HQ 0544833 - Acceptability of the "Price Paid" in Determining Eligibility of Imported Automobiles under the US/Canada Free Trade Agreement - United States International Trade Commision Rulings

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HQ 544833
December 3, 1991

VAL CO:R:C:V 544833 ML

CATEGORY: VALUATION

Regional Director
Regulatory Audit Division
Northeast Region

RE: Acceptability of the "Price Paid" in Determining Eligibility of Imported Automobiles under the US/Canada Free Trade Agreement

Dear Mr. Battaglioli:

This is in response to a request for internal advice, dated October 24, 1991 (Aud-1-O:RA JMP), regarding the meaning of the "price paid by the producer for all materials" in determining the eligibility of certain importations of automobiles under the US/Canada Free Trade Agreement (CFTA).

FACTS:

The first situation you describe involves non-territorial transmissions sold by Company X, a foreign corporation located in a non-CFTA country, to Company Y, a Canadian corporation, for approximately $300. You found that Company X sold identical transmissions to Company Z, a U.S. corporation, for approximately $600. Company Z in turn sold some of these transmissions to Company Y for $300. Further, you found that the $600 sales price was fairly consistent with the price Company Z paid to Company X for similar transmissions prior to the implementation of the CFTA. You conclude, therefore, that the price paid for the non- territorial transmissions was influenced by Company Y's relationship to Company X. You state, that if you are restricted to accepting the price paid in these situations then related parties could affect the "50 percent test" by manipulating the prices paid for originating and non-originating materials, i.e., the prices for originating materials could be increased and the prices for non-originating materials could be decreased.

Your second situation has more impact on originating materials than non-originating materials. This situation involved a four percent mark-up that Company Z added to the price it paid to non-related vendors in determining its sales price to Company Y. Company Z advised you that the mark-up was intended to defray its purchasing expenses. Company Y's price paid includes the 4 percent mark-up added by Company Z so the value of its materials would, therefore, be increased by 4 percent. You inquire as to whether these mark-ups should be allowed because it impacts more on originating materials than non-originating materials since these products were purchased in the territory.

ISSUE:

Whether the price paid by the producer must be accepted even though:

(1) you have indications that the price was influenced by the relationship of the parties; and

(2) the price includes a so called "source mark-up" added by a related supplier to the price it paid for components purchased from non-related territorial vendors and then sold to the producer.

LAW AND ANALYSIS:

According to the US/Canada Free Trade Agreement, Article 304, the value of materials originating in the territory of either Party or both Parties means the aggregate of:
a) the price paid by the producer of an exported good for materials originating in the territory of either Party or both Parties or for materials imported from a third country used or consumed in the production of such originating materials; and
b) when not included in that price, the following costs related thereto: i) freight, insurance, packing and all other costs incurred in transporting any of the materials referred to in subparagraph (a) to the location of the producer; ii) duties, taxes and brokerage fees on such materials paid in the territory of either Party or both Parties; iii) the cost of waste or spoilage resulting from the use or consumption of such materials, less the value of renewable scrap or by-product; and iv) the value of goods and services relating to such materials determined in accordance with subparagraph 1(b) of Article 8 of the Agreement on Implementation of Article VII of the General Agreement of Tariffs and Trade (GATT);

Your first question was whether the $300 price paid by the producer, Company Y, to Company X for transmissions that Company Z paid Company X $600 for must be accepted. In this regard, Article 304 of the U.S./Canada Free Trade Agreement, without any qualification, provides that for the purposes of establishing the value of materials the price paid by the producer of an exported good for materials imported from a third country used in the production of such originating material will be the value of the materials. Therefore, where Company X sold transmissions directly to Company Y the price paid by Company Y to Company X was the value of the materials, as that was the price paid by the producer of the exported good for materials imported from a third country used in the production of the originating material.

Your second inquiry regarded a 4 percent mark-up that Company Z charged Company Y on goods Company Z purchased from non-related vendors. Again, the price paid by the producer, Company Y, for materials used in the production of originating materials constitutes the value of materials originating in the territory. Therefore, the inclusion of Company Z's 4 percent mark-up represented the price paid by the producer.

It should be noted that Article 301(3)(c) of the CFTA provides:

3. A good shall not be considered to originate in the territory of a Party pursuant to paragraph 2 merely by virtue of having undergone:

...
c) any process or work in respect of which it is established, or in respect of which the facts as ascertained clearly justify the presumption, that the sole object was to circumvent the provisions of this Chapter.

Consequently, in the context of reviewing a completed CFTA audit, the totality of the facts must be examined to determine the applicability of this provision.

HOLDING:

(1) The price paid by the producer, Company Y for transmissions sold directly to it by Company X, was the value of the materials. The price paid was acceptable as the value of the materials, as that was the price paid by the producer of the exported good for materials imported from a third country used in the production of the originating material.

(2) The price paid by Company Y to Company Z, which included a 4 percent "source mark-up" added by Company Z represented the value of the materials.

Sincerely,

Harvey B. Fox, Director
Office of Regulations and

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