OT:RR:CTF:VS H190269 SEK
Port Director
U.S. Customs and Border Protection
Port of Baltimore
40 South Gay Street
Baltimore, MD 21202
RE: Request for Internal Advice, R&D Assist Apportionment; Sufficient Information
Dear Port Director:
This is in response to a letter from your office, dated October 7, 2011, requesting internal advice on behalf of the company (importer), regarding the proper allocation for research and development assists used in the production of telecommunications equipment. A ruling request, dated August 31, 2011, was submitted to this office by the company covering the same issue. Ruling requests should be submitted with regard to prospective transactions only. As this issue arose in the context of current transactions, in addition to prospective transactions, we are issuing this internal advice response.
FACTS:
The company imports telecommunications networking equipment from unrelated contract manufacturers located in a variety of locations outside the U.S. According to the company, the products are classified in subheadings 8517.70.00, 8517.62.00, and 8517.69.00, Harmonized Tariff Schedule of the United States (HTSUS). Products in these subheadings are duty-free.
The importer engages engineers, designers, consultants, and foreign affiliates to undertake research and development (R&D) work outside of the U.S. The R&D includes the development of new products and the improvement of existing products. The R&D is then provided to the manufacturers at no cost.
The importer classifies R&D costs as operational costs, and tracks them in the company’s general ledger. The costs are quantified quarterly. The importer acknowledges that the R&D is an assist, and that it should be added to the price actually paid or payable for purposes of determining the proper transaction value. The company states as follows:
However, because the total amount of R&D costs relating to the production of the imported telecommunications equipment is not fully ascertainable until after entry, [the importer] proposes to apportion the value of the R&D costs expensed in any fiscal quarter to the first entry of the next fiscal quarter from each foreign manufacturer, when the R&D expenses are known.
The company has clarified that R&D conducted in one quarter is not reasonably attributed to goods manufactured in that quarter, but rather later shipments. The company assumes that goods in the next quarter would benefit from the prior quarter’s activities.
The company proposes to calculate the value of the assist within 30 days after closing a quarter, and declare the total value of the assist on the first shipment of the second month after the close of a quarter. The company states that its accounting methodology is consistent with the Generally Accepted Accounting Principles (GAAP) articulated in the Financial Accounting Standards Board (FASB) Statement No. 2.
It is the opinion of your office that because the assist is dutiable, and the costs are not quantifiable at the time of export, transaction value is excluded. In the alternative, you propose that the company should use the reconciliation program and finalize the declared value after the value of the assist is known.
ISSUE:
Does sufficient information exist for transaction value to apply?
What is the appropriate method of apportionment for the research and development assists?
LAW AND ANALYSIS:
The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a. The transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions, including assists. See 19 U.S.C. § 1401a(b). We will assume for purposes of this internal advice that, except for the issue of the assist, transaction value is the appropriate means of appraisement.
I. Sufficient Information
If, for any reason, sufficient information is not available with respect to the additions to the price actually paid or payable, the transaction value of the imported merchandise is treated as one that cannot be determined. 19 U.S.C. § 1401a(b)(1). Sufficient information is information that establishes the accuracy of any addition to the price actually paid or payable. 19 U.S.C. § 1401a(h)(5); 19 C.F.R. § 152.102(j).
When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)).
Your office claims that because the R&D costs attributable to the goods are unknown at the time of importation, there is insufficient information to determine the value of the assist, and therefore, transaction value cannot apply. However, the information will be available one month after the previous quarter closes. Sufficient information does not have to be available at the time of entry. See Headquarters Ruling Letters (HRL) 542701, dated April 28, 1982; and 542746, dated March 30, 1982 (both answering Internal Advice Request No. 182/81). In HRLs 542701 and 542746, a percentage of the proceeds of a sale in the U.S. were paid back to the seller, and were to be added to the price actually paid or payable under 19 U.S.C. § 1401a(b)(1)(E). In discussing whether sufficient information existed such that an adjustment under section 1401a(b)(1)(E) would be appropriate, U.S. Customs and Border Protection (CBP) stated that:
[s]ince sufficient information from which to establish the proceeds of a subsequent resale rarely exists at the time of importation, transaction value could not be used in nearly every case in which subsequent proceeds accrue to the seller, a result which we believe is contrary to the purpose and intent of the TAA.
