HQ 546158 - Article 509; NAFTA; advance ruling; regional value content; net cost; accumulation - United States International Trade Commision Rulings

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HQ 546158

June 13, 1996

VAL RR:IT:VA 546158 CRS

CATEGORY: VALUATION

David R. Ostheimer, Esq.
Lamb & Lerch
233 Broadway
New York, NY 10279

RE: Article 509; NAFTA; advance ruling; regional value content; net cost; accumulation

Dear Mr. Ostheimer:

This is in reply to your letter of October 2, 1995, on behalf of your client, Converse, Inc., in which you requested an advance ruling under section 181.93, Customs Regulations (19 C.F.R. ? 181.93), as to whether footwear uppers produced in Mexico qualify as originating goods under the North American Free Trade Agreement (NAFTA). Pursuant to your request, the cost information submitted in connection with your ruling request will be treated as confidential in accordance with 19 C.F.R. ? 181.93(b)(7). We regret the delay in responding.

You also asked whether the footwear uppers satisfy the country of origin marking requirements of 19 C.F.R. pt. 134, and the rules of origin requirements of 19 C.F.R. pt. 102. These issues have been referred to the Special Classification and Marking Branch which will respond to you directly under separate cover.

FACTS:

Converse imports cotton, non-formed, footwear uppers assembled in Mexico by its wholly-owned Mexican subsidiary, Calzado Deportivo de Reynosa, S.A. de C.V. ("Reynosa"). The component materials used in the production of the footwear uppers will be purchased by Converse from various sources, packaged into kits in the United States and exported to Mexico. Alternatively, you state that the materials used to produce the footwear uppers will be shipped by Converse to Mexico in several, separate, export shipments, where each individual shipment consists of less than complete kits but which collectively, contain all the materials necessary to assemble the uppers. You state that the footwear uppers assembled by Reynosa are classified in subheading 6406.10, Harmonized Tariff Schedule of the United States (HTSUS).

Some of the materials used in the production of the good, such as eyelets, washers, ankle patches and thread, are purchased by Converse as originating materials from third party vendors in the U.S. Converse performs no additional work in respect of these originating materials. Converse purchases still other originating materials, such as #10 cotton duck woven fabric, #1.56 cotton duck woven fabric, cement and eyestay reinforcement fabric, from third party vendors in the U.S. Converse uses these items at its factory in Lumberton, North Carolina, to produce other, further-manufactured parts such as rubber compounds, counters, tongues, counter tape, quarters, outside backstays and eyestay reinforcements. In addition, Converse purchases certain non-originating materials, such as #1.41 and #1.42 cotton duck woven fabric and natural rubber, from foreign suppliers or from third party vendors in the U.S. The non-originating materials are also used by Converse at its Lumberton factory to produce further-manufactured component materials such as calendared sheets of rubber compound, counters, tongues and quarter linings. Irrespective of whether the materials are exported to Reynosa in kit form, or in separate shipments, Converse will supply Reynosa with all the component parts necessary to assemble the footwear uppers that are ultimately imported into the U.S.

You posit three scenarios in regard to the origin of the footwear uppers imported into the U.S. Under the first, you contend that the footwear uppers qualify for NAFTA preference on the basis that they were produced entirely in the territory of one or more NAFTA countries exclusively from originating materials. Under the second and third scenarios, you contend that the uppers qualify as originating goods because they satisfy the applicable rule of origin for subheading 6406.10, HTSUS, which requires that each of the non-originating materials used in the production of the good undergo a change in classification and that the good have a regional value-content requirement of not less than fifty-five percent under the net cost method.

