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HQ 545675




April 28, 1995

VAL CO:R:C:V 545675 CRS

CATEGORY: VALUATION

Mr. Porfirio Waters
Parker & Co.
403 East Texano Drive
Hidalgo, TX 78557

RE: NAFTA; article 509; advance ruling; origin; regional value content; net cost; total cost

Dear Mr. Waters:

This is in reply to your letters of May 13, 1994, and June 8, 1994, on behalf of Company X, under cover of which you requested an advance ruling pursuant to article 509 of the North American Free-Trade Agreement (NAFTA), regarding the regional value content of electronic products assembled in Mexico. Additional submissions were made via facsimile on December 12, 1994, and March 13, 1995. We regret the delay in responding.

FACTS:

Company X imports two types of automotive cruise control switches (part nos. ** and **; "good A") and two types of cruise and sunroof switches (part nos. ** and **; "good B") (collectively, the "goods"), produced in Mexico by a related company, Company Y (the "producer"), from originating and non-originating materials. You have advised that the goods are classified in tariff item 8536.50.8060, Harmonized Tariff Schedule of the United States (HTSUS). Company X consigns to Company Y certain materials, components, tools and machinery used in the production of the goods; the cost of these items is recorded on Company X's books. Company X also provides Company Y with purchasing, financial and sales and marketing support with respect to the goods.

Production, overhead and labor costs associated with the goods, including direct labor, plant labor, and general and administrative expenses, are recorded on Company Y's books. In addition, Company Y purchases certain materials used in the production of the goods, the cost of which materials is recorded on Company Y's books. You have submitted product worksheets that detail the classification, part number, country of origin and unit value of the materials used in the production of the goods. In addition, the worksheets state all other costs related to the production of the goods, including direct and indirect labor costs, factory overhead and operating costs, and transportation, brokerage, duties and taxes. Finally, the worksheets include regional value-content calculations for each good. According to your submission, the regional value content of good A, the two types of cruise control switches, is 84.68 and 84.15 percent, respectively, and the regional value content of good B, the two types of cruise and sunroof switches, is 76.24 and 76.76 percent, respectively. The regional value-content calculations were made using the net cost method.

In addition, the worksheets provide information with respect to certain self-produced, or intermediate materials, used in the production of the goods. The materials used to produce the intermediate materials undergo a change in classification as the result of which the intermediate materials qualify as originating materials under NAFTA. Both self-produced materials have been designated as intermediate materials and are classified in tariff item 8538.90.20, HTSUS.

The applicable rule of origin for heading 85.36 requires either that the good undergo a change in classification, or that it undergo a change in classification and satisfy a regional value-content test. In the instant case, the goods fail the rule requiring simply that each of the non-originating materials undergo a change in classification. Consequently, under the second, alternative rule of origin for heading 85.36, both a change in classification and a regional value-content test are required. You have concluded that both of these requirements have been met but have asked that we review the regional value-content calculation.

ISSUE:

The issue presented is whether the goods satisfy the fifty percent regional value-content requirement under the net cost method such that they qualify as originating goods for purposes of NAFTA.

LAW AND ANALYSIS:

The Appendix to part 181, Customs Regulations, (19 C.F.R. pt. 181.131 app.; the NAFTA Rules of Origin Regulations (the "ROR")), provides at section 4(2)(b), that a good originates in the territory of a NAFTA country where each of the non-originating materials used in the production of the good undergoes a change in tariff classification as the result of production occurring in one or more of the NAFTA countries, and the good satisfies the applicable regional value-content requirement. Pursuant to section 6(6) of the ROR, the regional value content of the goods must be calculated under the net cost method if, inter alia, the good is provided for in a tariff provision listed in Schedule IV and is for use in a motor vehicle described in section 6(6)(d)(i) of the ROR, either as original equipment, or as an after market part. The goods are provided for in a tariff provision listed in Schedule IV (subheading 8536.50) and are for use as original equipment in a motor vehicle referred to in section 6(6)(d)(i) of the ROR. Accordingly, the regional value content of the goods must be calculated under the net cost method.

