VAL CO:R:C:V 545676 CRS
Mr. Alex Romero, Jr.
A.F. Romero & Co., Inc.
P.O. Box 989
Calexico, CA 92231-0989
RE: NAFTA advance ruling; article 509; regional value content; accumulation; material used in the
production of a material; net cost incurred by the producer of a material
Dear Mr. Romero:
This is in reply to your letter, dated May 13, 1994, on behalf of S-B Power Tool, Inc. ("S-B"),
in which you requested an advance ruling pursuant to section 181.91 et seq., Customs Regulations
(19 C.F.R. 181.91 et seq.). Additional submissions were made on September 6, 1994, and
September 22, 1994. We regret the delay in responding.
FACTS:
Skil de Mexico S.A. ("Skil," or the "producer"), a wholly-owned subsidiary of S-B, produces
portable, electric hand tools (the "good") from originating and non-originating materials at its plant
in Mexicali, Mexico. A component of the good is a rechargeable battery produced in Mexico by
Sanyo Corp. (Mexico). You state that Sanyo Mexico has determined that the battery does not qualify
as an originating material under the North American Free Trade Agreement (NAFTA).
Although the batteries are produced in Mexico, S-B actually purchases them from Sanyo
Mexico's parent, Sanyo USA. The price paid by S-B to Sanyo USA includes not only Sanyo
Mexico's manufacturing cost, but also costs incurred by Sanyo USA, such as sales costs, general and
administrative expenses and support costs. In addition, certain other production expenses of Sanyo
Mexico, including rent, utilities and depreciation, are paid for and booked by the company's U.S.
parent. Finally, the price paid by S-B also includes Sanyo USA's profit. Once purchased, the
batteries are not exported to the U.S., but rather are shipped from Sanyo Mexico's plant directly to
Skil which uses them as a material in the production of portable, electric hand tools such as electric
screwdrivers.
The finished electric hand tools produced by Skil are imported by S-B; but in order to qualify
for NAFTA, the applicable rule of origin provides that the hand tools must satisfy both a tariff shift
rule and a regional value-content test. Although the batteries undergo a change in classification when
they are incorporated into the hand tools, you have advised that Sanyo Mexico has determined that
the batteries themselves are non-originating. Nevertheless, since a large portion of the purchase price
paid by S-B represents costs incurred by Sanyo USA, you have asked whether these costs can be
accumulated in the determination of the regional value content of the NAFTA good, i.e., the hand
tools. It is your position that the costs incurred in the U.S. should be considered originating.
In addition, you have asked whether steel coil, imported from Japan, and used by Sanyo
Mexico to produce the batteries that Skil incorporates in the good, can be considered to be
originating. As noted above, the batteries do not qualify for NAFTA; however, you state that the
steel coil itself undergoes a tariff shift as a result of the production process. Accordingly, you have
asked whether in calculating the regional value content of the batteries, Sanyo Mexico can treat the
steel coil as originating. Finally, you have asked whether the cost of steel coil that has undergone a
tariff shift can be treated as originating in accumulating the production of the batteries used in the
production of the good.
ISSUES:
The issues presented are: (1) whether Skil may accumulate the production of the batteries
such that Skil shall be considered to have produced the batteries; and (2) whether Skil can treat the
batteries as an originating material in calculating the regional value content of the good since the
batteries undergo a change in classification when incorporated in the finished tools.
LAW AND ANALYSIS:
The Appendix to section 181.131, Customs Regulations, (19 C.F.R. 181.131; the NAFTA
Rules of Origin Regulations (ROR)), at part VI, section 14, affords exporters or producers of a good
the option of determining the origin of a good by accumulating the production of a material with the
production of the good in which the good is used. Specifically, 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.
(2) Where a good is subject to a regional value-content requirement and an exporter
or producer of the good has a statement signed by the producer of a material that is
used in the production of the good that
* * *
(b) states any amount, other than amount that includes any of the value of
non-originating materials, that is part of the net cost incurred by the producer
of the material in the production of that material,
(i) the net cost incurred by the producer of the good with respect to
the material shall be the value of the material, determined in
accordance with section 7(1), and
(ii) the value of non-originating materials used by the producer of the
good with respect to the material shall be the value of the material,
determined in accordance with section 7(1), minus the amount stated
in the statement.
19 C.F.R. 181.131, ROR, part VI, section 14(1)-(2). You have asked whether Skil, the producer
of the good, can, in accumulating the production of the batteries used in the production of the good,
include certain costs incurred by Sanyo USA, the parent company of the producer.
Applying the above, under subsection (2), Skil must first obtain a statement from Sanyo
Mexico, the producer of the material; however, to date no statement has been provided.
Nevertheless, assuming one were to be provided, pursuant to subsection (2)(b), the amount specified
on the statement should represent the net cost incurred by Sanyo Mexico with respect to the batteries,
exclusive of the value of any non-originating materials. In other words, the amount specified on the
statement should include only originating costs incurred by Sanyo Mexico in the production of the
batteries. Thus an exporter or producer of a good may accumulate any originating costs, for
example, processing and overhead costs, as well as any material costs, provided the costs are part of
the net cost incurred by the producer of the material in the production of that material and are so
reflected on the material producer's books.
The net cost of a good 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. 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).
Thus, with the exception of materials and intermediate materials, whose value is determined,
respectively, in accordance with section 7(1) and section 7(9), total cost is determined with respect
to the books of the producer. Accordingly, there is no authority under the accumulation provision
to include costs incurred by persons other than the producer of the material. In the instant case,
therefore, Skil cannot accumulate costs incurred by Sanyo USA since Sanyo USA is not the producer
of the material.
Alternatively, due to the change in classification that occurs when the battery is incorporated
into the finished tools, you have asked whether Skil can include the value of the battery as an
originating cost in calculating the regional value content of the good. However, you acknowledge
that Sanyo has determined that the battery is non-originating, i.e., that it does not qualify as
originating under part II, section 4 of the ROR. Consequently, in calculating the regional value
content of the good, the cost of the battery would be included in the value of non-originating
materials.
You have also asked whether Sanyo Mexico can treat steel coil, imported from outside the
territory of a NAFTA country and used in the production of the battery, as being an originating
material, where the steel coil undergoes a change in classification as the result of the production
process in Mexico. The steel coil is a non-originating material produced in Japan. Pursuant to
section 6(3) of the ROR, the value of non-originating materials used by the producer in the
production of the good (in this instance, the battery) is determined in accordance with part IV, section
7, of the ROR. Section 7 provides that 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,
determined in accordance with Schedule VIII of the Annex to the ROR. Accordingly, the value of
the steel coil is its customs value, and Sanyo Mexico should include this amount in the value of non-originating materials.
Finally, you have asked whether Skil, under the accumulation provision, can include the
value of the imported Japanese steel coil as an originating cost. As noted above, an exporter or
producer of a good may accumulate any originating costs, provided the costs are part of the net cost
incurred by the producer of the material in the production of that material and are so reflected on the
producer's books. You have indicated that the steel coil undergoes a change in tariff classification
as the result of production in Mexico; but since you have not provided any details with respect to the
change of classification that occurs in Mexico we regret that we are unable to address this aspect of
your ruling request. In this regard, however, you may wish to consider designating the steel coil as
an intermediate material. See, ROR, part III, section 6(4)(b); part IV, section 7(5); and part VI,
section 14(3).
HOLDING:
Pursuant to the foregoing, Skil may not accumulate production costs incurred by Sanyo USA.
The value of the steel coil imported into Mexico is its customs value.
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