In respect of the first scenario, which applies only to materials exported in kit form, you state that the only non-originating materials contained in the kits exported by Converse, viz., # 1.41 and # 1.42 cotton woven fabric and natural rubber, will satisfy the change in tariff classification requirement when they are imported into Mexico. Specifically, you state that based on General Rule of Interpretation (GRI) 2(a), these materials will undergo a change in classification from, respectively, headings 5209 and 4001, Harmonized Tariff Schedule of the United States (HTSUS), to subheading 6406.10, HTSUS, which provides for footwear uppers and parts thereof. Moreover, you contend that, when imported into Mexico, the regional value content of the kits will exceed the fifty-five percent requirement set forth in the applicable rule of origin. On the basis of the calculation attached as Exhibit 1 to your submission, you state that the regional value content of the unassembled footwear upper kits shipped by Converse to Mexico is [*****] percent. Accordingly, it is your position that all the materials used to produce the footwear uppers are originating and that, consequently, the finished footwear uppers imported into the U.S. will qualify as originating goods on the basis that they were produced entirely in the territory of one or more NAFTA countries exclusively from originating materials.

In the second scenario, the materials are exported to Reynosa either in kit form or in separate shipments. With two exceptions, all of the materials used in the production of the finished uppers will qualify as originating materials. Converse will provide Reynosa with certificates of origin for the originating materials, stating the basis on which the materials originate. However, two of the materials produced by Converse at its Lumberton factory, the tongue and the quarter lining, will not qualify as originating materials at the time they are exported by Converse to Mexico. Accordingly, for purposes of determining the net cost of the footwear uppers, you have advised that Reynosa, the producer of the good, wishes to accumulate Converse's production in respect of the tongue and quarter lining incorporated into the uppers. On this basis, as set forth in Exhibit 2 to your submission, you state that the regional value-content of the finished uppers will be [*****] percent. In conjunction, Reynosa will a obtain a statement from Converse stating both the net cost incurred by Converse in respect of the non-originating materials and the value of the non-originating materials.

In the third scenario, Reynosa contemplates using accumulation to qualify all the materials that are exported by Converse to Reynosa and used in the production of the finished uppers. On this basis, as set forth in Exhibit 3 of your ruling request, the regional value content of the finished uppers under the net cost method is [*****] percent. This scenario, like the second scenario, is predicated on the assumption that Converse will export materials to Reynosa either in kit form or in separate shipments, where each individual shipment consists of less than complete kits but which collectively, contain all the materials necessary to assemble the uppers. As above, Reynosa will a obtain a statement from Converse stating both the net cost incurred by Converse in respect of the non-originating materials and the value of the non-originating materials.

ISSUES:

The issues presented are: (1) whether the finished footwear uppers good originate under the three scenarios set forth above such they are eligible for preferential tariff treatment under NAFTA; and (2) in this regard, whether in the second and third scenarios the producer's use of the accumulation method is acceptable in determining the regional value content of the finished uppers.

LAW AND ANALYSIS:

The Appendix to the final NAFTA Rules of Origin Regulations ("ROR"; 19 C.F.R. pt. 181 app.; NAFTA Rules of Origin Regulations, as amended by 60 Fed. Reg. 46,334, 46249, T.D. 95-68, 29:38 Cust. B. & Dec. 1), provides, inter alia, that a good originates in the territory of a NAFTA country if each of the non-originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries and the good satisfies the applicable regional value-content requirement, where the applicable rule of origin specifies both a change in tariff classification and a regional value-content requirement. ROR, ? 4(2)(b). A good also originates in the territory of a NAFTA country if it is produced entirely in the territory of one or more of the NAFTA countries exclusively from originating materials. ROR, ? 4(3).

In the instant case, the applicable rule of origin for the imported footwear uppers, which you state are classified in subheading 6406.10, HTSUS, directs that the regional value content of the good be determined in accordance with the net cost method. Furthermore, the net cost method must be used where the producer of the good chooses to accumulate with respect to the good. Accordingly, for the above reasons, the regional value content of the imported footwear uppers must be determined under the net cost method.

In the first scenario you maintain that the footwear uppers assembled in Mexico and imported into the U.S. originate pursuant to section 4(3) of the ROR in that they are produced in Mexico exclusively from originating materials, viz., the kits supplied by Converse. In this regard, you contend that the kits constitute originating materials when used in the production of the good because: (1) the non-originating materials contained in the kits satisfy the change in classification requirement when exported from the U.S. to Mexico; and (2) the kits satisfy the regional value-content requirement set forth in the applicable rule of origin.