Net Cost/Total Cost

In accordance with section 6(3) of the ROR, the net cost of a good is determined in accordance with section 6(11). Section 6(11) sets forth several options for determining the net cost of a good, all of which involve the calculation of the producer's total cost. For example, the producer may choose to compute net cost by calculating the total cost incurred with respect to all goods it produces, less any "excluded costs" included in total cost. Under this option, the resulting difference is reasonably allocated to the good in accordance with Schedule VII of the Annex to the ROR.

Pursuant to section 6(12)(a) of the ROR, the term "total cost" consists of "all product costs, period costs and other costs that are recorded, except as otherwise provided...on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made." For purposes of calculating total cost, the value of materials is determined in accordance with section 7(1), and the value of intermediate materials, in accordance with section 7(9). However, the value of indirect materials, packing materials and containers is based on the costs recorded on the books of the producer of those materials. Similarly, product costs, period costs and other costs, except for those described above, are valued based on the costs recorded on the books of the producer of those materials. 19 C.F.R. pt. 181 app., ROR, section 6(12)(b)(i)-(iv).

Under cover of your facsimile transmission of March 13, 1995, you provided revised worksheets with respect to the regional value content of the goods. Accordingly, this ruling is based on the information contained in the revised worksheets rather than on the information submitted in the ruling request. The revised worksheets specify the value of originating and non-originating materials, and the value of intermediate materials. In addition, the information submitted identifies the following: the cost of direct and indirect labor; factory overhead and operating costs; transportation costs, brokerage fees, and customs duties and taxes incurred with respect to both originating and non-originating materials; and the cost of waste and spoilage less recoverable scrap and by-product. Based on the information submitted, the regional value content of the two types of good A is, respectively, 84.68 and 84.15 percent, and that of the two types of good B, respectively, is 76.24 and 76.76 percent. Thus, in all cases the regional value content exceeds the 50 percent required under the applicable rules of origin. Provided your calculations are correct, the subject goods qualify as originating goods under section 4(2) of the ROR. However, this conclusion is predicated on our having made certain assumptions with respect to the information underlying your regional value-content calculations.

First, in regard to materials, section 7(1) of the ROR sets forth, with the exception of certain non-originating materials, the manner in which materials used in the production of a good are valued for purposes of determining total cost. If the material was imported by the producer of the good into the territory of the NAFTA country in which the good was produced, its value would be its customs value. ROR, section 7(1)(a). However, if the material was acquired by the producer of the good from another person located in the territory in which the good was produced, its value would be determined in accordance with Schedule VIII. ROR, section 7(1)(b). In your letter of May 13, 1994, you state that certain materials used in the production of the goods are purchased by Company X from suppliers in the U.S., or from suppliers in non-NAFTA countries, and shipped, on a consignment basis, directly to the producer. In view of this we have assumed that the value of these materials as shown on your worksheets was based on their customs value. Other materials used in the production of the goods were purchased by the producer. Provided the materials were purchased from another person in Mexico, we have assumed that the value of these materials stated on the worksheets reflects their value as determined in accordance with Schedule VIII.

Furthermore, both the customs value and the value determined under Schedule VIII should include the costs set forth in section 7(1)(c)-(f) of the ROR, to the extent those costs are not already included in the value of the materials. The worksheets show separate breakouts for transportation, customs brokerage fees, duties and taxes paid or payable, and the cost of waste and spoilage minus reusable scrap or by-product. While you have properly included these costs in your calculation of total cost, pursuant to section 7(1)(c)-(f), these amounts should be included as part of the value of materials, rather than appear as separate line items. However, these costs should be included only to the extent that they are recorded on the books of the producer, i.e., on Company Y's books. For purposes of this ruling we have assumed that these costs were so recorded.

You have also advised that intermediate materials are used in the production of the goods. Under section 7(4) of the ROR, an "intermediate material" may be designated "for purposes of calculating the regional value-content of a good." You have advised that the self-produced materials used in the production of goods A and B have been so designated. Pursuant to section 7(6), the value of intermediate materials is determined, at the choice of the producer, with respect to:

(a) the total cost incurred with respect to all goods produced by the producer, calculated on the basis of the costs that are recorded on the books of the producer, that can be reasonably allocated to that intermediate material in accordance with Schedule VII; or

(b) the aggregate of each cost, calculated on the basis of costs that are recorded on the books of the producer, that forms part of the total cost incurred with respect to that intermediate material that can be reasonably allocated to that intermediate material in accordance with Schedule VII.

