HQ 563352 - Treatment of material costs under the Caribbean Basin Economic Recovery Act - United States International Trade Commision Rulings

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HQ 563352

December 12, 2005

CLA-02 RR:CTF:VS 563352 DCC

CATEGORY: CLASSIFICATION

Mr. Melvin S. Schwechter
LeBoeuf, Lamb, Greene & Mac Rae, LLP
1875 Connecticut Avenue, NW
Washington, D.C. 20009-5728

RE: Treatment of material costs under the Caribbean Basin Economic Recovery Act

Dear Mr. Schwechter:

This is in response to your letter dated September 9, 2005, requesting a ruling on behalf of AFL Automotive, L.P. (“AFL U.S.”), regarding the treatment of certain material costs under the Caribbean Basin Economic Recovery Act (“CBERA”).

FACTS:

AFL-U.S. imports wire harnesses made in Honduras by a related manufacturer, AFL Honduras. AFL Honduras plans to purchase insulated copper wire produced in Nicaragua from an unrelated company. The Nicaraguan manufacturer will use copper wire and XLPE or PVC pellets made in the United States to produce the insulated wire.

The insulating material will be made in Nicaragua using XLPE or PVC pellets which are made in the United States. In Nicaragua, the XLPE or PVC pellets will be fed into an extruder machine where they will be melted. The melted PVC compound will be pumped through a die to form the melted compound around the bunched copper wire. For PVC-insulated wire, the article will be cooled with water.

For XLPE-insulated wire, melted XLPE compound will be formed around the stranded copper conductor which will then undergo a steam vulcanization process. This process involves steaming the wire at 405° F and at a pressure of 250 psi. As a result of the vulcanization process, the insulating material undergoes a chemical reaction causing crosslinking in the underlying polymer chain. After processing, XLPE insulated wire is suitable in applications where the required temperature range is up to 125° C.

Following production of the PVC and XLPE insulated wire, the unrelated supplier will ship the materials to AFL Honduras. AFL Honduras will use the PVC and XLPE insulated wire to produce wire harnesses in Honduras. You request a ruling as to whether the cost of insulated wire produced by an unrelated manufacturer may be used to satisfy the 35% value-content requirement.

ISSUE:

Whether the cost of insulated wire produced in Nicaragua may be used to satisfy the 35% value-content requirement under CBERA when used to produce wire harnesses by an unrelated manufacturer in Honduras.

LAW AND ANALYSIS:

Under CBERA, eligible articles the growth, product, or manufacture of a designated beneficiary country (“BC”), which are imported directly to the United States from a BC, qualify for duty-free treatment, provided the sum of (1) the cost or value of materials produced in a BC, or two or more BCs, plus (2) the direct costs of processing operations performed in a BC, or two or more BCs, is not less than 35 percent of the appraised value of the article at the time it is entered into the United States. See 19 U.S.C. 2703(a)(1).

To calculate the cost or value of materials, 19 C.F.R. 10.196(c) provides:

Determination of cost or value of materials produced in a beneficiary country. The cost or value of materials produced in a beneficiary country or countries includes: The manufacturer’s actual cost for the materials; When not included in the manufacturer’s actual cost for the materials, the freight, insurance, packing, and all other costs incurred in transporting the materials to the manufacturer’s plant; The actual cost of waste or spoilage (material list), less the value of recoverable scrap; and Taxes and/or duties imposed on the materials by any beneficiary country, provided they are not remitted upon exportation.

On April 28, 1994, CBP published a final rule in the Federal Register entitled “Elimination of Certain Documentation Requirements for Articles Entered under Various Special Tariff Treatment Programs and Provisions.” Treasury Decision 94-47, 28 Cust. B. & Dec. No. 21. That document amended the CBP Regulations (19 C.F.R. 10.198) by eliminating the requirement that importers use the “Certificate of Origin Form A” in connection with claims for duty-free treatment under the Caribbean Basin Initiative (“CBI,” now known as CBERA). As revised, the CBI Declaration now serves as the basic documentary evidence to support claims for duty-free treatment for merchandise not wholly the growth, product, or manufacture of the producing country. The amended regulations provided as follows:

§ 10.198 Evidence of country of origin.
Shipments covered by a formal entry.
Merchandise not wholly the growth, product, or manufacture of a beneficiary country. Declaration. In a case involving merchandise covered by a formal entry which is not wholly the growth, product, or manufacture of a single beneficiary country, the exporter or other appropriate party having knowledge of the relevant facts in the beneficiary country where the article was produced or last processed shall be prepared to submit directly to the district director, upon request, a declaration setting forth all pertinent detailed information concerning the production or manufacture of the article. When requested by the district director, the declaration shall be prepared in substantially the following form:

CBI DECLARATION

I, (name), hereby declare that the articles described below (a) were produced or manufactured in (country) by means of processing operations performed in that country as set forth below and were also subjected to processing operations in the other beneficiary country or countries (including the Commonwealth of Puerto Rico and the U.S. Virgin Islands) as set forth below and (b) incorporate materials produced in the country named above or in any other beneficiary country or countries (including the Commonwealth of Puerto Rico and the U.S. Virgin Islands) or in the customs territory of the United States (other than the Commonwealth of Puerto Rico) as set forth below:

Number and date of invoices

Description of articles and quantity
Processing operations performed on articles Materials produced in a beneficiary country or in the U.S.