As to the first contention, you state that all the non-originating materials contained in the kits, viz., the cotton woven fabric of heading 5209, HTSUS, and the natural rubber of heading 4001, HTSUS, are classified in headings outside Chapter 64, HTSUS. At the Lumberton factory, the originating and non-originating materials are processed and combined to form kits which you allege contain, in unassembled form, all the components of a footwear upper of subheading 6406.10, HTSUS.

Subheading 6406.10, HTSUS, provides for footwear uppers and parts thereof. GRI 2(a), HTSUS, provides:

Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as entered, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), entered unassembled or disassembled.

Assuming for purposes of this ruling that the kits have the essential character of a complete or finished article of subheading 6406.10, HTSUS, it follows that since the non-originating materials included in the kits are classified outside Chapter 64, HTSUS (according to your contention, in headings 4001 and 5209, HTSUS), they undergo a change in classification to subheading 6406.10, HTSUS, when put up in kit form and exported to Mexico. Accordingly, the materials used in the production of the finished uppers satisfy the first prong of the applicable rule of origin.

In support of your position that the good imported into the U.S. is made entirely from originating materials you have also submitted a net cost calculation in respect of the kits exported to Mexico. The net cost of a good is determined in accordance with section 6(11), pursuant to one of several possible options, all of which involve a calculation of the producer's total cost. The term "total cost" is defined by section 2(6) of the ROR which provides, inter alia, that for purposes of determining net cost under section 6(11):

(a) total cost consists of all product costs, period costs and other costs that are recorded, except as otherwise provided in paragraphs (b)(i) and (ii), on the books of the producer without regard to the location of the persons to whom payments with respect to those costs are made;

(b) in calculating total cost,

(i) the value of the materials, other than intermediate materials, indirect materials and packing materials and containers, shall be the value determined in accordance with section 7(1),

(ii) the value of intermediate materials shall be determined in accordance with section 7(9),

(iii) the value of indirect materials and the value of packing materials and containers shall be the costs that are recorded on the books of the producer for those materials, and

(iv) product costs, period costs and other costs, other than costs that are referred to in subparagraphs (i) through (iii), shall be the costs thereof that are recorded on the books of the producer of those materials.

Id. at 46,393, ROR, pt I, ? 2(6). In regard to the value of materials, section 7(1) provides that where the material is imported by the producer of the good into the territory of the NAFTA country in which the good is produced, the value of a material used in the production of the good shall be the customs value of the material with respect to that importation. However, if the customs value of the material was not determined in a manner consistent with Schedule VIII of the ROR, section 7(2) provides that the value of the material shall be determined in accordance with Schedule VIII with respect to that material. For purposes of this ruling we have assumed that the value of the materials supplied to Reynosa by Converse was based on the customs value as determined in accordance with section 7.

Based on your calculation as set forth in Exhibit 1 of your submission, the net cost of the kits going into Mexico is [*****] percent. Assuming that the net cost calculation was determined in accordance with section 6(11) of the ROR, the kits were originating goods when exported to Mexico. Reynosa used the kits in Mexico to produce the footwear uppers that are subsequently exported to Converse in the U.S. Accordingly, it is our position that the finished uppers are produced entirely in Mexico from originating materials and thus originate pursuant to section 4(3) of the ROR. To this end, Reynosa may issue a certificate of origin (Customs Form 434) for the good based on preference criterion "C". Please note, however, that this determination has no bearing on the question of whether the kits are an originating good and qualify for NAFTA preference when exported to Mexico, nor do we rule that the kits are in fact classified in subheading 6406.10, HTSUS, pursuant to GRI 2(a). The focus of this portion of the ruling is confined solely to the issue of whether the imported footwear uppers are produced exclusively from originating materials.

