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HQ 545405





February 1, 1994

VAL-CO:R:C:V 545405 GG

CATEGORY: VALUATION

Patricia Goldman
Regional Director, Regulatory Audit Division Southeast Region
U.S. Customs Service
909 S.E. 1st Ave., Rm. 632
Miami, FL 33131

RE: Request for Internal Advice; Dutiable Status of Severance Pay; Computed Value

Dear Ms. Goldman:

This is in response to your internal advice request AUD-1-O:R LR, dated August 10, 1993, which raises issues about the dutiability of severance pay liability recorded on the books of Gator of Florida, Inc. ("Gator"), an importer.

FACTS:

A recent audit of Gator's accounting records and entry documentation disclosed that Gator had an accrued expense account entitled "Severance Payable - Central America". It had a balance of $584,064 on December 31, 1991, which was the end of the one year audit period. This severance payable account was expensed in Gator's cost of goods sold account as "Contract Work".

Gator imports from a related party in Honduras, Sale City Manufacturing Co. ("Sale City"). You state that the companies are related because they are under common control. Employees of Sale City accumulate severance pay based on the employees' length of employment and a percentage of yearly income. Upon termination of employment, the employee receives the accumulated amount of severance pay.

Sale City, not Gator, pays the severance pay to its employees. Gator has stated that the payable is expensed on the foreign books when paid, and Gator records an estimated liability at each year-end should the foreign assembler's factory close. Even though Gator does not actually make the severance payments, it uses the yearly addition to its severance pay liablity to reduce its revenue and thus, its taxable income.

The imported merchandise is appraised under the computed value method of valuation.

ISSUE:

Whether the contract work expensed on Gator's books is included in the computed value of the imported merchandise.

LAW AND ANALYSIS:

As a preliminary matter, the severance payments recorded on Sale City's books as general expenses will be included in the computed value of the imported merchandise, provided Sale City is the producer and its profit and general expenses are consistent with those usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by producers in the country of exportation for export to the United States. See 19 U.S.C. 1401a(e)(1)(B) and (e)(2)(B). This is consistent with Headquarters Ruling Letter 544616, dated April 15, 1991, in which it was determined that severance payments recorded on a producer's books as general expenses were included in computed value. However, whether the expense listed on Gator's books to reflect the estimated liability for unpaid severance pay is part of the computed value of the merchandise at issue presents an entirely different question.

The Statement of Administrative Action ("SAA") and the valuation statute ("TAA") state that the amount for profit and general expenses shall be derived from the commercial accounts of the producer, provided that the accounts conform to the generally accepted accounting principles applied in the country of production and the amount is consistent with the profits and general expenses usually reflected in sales of merchandise of the same class or kind. There is no authority to include in computed value an amount for profit and general expenses that is derived from a source other than the producer, unless the producer's amount is inconsistent. In that situation, the TAA and the SAA instruct us to include in the computed value of the merchandise an amount based on the usual profit and general expenses of producers of same class or kind merchandise made in the country of exportation for export to the United States.

Clearly, we must look first at Sale City's profit and general expense accounts in trying to determine the correct amount of profit and general expenses to be included in computed value. Sale City's profit and general expense amount, taken as a whole, will be an element of computed value if it is consistent with the amount of profit and general expenses that is usually reflected in sales of merchandise of the same class or kind. If the amount is inconsistent then resort must be made to the usual profit and general expense amounts of producers of same class or kind merchandise made in Honduras for export to the United States. No authority exists for the inclusion of Gator's profit and general expense amount in the computed value of the imported merchandise, unless Gator is also a producer in Honduras of same class or kind merchandise, and its profit and general expenses are taken as a usual amount in a situation where Sale City's own profit and general expense figures are found to be inconsistent.

HOLDING:

The severance pay expensed on Gator's books is not included in the computed value of the imported merchandise.

Sincerely,

John Durant
Director, Commercial
Rulings Division

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