CLA-2 RR:CR:SM 563020 DCC
Field Director
Regulatory Audit Division
U.S. Customs and Border Protection
477 Michigan Avenue
Detroit, Michigan 48226
RE: Request for Internal Advice; Treatment of Standard Costs for Purposes of the Generalized System of Preferences
Dear Field Director:
This is in reference to your memorandum dated March 29, 2004, requesting internal advice regarding the eligibility for duty-free treatment under the Generalized System of Preferences (“GSP”) of certain fiberglass products known as chopped strand mats (“CSM”) from Brazil imported by Owens Corning (“Owens”).
FACTS:
Owens produces a fiberglass products known as chopped strand mats (“CSM”). In this case, Owens produces CSM in a beneficiary developing country (“BDC”) and claims preferential tariff treatment under GSP. Owens’ production costs are allocated by department rather than product “because their products are produced to customer specifications.” The production costs vary according to the efficiency of the production process.
Owens uses a formula based on its “standard costs” and “actual costs” to determine whether the merchandise satisfies the 35% value added criteria. Owens’ “actual costs” are known by department and the company’s “standard costs” are derived using production parameters.
Owens claims that its formula based on actual and standard costs may be used to calculate the 35% value-added requirement under GSP.
ISSUE:
Whether actual and standard costs may be used to calculate the 35% value-added requirement under GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or manufacture of a designated beneficiary developing country that are imported directly into the customs territory of the United States may receive duty-free treatment if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of the processing operations performed in the BDC, is equivalent to at least 35 percent of the appraised value of the article at the time of entry into the United States. See 19 U.S.C. 2463(a)(2).
The cost or value of materials used in the production of the CSM may be included in the 35% value-content calculation if they are produced in the BDC. The regulations regarding the calculation of the cost of materials are codified at 19 C.F.R. 10.177, which provide:
§ 10.177 Cost or value of materials produced in the beneficiary developing country.
“Produced in the beneficiary developing country” defined. For purposes of sections 10.171 through 10.178, the words “produced in the beneficiary developing country” refer to the constituent materials of which the eligible article is composed which are either:
Wholly the growth, product, or manufacture of the beneficiary developing country; or
Substantially transformed in the beneficiary developing country into a new and different article of commerce.
Questionable origin. When the origin of an article either is not ascertainable or not satisfactorily demonstrated to the appropriate district director, the article shall not be considered to have been produced in the beneficiary developing country.
Determination of cost or value of materials produced in the beneficiary developing country.
The cost or value of materials produced in the beneficiary developing country includes:
The manufacturer’s actual cost for the materials;
When not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant;
The actual cost of waste or spoilage (material lost), less the value of recoverable scrap; and
Taxes and/or duties imposed on the materials by the beneficiary developing country, or an association of countries treated as one country, provided they are not remitted upon exportation.
* * *
If the pertinent information needed to compute the cost or value of the materials is not available, the appraising officer may ascertain or estimate the value thereof using all reasonable ways and means at his disposal.
In addition to the cost of materials, the 35% value-content calculation includes the direct costs of processing performed in the BDC. The regulations regarding the direct costs of processing operations are codified at 19 C.F.R. 10.178, which provide:
§ 10.178 Direct costs of processing operations performed in the beneficiary developing country.
(a) Items included in the direct costs of processing operations. As used in § 10.176, the words “direct costs of processing operations” means those costs either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. Such costs include, but are not limited to:
All actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits, on-the-job training, and the cost of engineering, supervisory, quality control, and similar personnel;
Dies, molds, tooling, and depreciation on machinery and equipment which are allocable to the specific merchandise;
Research, development, design, engineering, and blueprint costs insofar as they are allocable to the specific merchandise; and
Costs of inspecting and testing the specific merchandise.
(b) Items not included in the direct costs of processing operations. Those items which are not included within the meaning of the words “direct costs of processing operations” are those which are not directly attributable to the merchandise under consideration or are not “costs” of manufacturing the product. These include, but are not limited to:
Profit; and
General expenses of doing business which are either not allocable to the specific merchandise or are not related to the growth, production, manufacture, or assembly of the merchandise, such as administrative salaries, casualty and liability insurance, advertising, and salesmen’s salaries, commissions, or expenses.
In the instant case, Owens is unable to provide the actual cost of materials produced, and processing performed, in the BDC. Instead of the actual cost of materials and processing, Owens devised a formula based on the actual and standard costs of production to determine whether the imported merchandise meets the 35% value content requirement. This formula is based on Owens’ “total manufacturing costs,” minus an amount for “administrative and non-qualifying costs.”
The GSP regulations clearly reflect that the “direct costs of processing operations” and the “cost or value of materials produced” must relate to the specific merchandise under consideration, and must be determined based on the actual costs incurred in regard to particular shipments. Therefore, an accounting methodology that is based on the “standard costs” rather than the actual cost of materials and processing for products manufactured over time and encompassing multiple shipments cannot be used to determine the “direct costs of processing operations” and the “cost or value of materials produced” for a specific shipment, as such a methodology does not relate to the costs directly attributable to the specific articles under consideration.
In Headquarters Ruling Letter (“HRL”) 557015, dated June 28, 1993, Customs and Border Protection (“CBP”) considered whether a producer may estimate the cost of materials produced in the BDC for purposes of GSP. In that ruling, CBP determined that the cost of local materials used in the production of a specific lot may not be calculated through the use of an accounting methodology that establishes the average inventory costs of the materials if that cost does not represent the manufacturer’s “actual” cost for the materials used in the production of that lot. If the quantity of local materials for each lot can be determined, and the manufacturer’s actual costs for those materials did not fluctuate during the production period, the average inventory costs for the local materials over that same time period would represent the manufacturer’s actual cost.
In this case, however, there is no information to indicate that Owens’ cost accounting methodology can accurately calculate the cost or value of materials according to a specific production period that may be tied to particular lots of merchandise. Furthermore, the accounting method used in HRL 557015 was only used to calculate the cost of materials—not the cost of processing. We therefore find that a formula for calculating the 35% value-content requirement based on standard costs is not acceptable because it is not based on the actual cost of processing and there is no information to suggest that the standard cost of materials is based on a specific batch of finished goods.
HOLDING:
Based on the information provided, we find Owens’ proposed accounting methodology for production costs cannot be used to determine the “direct costs of processing operations” and the “cost or value of materials produced,” for purposes of calculating the 35% value-content requirement under GSP.
This decision should be mailed by your office to the importer no later than 60 days from the date of this letter. On that date, the Office of Regulations and Rulings will make the decision available to Customs personnel, and to the public on the Customs Home Page on the World Wide Web at www.cbp.gov, by means of the Freedom of Information Act, and other methods of public distribution.
Sincerely,
Myles B. Harmon, Director
Commercial Rulings Division