In the second and third scenarios you have asked if the finished uppers originate pursuant to section 4(2)(b) of the ROR, which provides that a good originates if each of the non-originating materials used in the production of the good undergoes the applicable change in tariff classification as a result of production occurring entirely in the territory of one or more of the NAFTA countries, and the good satisfies the applicable regional value-content requirement, where the applicable rule of origin specifies both a change in tariff classification and a regional value-content requirement. In the instant case, however, assuming the kits, i.e., the materials used in the production of the good, are classified as articles of subheading 6406.10, HTSUS, pursuant to GRI 2(a), the good itself will not meet the change in tariff classification required by the applicable rule of origin since both the kits and the finished uppers are classified in subheading 6406.10, HTSUS. Consequently, the finished uppers do not originate under section 4(2)(b).

However, there are exceptions to the change of tariff classification requirement. Section 4(4) of the ROR provides in pertinent part that a good originates in the territory of a NAFTA country where:

(a) except in the case of a good provided for in any of Chapters 61 through 63,

(i) the good is produced entirely in the territory of one or more of the NAFTA countries,

(ii) one or more of the non-originating materials used in the production of the good do not undergo an applicable change in tariff classification because the materials were imported together, whether or not with originating materials, into the territory of a NAFTA country as an unassembled or disassembled good, and were classified as an assembled good pursuant to Rule 2(a) of the General Rules for the Interpretation of the Harmonized System,

(iii) the regional value content of the good, calculated in accordance with section 6, is not less than 60 percent where the transaction value method is used, or is not less than 50 percent where the net cost method is used, and

(iv) the good satisfies all other applicable requirements of this Appendix, including any applicable, higher regional value-content requirement provided for in section 13 or Schedule I....

ROR, ? 4(4)(a). In the instant case, the imported footwear uppers are classified in subheading 6406.10, HTSUS, i.e., outside of Chapters 61 through 63, are produced entirely in a NAFTA country, Mexico, and certain of the non-originating materials supplied by Converse and used in the production of the uppers are themselves classified in subheading 6406.10, HTSUS, and thus do not undergo a change in classification, since the kit is also classified in subheading 6406.10, HTSUS, pursuant to GRI 2(a). Thus, the good satisfies the first two requirements of section 4(4)(a); but, in order for the good satisfy the third and fourth requirements set forth in section 4(4)(a)(iii)-(iv) and thereby fall under one of the exceptions to the change in classification requirement, the good must satisfy the higher regional value-content requirement of Schedule I (which contains the applicable rule of origin for subheading 6406.10, HTSUS) which calls for a regional value content of not less than 55 percent under the net cost method.

You have advised that two of the materials used in the production of the good, viz., the tongue and quarter lining, will be produced by Converse at its Lumberton factory with the use of non-originating materials. At the time of their exportation to Mexico, neither the tongue nor the quarter lining will satisfy the regional value content required by the applicable rule of origin. Accordingly, you propose that Reynosa avail itself of the accumulation provision of section 14 of the ROR, which, for purposes of determining whether a good is an originating good, and subject to certain requirements, states that an exporter or producer of a good may choose to accumulate the production, by one or more producers in the territory of one or more of the NAFTA countries, of materials that are incorporated into that good such that the production of the materials shall be considered to have been performed by that exporter or producer.

In order to accumulate the material producer's production, section 14(2) provides that the producer of the good must have in its possession a statement signed by a producer of the material used in the production of the good. Pursuant to section 14(2)(a), this document must state "the net cost incurred and the value of non-originating materials used by the producer of the material in the production of that material," where

(i) the net cost incurred by the producer of the good with respect to the material shall be the net cost incurred by the producer of the material plus, where not included in the net cost incurred by the producer of the material, the costs referred to in sections 7(1)(c) through (e), and

(ii) the value of non-originating materials used by the producer of the good with respect to the material shall be the value of non-originating materials used by the producer of the material....

19 C.F.R. pt. 181, app., ? 14(2)(a) (emphasis added). Alternatively, the producer of the good must have a statement prepared in accordance with section 14(2)(b). Please note that for purposes of this ruling we have assumed that in respect of any accumulated production, the net cost incurred by Reynosa and the value of non-originating materials used by Reynosa were determined in accordance with sections 6(11), and 7, respectively . Furthermore, please note that the statement required under section 14(2)(a) must state the net cost incurred and the value of non-originating materials used by the producer of the material in the production of that material. Thus, the required statement must be submitted with each shipment in respect of each material whose production is accumulated by the producer of the good.

