VAL CO:R:C:V 544395 ML
Regional Director
Regulatory Audit Division
New York, New York 10048
RE: Request for Reconsideration of C.S.D. 88-34, Dated September
8, 1988; Mori-Lee Associates
Dear Sir:
This is in reply to a memorandum, dated June 8, 1990, (AUD-
8-O:R JCS), from your office referencing letter dated August
29,1989, requesting the reconsideration of C.S.D. 88-34,
regarding deductions made for financing fees by Mori Lee
Associates (CLA-2 CO:R:C:V 544082 EK).
FACTS:
Mori-Lee Associates (hereinafter referred to as the
"importer") purchases formal wear from an unrelated and a related
manufacturer. The importer deducts from entered value an amount
allegedly incurred in Taiwan by the foreign manufacturers for
finance or capital acquisition. For the unrelated manufacturer,
a constant 8% of the imported material costs are added to the FOB
invoice price for the merchandise. The related Taiwanese
manufacturer has a 5% addition for the merchandise. The importer
states that he is unaware of the actual finance costs incurred by
the two manufacturers. Additionally, the auditors have informed
us that the importer makes "advance payments" to both Taiwanese
manufacturers. The auditors have not, however, provided any
detailed descriptions as to the nature of these advance payments
(i.e., whether they are in the nature of cash, or perhaps
materials furnished to the manufacturers, resulting from cash
payments made by the importer to a third party). This fact was
not set forth in the original protest decision published as
C.S.D. 88-34. The auditors do state, that these advance payments
provide "working capital" for the manufacturers for which the
importer receives no interest income.
The relevant portion of C.S.D. 88-34 about which you ask for
reconsideration, holds that payments made by the buyer for the
interest charges are not part of the "price actually paid or
payable." Your audit revealed that the importer did not record
the "financing fees" as interest expense within the firm's
internal accounting records in conformance with generally
accepted accounting principles. You believe that "financing
fees" should only be considered nondutiable if it can be proven
that they were actually incurred by the foreign manufacturer, and
calculated on some appropriate and reasonable basis.
ISSUE:
Whether the "financing fee" charged by the manufacturer to
the importer is includable in the "price actually paid or
payable" for imported merchandise, when the fee is not recorded
as interest expense in accordance with generally accepted
accounting principles.
LAW AND ANALYSIS:
The preferred method of appraisement, transaction value, is
defined in section 402(b) of the Tariff Act of 1930, as amended
by the Trade Agreements Act of 1979 (TAA; 19 U.S.C. 1401a(b)) as
"the price actually paid or payable for the merchandise when
sold for exportation to the United States", plus certain
enumerated additions. Treasury Decision (T.D.) 85-111 dated July
17, 1985, addressed the issue of the dutiability of the interest
charges paid by the importer. Customs stated that interest
payments, whether or not included in the "price actually paid or
payable" for imported merchandise, should not be considered part
of dutiable value provided the following criteria are satisfied:
(1) The interest charges are identified separately
from the price actually paid or payable;
(2) The financing arrangement in question was made in
writing;
(3) Where required by Customs, the buyer can
demonstrate that
- the goods undergoing appraisement are actually
sold at the price declared as the price actually
paid or payable, and
- the claimed rate of interest does not exceed the
level for such transaction prevailing in the
country where, and at the time, when the financing
was provided.
Customs issued a statement of clarification regarding the
treatment of interest charges in the value of imported
merchandise in C.S.D. 89-70 which became effective October 17,
1989. While the changes made by C.S.D. 89-70 have no retroactive
effect, Customs therein, interpreted the term "interest" to
encompass only bona fide interest charges, not simply the notion
of interest arising out of a delayed payment. Bona fide interest
charges are those payments that are carried on the importer's
books as interest expenses in conformance with generally accepted
accounting principles (emphasis added). C.S.D. 89-70 further
stated that the buyer must be able to prove that the "price
actually paid or payable" for identical or similar goods sold
without a financing arrangement closely approximates the "price
paid or payable" for the goods being appraised. If the buyer
fails to meet this test, no authority exists for distinguishing
the alleged interest payments from the "price actually paid or
payable" for the merchandise.
In the instant case, the importer has often supplied the
manufacturers with advance payments and financing fees. It is
unclear as to whether the financing fees have any direct
correlation to the actual "cost of capital" in Taiwan since
"capital" had previously been supplied in the form of the cash
advances. Further negating the nondutiability of these interest
expense deductions is the fact that the internal accounting
records of the importer do not record the "financing fees" as
interest expenses. Under these circumstances, we have no
authority to make an adjustment to the "price actually paid or
payable."
The second issue involves advance payments supplied to the
manufacturers for "working capital". In the instant case,
advance payments (cash) are a dutiable part of the "price
actually paid or payable" for the merchandise when they are in
the form of cash advances.
If the money is advanced to a third party and materials are
purchased, which are later supplied to the manufacturer free of
charge, the furnishing of this material would be considered an
assist. The term "assist" is defined as follows:
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 sale for export to the United
States of the merchandise:
(i) Materials, components, parts, and similar
items incorporated in the imported
merchandise....
If the importer has sent money abroad to purchase materials to be
furnished to the manufacturer of subsequently imported
merchandise, the materials supplied will be a dutiable addition
to the "price actually paid or payable" for the merchandise.
Please note, that the value of any assist will include
transportation costs to the place of production. See, Section
152.103(d), Customs Regulations (19 CFR 152.103(d)).
HOLDING:
In view of the foregoing, no authority exists to deduct the
claimed financing fees from the "price actually paid or payable"
for the imported merchandise. In light of the statement of
clarification, C.S.D. 89-70, it is not necessary to reverse
C.S.D. 88-34, CLA-2 544082 EK. Please note, however, that C.S.D.
88-70 has no retroactive effect and will not impact on those
entries filed prior to October 17, 1989. Only entries made after
October 17, 1989 are subject to the changes bade by C.S.D. 89-70.
Furthermore, to the extent that any monetary advances are
made to the manufacturers in connection with the imported
merchandise, they are dutiable as part of the "price actually
paid or payable". Should these advances be made to a third party
and result in the acquisition of materials subsequently furnished
to the manufacturer in connection with the imported merchandise,
this type of advance would be an addition to the "price actually
paid or payable" for the imported merchandise, under authority of
section 402(b)(1)(c) of the TAA.
Sincerely,
John Durant, Director
Commercial Rulings Division