Description of processing operations and country of processing Direct costs of processing operations
Description of materials, production process, and country of production Cost or value of material

Date

Address

Signature

Title

Retention of records and submission of declaration. The information necessary for preparation of the declaration shall be retained in the files of the party responsible for its preparation and submission for a period of 5 years. In the event that the district director requests submission of the declaration during the 5-year period, it shall be submitted by the appropriate party directly to the district director within 60 days of the date of the request or such additional period as the district director may allow for good cause shown. Failure to submit the declaration in a timely fashion will result in a denial of duty-free treatment.

Verification of documentation. Any evidence of country of origin submitted under this section shall be subject to such verification as the district director deems necessary. In the event that the district director is prevented from obtaining the necessary verification, the district director may treat the entry as dutiable.

For purposes of determining the 35% value-content requirement, an amount not to exceed 15% of the appraised value of the article at the time of entry may be attributed to the cost or value of materials produced in the U.S. customs territory. See 19 U.S.C. § 2703(a)(1); 19 C.F.R. 10.195(c).

The issue presented in this case is whether the cost of raw materials (PVC or XLPE pellets) and processing to produce insulated wire in Nicaragua may be used to satisfy the 35% value-content requirement under CBERA when used to produce wire harnesses by an unrelated manufacturer in Honduras. Counsel does not claim that the cost of the copper wire, which only undergoes a single substantial transformation, should be treated as a beneficiary country material.

We agree with Counsel’s assertion that the cost of materials used by an unrelated manufacturer may be included in the calculation of the value of materials produced in a beneficiary country provided that such materials undergo a double substantial transformation and the claim may be substantiated with documentary evidence.

In this case, Counsel states that the PVC and XLPE pellets are produced in the United States, and that these materials are used in Nicaragua to produce the PVC- and XLPE-insulated copper wire, which is then used to produce the finished wire harnesses in Honduras. CBP has previously held that such processing constitutes a double substantial transformation of PVC and XLPE pellets. See Headquarters Ruling Letter (“HRL”) 563086, dated November 22, 2004; HRL 562743, dated July 2, 2003; and HRL 561245, dated June 24, 1999. Based on previous CBP rulings we find that the cost of the PVC or XLPE pellets made in the United States may be included in the calculation of the value of materials produced in a beneficiary country, up to a maximum of 15% of the customs value of the imported wire harnesses or without limitation provided that such materials undergo a double substantial transformation.

Pursuant to 19 C.F.R. 10.198(b)(1), the exporter (i.e., AFL Honduras), or other appropriate party, must be prepared to submit upon request a declaration with all pertinent information required to substantiate a claim for duty-free treatment under CBERA. Furthermore, any records used to prepare the declaration must be retained by the responsible party for five years in the event CBP determines it is necessary to verify a claim. Records to substantiate the cost or value of materials produced in a beneficiary country may include — but are not limited to — commercial invoices and purchase orders, records of payment, manufacturing records, and transportation records such as bills of lading, for both the raw materials (i.e., PVC and XLPE pellets produced in the United States) and intermediate goods (i.e., insulated copper wire produced in Nicaragua). In the event the information necessary to determine the cost or value of a material is not provided, the appraising officer may estimate the value using any reasonable means available. 19 C.F.R. 10.196(c).

HOLDING:

Based on the information provided, the cost of raw materials that undergo a double substantial transformation in a beneficiary country (including the cost of the PVC and XLP pellets that will be produced in the United States up to 15% of the customs value of the imported wire harnesses, or without limitation provided that such materials undergo a double substantial transformation) and processing to produce insulated wire for use in the production of wire harnesses in Honduras may be included in the cost or value of material produced in a beneficiary country for purposes of the 35% value-content requirement under CBERA, provided the exporter or other appropriate party is prepared to provide a declaration and any commercial documents CBP deems necessary to verify the claim.

A copy of this ruling should be attached to the entry documents filed at the time this merchandise is entered. If the documents have been filed without a copy, this ruling should be brought to the attention of the CBP officer handling the transaction.

Sincerely,

Monika R. Brenner, Chief
Valuation and Special Programs Branch

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