 6(11), pursuant to one of several options, all of which
involve a calculation of the producer's total cost. Total cost is
calculated in accordance with section 2(6) of the ROR which
provides that "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". 19 C.F.R. pt. 181
app., ROR, 2(6). The term "product costs" is defined as "costs
that are associated with the production of a good, and includes the
value of materials, labor costs and direct overhead"; the term
"period costs" is defined as "costs, other than product costs, that
are expensed in the period in which they are incurred". 19 C.F.R.
pt. 181 app., ROR, 2(6).
In the instant case, Shure Electronica is the producer of the
good, i.e., the microphones. Both originating and non-originating
materials are used in the production of the good. As a general
matter, the determination as to whether a good originates in the
territory of a NAFTA country is made by applying the provisions of
section 4 of the ROR. In determining the RVC of a good, the entire
value of the materials used in the production of the good is
considered to be originating or non-originating, as appropriate.
The accumulation provision, however, allows the producer or
exporter to include as part of the good's RVC any regional value
added by suppliers of non-originating materials used in the
production of the good. Thus, accumulation allows the producer to
reduce the value of non-originating materials used in the
production of the good by taking into account the NAFTA inputs
incorporated in those non-originating materials.
For purposes of determining the RVC of the [******]
microphone, you have asked whether Shure Electronica can accumulate
all the product and period costs incurred by the Shure entities
involved in the production of the good, including its own product
costs. However, unlike the general scenario, described above, for
determining the originating status of a good, Shure proposes to do
this regardless of whether the materials used in the production of
the microphones are originating or non-originating. In effect,
Shure proposes to by-pass section 4 of the ROR and apply the
accumulation provision ab initio in determining whether the
imported microphones meet the applicable RVC requirement.
Indeed, Shure contemplates using accumulation even if a
material used in the production of the microphones contains no non-originating materials. For example, as set forth in the bill of
materials dated June 19, 1997, part no. [********], a swivel
assembly, contains no non-originating content whatsoever. The
material costs are originating and are carried on the producer's
books, as are certain direct labor and overhead costs. Other
direct labor and overhead costs are carried on Shure's books in
Evanston. Rather than make an initial determination as to which
materials are originating and which are non-originating, and then
accumulate any regional value contained in the latter, Shure has
asked whether, in order to calculate the RVC of the microphones, it
is acceptable to apply the accumulation method without regard to
the originating status of the materials used in the production of
the microphones.
As noted above, section 14 allows the producer of the good to
accumulate the production, by producers in one or more of the NAFTA
countries, of materials incorporated into the good. 19 C.F.R. pt.
181 app., ROR, 14(1)-(2). While Shure's approach is unusual in
that Shure intends to use the accumulation method irrespective of
whether the materials to which the costs relate are originating or
non-originating, it is our position that the approach is
nevertheless a permissible application of the accumulation method,
subject to the following considerations.
First, based on the fact that Evanston and El Paso are part of
the same corporate entity (Shure Brothers International), the
producer of the good, Shure Electronica, can accumulate any
corporate overhead costs on Evanston's books that are related to
the production of materials used in the production of the good. In
this regard, any overhead or other costs that are allocated to the
good must be allocated in accordance with the reasonable allocation
provisions of schedule VII. Second, in order to support the
information contained in the bill of materials for the microphone,
Shure must have bills of material for all the materials it produces
which are used in the production of the microphones.
Alternatively, for materials acquired from other producers, Shure
must have a statement from the supplier of the materials in order
to document the originating status of the materials. Based on the
information presented some fifty-five materials (sub-assemblies and
components) are used to produce the microphones. Thus, to support
its RVC calculation in the event of a verification, Shure must have
available individual bills of material or statements for all of the
materials used in the production of the microphones.
In addition, in calculating the RVC of the microphones, we
note that Shure has combined labor and overhead in a single figure
based on the standard labor hours used the production of the
microphones at each of Shure's plants. However, under schedule VII
(Reasonable Allocation of Costs), materials and labor must be
directly attributed to the good. Thus, while the overhead
calculation can be based on a formula, labor costs, in contrast,
must be directly attributed. Under schedule VII, cost allocation
methods used for internal management purposes must also be used for
purposes of allocating direct material costs, direct labor costs
and overhead costs to the good. 19 C.F.R. pt. 181, app. schedule
VII, 3. Please note, however, that any costs allocated to the
good on the basis of a cost allocation method used for internal
management purposes that is solely for the purpose of qualifying a
good as an originating good will not be considered a reasonable
allocation. Id. at 7.
Finally, Shure has requested a waiver of the requirement of
section 14 that producers choosing to accumulate the production of
materials obtain net cost statements from the material producers
whose costs are being accumulated. The basis for this request is
that the cost information of all the producers whose costs would be
accumulated are located at Shure's Evanston headquarters. Shure
contends that the present circumstances are unlike those which
would obtain where, for example, a producer wishes to accumulate
costs incurred by unrelated parties, or in a decentralized
organization. Shure notes further that a net cost statement in
this instance would be duplicative of information already available
in Evanston and would serve no purpose for the company internally.
It is our position, however, that the statement required by
section 14 may not be waived. The documentation and records
specified under Article 505 of the NAFTA are required to enable the
customs administration of a Party to conduct a verification of
origin under Article 506 of the NAFTA. Uniform Regulations for the
Interpretation, Application, and Administration of Chapters Three
(National Treatment and Market Access for Goods) and Five (Customs
Procedures) of the North American Free Trade Agreement (the
"Uniform Regulations"), Article V, 60 Fed. Reg. 46464, 46465
(1995). Nevertheless, in the circumstances of this related party
case it is our position that the required statement may take the
form of cost sheets so long as it is made available in the event of
a verification. The statement or cost sheets may be maintained in
machine-readable form provided they can be retrieved and printed;
in any event, they must be made available for inspection in the
course of a verification visit.
HOLDING:
In conformity with the foregoing, Shure Electronica can
accumulate the production by its related producers in the NAFTA
territory of materials incorporated into the microphones, including
the management, personnel and other administrative costs carried on
Shure's books, to the extent those costs were incurred in the
production of materials by Shure's U.S. entities. The requirement
of a statement under section 14 of the ROR is not waived.
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,
Acting Director
International Trade Compliance Division