For purposes of this ruling we have assumed that the value of the intermediate materials used in the production of good A and good B was determined in conformity with the above and therefore reflects costs recorded on Company Y's books.

In addition, according to the worksheets you submitted, the net cost of the goods includes certain direct and indirect labor costs, and factory overhead and operating costs. Under section 6(12) of the ROR, total cost includes product costs, period costs and other costs recorded on the books of the producer. Thus, in order for the costs identified on the worksheets to be included as part of the net cost of the goods they would have to have been recorded on the books of the producer.

Based on the worksheets, you have determined the total cost of goods A and B, but have adjusted this amount to exclude certain packing costs associated with shipping the goods to the U.S. Under the three options set forth in section 6(11), certain costs are excluded from the calculation of total cost. The term "excluded costs" refers to "sales promotion, marketing and after-sales costs, royalties, shipping and packing costs and non-allowable interest costs." The term "shipping and packing costs" is defined as "costs incurred in packing a good for shipment and shipping the good from the point of direct shipment to the buyer, excluding the costs of preparing and packaging the goods for retail sale. ROR, section 2(1). From your total cost figure you have deducted an amount for shipping and packing costs." Nevertheless, shipping and packing costs, as well as the other "excluded costs" should be excluded from total cost only to the extent that they were included in that total cost. In the instant case the shipping and packing costs were included in total cost and were therefore properly excluded from total cost.

Value of Non-Originating Materials

In regard to the value of non-originating materials used in the production of the goods we note the following. First, you have advised that the goods are classified in tariff item 8536.50.8060, HTSUS, and will be used as original equipment in automobiles. Pursuant to section 2(1) of the ROR, the term "light-duty automotive good" is defined in pertinent part as a "good of a tariff provision listed in Schedule IV that is subject to a regional value-content requirement and is for use as original equipment in the production of a light duty vehicle." Subheading 8536.50 is among the tariff provisions listed in Schedule IV, and automobiles are light-duty vehicles within the meaning of section 2(1) of the ROR. Accordingly, the instant goods meet the definition of "light-duty automotive good."

Second, section 9(1) of the ROR provides that "the value of non-originating materials used by the producer in the production of the good shall be the sum of the values of the non-originating materials that are traced materials and are incorporated into the good." The instant goods incorporate traced materials as defined by section 8 of the ROR; consequently, the value of the non-originating materials used in the production of the instant goods is the sum of the values of the traced materials incorporated into the goods. Based on the information submitted, the value of the traced materials incorporated in the goods is, respectively, 0.642 for good A, and 1.492 for good B. While no information has been provided in this respect, we have assumed that the value of traced materials was determined in accordance with section 9(2) of the ROR.

Reconciliation

Finally, please note that in cases where the regional value-content determination is based on estimated costs, the producer has an obligation to perform a reconciliation at year-end.

(7) Where the producer of a good has calculated the regional value content of the good on the basis of estimated costs, including standard costs, budgeted forecasts or other similar estimating procedures, before or during the period chosen under subsection (1), the producer shall conduct an analysis, at the end of the producer's fiscal year following the end of that period, of the actual costs incurred over the period with respect to the production of the good and, if the good does not satisfy the regional value content requirement on the basis of the actual costs during that period, immediately inform any person to whom the producer has provided a Certificate of Origin for the good, or a written statement that the good is an originating good, that the good is a non-originating good.

19 C.F.R. pt. 181 app., ROR, section 12(7).

HOLDING:

Based on the information presented, the regional value content of the subject goods exceeds the fifty percent level required under the net cost method such that the goods qualify as originating under section 4(2) of the ROR. (19 C.F.R. pt. 181 app., ROR, 4(2)).

This holding applies only to the specific factual situation and merchandise identified in the ruling request. This position is clearly set forth in section 19 C.F.R. § 181.100(a)(2), 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,


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