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HQ 555198

August 25, 1989

CLA-2 CO:R:CV:V BJO

CATEGORY: CLASSIFICATION

Mr. Richard G. Seley
Rudolph Miles & Sons, Inc.
4950 Gateway East
P.O. Box 144
El Paso, Texas 79942

RE: GSP Direct Costs of Processing Operations

Dear Mr. Seley:

This is in response to your letter on behalf of Electrical Systems Division of Bristol Corp. ("importer") dated November 28, 1988, in which you request a ruling that certain fringe benefits are direct costs of processing for purposes of the Generalized System of Preferences (19 U.S.C. 2461-2466). We regret our delay in responding to your request.

FACTS:

The importer has a plant in Mexico for the assembly and packaging of small electrical appliances. You state that in addition to a minimum wage, the Mexican government requires the importer to pay the plant employees vacation pay plus a 25% bonus and a Christmas bonus, and pay the Mexican government, on behalf of each individual employee, social security taxes, employee housing fund, federal payroll taxes, state payroll taxes, and a nursery tax. In addition, you state that the importer supplements the employees' wages by paying directly to the employees an attendance bonus and, to the extent necessary for the completion of job tasks related to production of GSP eligible articles, travel expense and tuition reimbursement. Finally, you state that the importer provides a cafeteria subsidy to the employees to allow them to eat at reduced prices, a transportation subsidy to allow employees to travel to and from work at reduced prices, and a sports team subsidy which may be used by some employees. You ask whether these payments and subsidies, to the extent they are made to employees engaged in direct labor and to the extent they are included in appraised value, may be considered direct costs of the processing operation for purposes of the GSP.

ISSUE:

Whether vacation pay, Christmas bonuses, social security taxes, housing funds, federal payroll taxes, nursery taxes, and cafeteria, transportation, and sports team subsidies paid to or on behalf of employees directly engaged in production of GSP- eligible articles are direct costs of processing operations for GSP purposes.

LAW AND ANALYSIS:

Under the GSP, eligible articles imported directly from designated beneficiary countries are entitled to duty-free entry if the sum of (1) the cost or value of materials produced in the BDC, plus (2) the direct costs of processing operations performed in such BDC is not less than 35% of the appraised value of the article at the time of its entry into the customs territory of the U.S. See 19 U.S.C. 2463.

Direct costs of processing operations are those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. 19 CFR 10.178(a). They include "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits," but do not include general expenses of doing business which are not so related, such as administrative salaries. 19 CFR 10.178(a)(1) and (b).

In accordance with that definition, our previous rulings have generally held that whether a particular labor cost is a direct cost of processing is determined by the function that the employee performs. See HQ 555043, dated November 21, 1988. For example, we have ruled that Christmas bonuses, vacation pay, social security taxes, cost of a nursery, housing allowances, payroll taxes, and the cost of daily bus transportation are direct costs of the processing operation to the extent they are costs incurred on behalf of employees who are directly engaged in production of GSP eligible articles. See HQ 555316, dated April 26, 1989; HQ 555043, dated November 21, 1988; HQ 541689, dated March 7, 1978. On the other hand, costs of employees who perform administrative functions, such as a general manager, a personnel manager, or accounting and payroll employees, are not direct costs. See Internal Advice Request 83/76 (HQ 541249, dated February 24, 1977). If a benefit, such as a nursery, is available to both employees directly engaged in production of GSP
eligible articles and to those who perform administrative tasks, then only that portion of the cost of the benefit which may be reasonably allocated to production employees is a direct cost. See HQ 555043. If the payment or benefit is for employees directly engaged in production of GSP eligible articles, it is a direct cost of processing, whether it is in the form of a payment directly to the employee, such as a bonus, payment to a government agency, such as payroll or social security taxes, or payment to a third party, such as cafeteria or transportation subsidies.

If, as you state, the described costs are paid to, or incurred on behalf of, employees directly engaged in the production of GSP eligible articles, they are direct costs of the processing operation, subject to the limitations described above.

CONCLUSION:

The costs of vacation and Christmas bonuses, social security taxes, housing funds, federal payroll taxes, nursery taxes, and cafeteria, transportation, and sports team subsidies, to the extent they are incurred for employees directly engaged in production of GSP eligible articles, are direct costs of processing operations and therefore may be included toward the GSP 35% value-content minimum.

Sincerely,

John Durant, Director

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