HRL 542701 at 3. Similarly, in HRL 542746, CBP stated that “[t]o hold that the addition must be quantifiable at the time of exportation … would be inconsistent with commercial reality and with the clear intent of the statute.” In HRL 546038, dated July 19, 1996, CBP applied the same analysis to a situation involving an addition for royalty payments under 19 U.S.C. § 1401a(b)(1)(D) because, like proceeds, the royalty may be agreed upon before importation, but the amount may remain unknown until after importation.
HRL 542746 clarified, however, that while the information need not be available at importation, the addition must be able to be determined within a reasonable period of time. In the situation discussed in HRLs 542701 and 542746, the pricing agreement did not provide for a period of time in which the adjustments must be effective, and the importer noted it could occur more than one year after importation. While no decreases in the price were permitted, CBP noted that transaction value would be proper and that the proceeds from the subsequent resale could be determined within a reasonable period of time. HRL 542928, dated January 21, 1983, found that sufficient information did not exist when an adjustment for proceeds could occur many years later, with an example of ten years given. HRL H025216, dated August 16, 2010, determined that because 19 U.S.C. § 1504(b)(1) gives CBP the ability to extend liquidation for a period of four years, an adjustment would be proper if the importer is able to provide the information to make the adjustment within that time frame.
In the situation at issue, as with the proceeds and royalties discussed above, the specific amount spent on R&D per quarter is unknown until the books are completed after the quarter closes. We find that this is a reasonable period of time and, therefore, sufficient information exists to appropriately make an addition to the price actually paid or payable for the value of the assist. Cf. HRL 545504, dated May 4, 1995 (concluding that sufficient information exists when proceeds are accounted for and paid 30 days after the end of the quarter). As such, transaction value may be appropriate.
II. Apportionment
The importer proposes to calculate the value of the assist within 30 days after closing a quarter, and declare the total value of the assist on the first shipment of the next month after the close of the quarter. The importer states that the “shipment in the second month in the new quarter would be the earliest possible time when [the importer] would have processed and obtained R&D expenses data, and thus be able to allocate the R&D expenses to products which benefit from the Assists (drawings and specifications undertaken outside the United States). The company states that its accounting methodology is consistent with the GAAP.
The term “assist” refers to an item that is supplied directly or indirectly by the buyer, and free of charge or at a reduced cost, for use in connection with the production or sale for export of the imported merchandise. 19 U.S.C. § 1401a(h)(1)(A). There are four categories of assists, including “[e]ngineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise.” 19 U.S.C. § 1401a(h)(1)(A)(iv). In this case, the company acknowledges that the activities undertaken constitute assists.
Concerning the apportionment of assists, the CBP regulations provide as follows:
The apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles. The method of apportionment actually accepted by Customs will depend upon the documentation submitted by the importer. If the entire anticipated production using the assist is for exportation to the United States, the total value may be apportioned over (i) the first shipment, if the importer wishes to pay duty on the entire value at once, (ii) the number of units produced up to the time of the first shipment, or (iii) the entire anticipated production. In addition to these three methods, the importer may request some other method of apportionment in accordance with generally accepted accounting principles…
19 C.F.R. § 152.103(e)(1) (emphasis added). CBP has the authority under 19 C.F.R. 152.103(e)(1) to accept or reject a proposed apportionment method. See HRL 548242, dated February 19, 2003 (citing HRLs 545031, dated June 30, 1993 and HRL 544194, dated May 23, 1988).
The importer analogizes their proposed method of appraisement with that of 19 C.F.R. § 152.103(e)(1)(i), and cites HRLs H015975, dated September 13, 2007, and H086246, dated March 2, 2010, as support. The importer claims that their method is similar to apportionment over the first shipment, and is in accordance with GAAP. We agree it is reasonable that one quarter’s R&D is more likely to affect merchandise imported in the following quarter, as opposed to the quarter in which the R&D is conducted, as it will take time for R&D to be applied.
In HRL H015975, the importer provided all necessary production materials and parts to the manufacturer. The indirect materials were shipped to the manufacturer sporadically, and could not easily be allocated to individual shipments or merchandise. Additionally, the cost to transport the materials to the manufacturer were not assessed or paid on a per-unit basis. Therefore, the company could not declare the value of the assists on an entry-by-entry basis. CBP held that the company could apportion the value of the assists to the first entry of the month following the incurrence of such costs provided that such apportionment was in accordance with GAAP. In determining that this would be an acceptable method of apportionment, CBP noted that the goods were all classified in the same subheading and that this was closely related to the “first shipment” methodology.