Alternatively, under section 14(3) of the ROR, an exporter or producer of a good may submit a statement signed by the producer of a material that is used in the production of the good that:
a) states the sum of the net costs incurred and the sum of the values of non-originating materials used by the producer of the material in the production of that material and identical materials or similar materials, or any combination thereof, produced in a single plant by the producer of the material over a month or any consecutive three, six or twelve month period that falls within the fiscal year of the producer of the good, divided by the number of units of materials with respect to which the statement is made....

19 C.F.R. pt. 181, app., ? 14(3)(a) (emphasis added). Thus, rather than submit a separate statement for each material on a per shipment basis, the exporter or producer of the good may average the sum of the net cost incurred and the value of non-originating materials. However, while the sum of these may be averaged over a period, they must once again be averaged with respect to each non-originating material.

In regard to accumulation, Exhibit 2 of your submission sets forth the regional value content of an assembled footwear upper using accumulation for the two materials you have identified as non-originating in consequence of their failure to meet the applicable regional value-content requirement when exported to Mexico. By accumulating the Converse's production in respect of the tongues and quarter linings incorporated into the finished footwear uppers, you calculate the regional value content of the good to be [*****] percent under the net cost method. In connection with the use of the accumulation provision, Reynosa will have a statement from Converse setting forth both the net cost incurred by Converse in producing the tongues and quarter linings and the value of the non-originating materials used by Converse in producing these items. Assuming that Reynosa has such a statement and that the statement is submitted in respect of each material whose production is accumulated in conformity with the requirements of either section 14(2) or section 14(3) and, in addition, that the net cost of the good is determined in accordance with section 6(11) of the ROR, and the value of non-originating materials used in the production of the good in accordance with section 7, the imported footwear uppers would qualify as an originating good under section 4(4)(a) of the ROR.

You have also asked whether the imported footwear uppers would originate if instead of kits, Converse were to supply Reynosa with a number of different shipments where each individual shipment consisted of less than complete kits but which collectively, contained all the materials necessary to assemble the footwear uppers. In this instance the good would meet the change in tariff classification requirement. Therefore, subject to the same assumptions as set forth above, viz., that statements were provided in conformity with section 14(2) or 14(3), and that the net cost of the good was determined in accordance with section 6(11) of the ROR and the value of non-originating materials in accordance with section 7, the footwear uppers would originate pursuant to section 4(2)(b) of the ROR.

The third scenario applies, once again, both in respect of materials supplied to Reynosa in kit form, as well as in the case of materials supplied in separate shipments. In regard to the change in classification requirement, the same considerations would apply as did apply in the second scenario. Thus, if Converse were to supply Reynosa with kits, the good would not meet the tariff shift rule; but, the good could still qualify by satisfying the provisions of the exception to the change in tariff classification requirement set forth in section 4(4)(a) of the ROR. If the materials were supplied to Reynosa in separate shipments, the good would meet the change in tariff classification requirement when imported into the U.S.

Under the third scenario you state that Reynosa proposes to use the accumulation provision in respect of all of Converse's production of materials for incorporation into the good, as opposed to the method set forth in the second scenario where only production related to the non-originating tongue and quarter lining was accumulated. In this scenario, based on the calculation set forth in Exhibit 3 of your submission, the good has a regional value content of [*****] percent. Once again, however, separate statements would have to be provided in respect of each material and for each shipment under section 14(2). In contrast, while averaging could be used under section 14(3) with the result that separate statement would not be needed for each shipment, statements would still have to be provided for each material. Assuming that the necessary statements are provided for each material, and that the net cost of the good was determined in accordance with section 6(11) of the ROR and the value of non-originating materials in accordance with section 7, the imported footwear uppers would qualify as an originating good under section 4(4)(a) of the ROR.

HOLDING:

In conformity with the foregoing, the good originates under the three scenarios set forth above such that it is eligible for preferential tariff treatment under NAFTA. Subject to the assumptions set forth above, Reynosa's use of the accumulation method is acceptable for purposes of determining the regional value content of the good.

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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