In HRL H086246, citing HRL H015975, CBP permitted the importer to apportion all assists from the prior month to the first shipment from each separate vendor after the prior month’s closing period (about a week or two later), provided that this was in accordance with GAAP. In that case, the importer provided fabric and leather free of charge to the furniture producers; however, the prices of the material varied by type and market factors, making it difficult to apportion on an item-by-item basis. In this case, the importer proposes to apportion assists to the first entry in the second month of the fiscal quarter to which the R&D costs were incurred, which the importer states is the first entry to which the goods at issue benefit from the prior R&D expenditures. Based on the rulings above, we find that allocating the entire value of the assist to the first entry of the second month after the close of a quarter is acceptable, provided that such apportionment is in accordance with generally accepted accounting principles.
CBP has held that the entire value of an assist may not be apportioned to the first entry where the merchandise is imported duty-free. See HRL 542519, dated July 21, 1981. See also H031244, dated April 10, 2009. As stated in the Customs Regulations, the total value of the assist may be apportioned to “the first shipment, if the importer wishes to pay duty on the entire value at once[.]” 19 CFR 152.103(e)(1)(i) (emphasis added). Similar language appears in the Statement of Administrative Action (SAA), and was discussed in HRL 542519. See Statement of Administrative Action, H.R. Doc. No. 153, 96 Cong., 1st Sess., Pt II (1979)[hereinafter SAA]. Based on this language, Customs has ruled that there is “no authority under the TAA to apportion the value of an assist on the first duty free entry.” HRL 542519. However, HRL 542519 dealt with entries that were entered duty free under the Automotive Products Trade Act of 1965 (APTA). Under the APTA, parts were entered duty free if, among other requirements, they were intended for use in the U.S. in the manufacture of motor vehicles, while parts not so intended were dutiable. It was a common occurrence for a particular vehicle part to be entered duty free on one entry, and dutiable on the next. Further, parts entered duty-free under the APTA, but diverted to use other than in the manufacture of motor-vehicles subsequent to importation were to be reported to Customs and duty paid at the time of diversion. Therefore, concerned with the likelihood that the importer could amortize all assists for a given part on a duty-free entry and then on subsequent dutiable entries no duties on the assists would be collected, CBP held that “there is no authority under the TAA to apportion the value of the assist on the first duty free entry.”
In H031244, the importer was seeking to apportion the entire value of the assist to the first duty-free entry, even though the assist was provided for both dutiable and duty-free entries. While CBP ultimately held that the value of the assist may be divided among the entries in relation to the total value of the entries at each duty rate, CBP stated that the value of the assist may not be apportioned to the first duty-free entry.
In contrast to HRLs 542519 and H031244 which dealt with both dutiable and duty-free entries, the importer in this case asserts that all its entries are entered under HTSUS subheadings that carry a duty-rate of “free.” Therefore, if the importer opts to apportion the entire value of the assist to the first entry pursuant to 19 C.F.R. § 152.103(e)(1), it is not avoiding applying the value of the assist to a dutiable entry, because none exist. Whereas in the rulings described above, where CBP held that the assist could not be apportioned to the first duty-free entry when there were both dutiable and duty-free entries to avoid paying duties on subsequent dutiable entries, in this case the importer is not avoiding paying duties on the assist on any subsequent dutiable entries, and is thereby not disproportionately allocating value to duty-free entries. Therefore, we find the importer’s proposed method of allocating the value of the assist to the first shipment in the second month of the fiscal quarter following the quarter in which R&D expenses were incurred is acceptable under 19 C.F.R. § 152.103(e)(1). We note that if the importer has dutiable entries in addition to its duty-free entries, the proposed method of declaring the assist will no longer be acceptable.
HOLDING:
Sufficient information exists to determine the value of the assist after entry, and therefore the additions to the price actually paid or payable can be determined and transaction value may apply. The importer may apportion its assist costs as requested, i.e. in the first entry in the second month of the fiscal quarter subsequent to which the R&D costs were incurred, provided this is in accordance with GAAP.
You are directed to mail this decision to the internal advice applicant, no later than 60 days from the date of this letter. On that date, Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.CBP.gov, and by means of the Freedom of Information Act, and other public methods of distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch