HQ 545680 - Article 509; NAFTA: regional value content; net cost method; shipping tubs and pallets; value of packing materials and containers should be disregarded for purposes of determining whether a good satisfies a regional value-content requirement. - United States International Trade Commision Rulings

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HQ 545680

July 31, 1995

VAL R:C:V 545680 CRS

CATEGORY: VALUATION

Mr. Frank Parker, Jr.
Parker & Co.
P.O. Box 271
Brownsville, TX 78521

RE: Article 509; NAFTA: regional value content; net cost method; shipping tubs and pallets; value of packing materials and containers should be disregarded for purposes of determining whether a good satisfies a regional value-content requirement.

Dear Mr. Parker:

This is in further reply to your letter of May 4, 1994, submitted on behalf of General Safety Corporation (GSC), concerning plastic totes and pallets. The classification and entry issues raised in your letter were addressed under cover of Headquarters Ruling Letter (HRL) 956547, dated October 12, 1994, and HRL 225469, dated August 24, 1994. This letter concerns the third issue raised by your inquiry, i.e., the value of the totes and pallets for purposes of determining the regional value content of a good under the North American Free Trade Agreement (NAFTA). We regret the delay in responding.

FACTS:

GSC's Mexican subsidiary produces seat belts (the "good(s)") at its Valle Hermoso plant. The finished seat belts are shipped to GSC's factory in Michigan where they are inspected, and installed in seat belt retractor assemblies. In addition to the seat belts, the Valle Hermoso plant produces plastic totes (shipping tubs) and pallets which are date stamped with the month of production and used to transport the goods and materials used in the production of the goods between GSC's U.S. and Mexican plants. The tubs and pallets have been designated as "instruments of international traffic." HRL 956547.

Currently, the shipping tubs and pallets produced by the Valle Hermoso subsidiary (the "producer") are recorded on GSC's books on a depreciated basis. As a result, it is possible that in the future the individual shipping tubs and pallets used in a particular shipment will have different values to the extent that they were produced at different times. Accordingly, you have asked whether the value of the shipping tubs and pallets could be based on an average price that, in all cases, would exceed their depreciated value, or whether the actual book values must instead be used.

ISSUE:

The issue presented is whether, in determining the regional value content of a good, the value of shipping tubs and pallets used to transport the good and materials used in the production of the good, can be determined with respect to amounts recorded on the books of a person other than the producer of the good.

LAW AND ANALYSIS:

The Appendix to part 181, Customs Regulations (the "NAFTA Rules of Origin Regulations" (the "ROR")), provides that in certain situations, the net cost method must be used to determine the regional value content of a good. 19 C.F.R. pt. 181. In particular, the net cost method is required for any good provided for in a tariff provision listed in Schedule IV of the Annex to the ROR, or for any good that: (1) is an automotive component assembly, automotive component, sub-component or listed material; and (2) is for use in a motor vehicle. Seat belts used as parts in motor vehicles are classified in subheading 8708.21 of the Harmonized Tariff Schedule of the United States. Subheading 8708.21 is one of the provisions listed in Schedule IV. Accordingly, the regional value content of the goods produced by the Valle Hermoso plant must be determined under the net cost method.

Pursuant to 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. Under 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 packing materials and containers is determined with respect to the cost recorded on the books of the producer. 19 C.F.R. pt. 181 app., section

You have asked whether the value of shipping tubs and pallets used to transport the good and materials used in the production of the good, can be determined with respect to amounts recorded on the books of a person other than the producer of the good. However, while the value of packing materials and containers must be taken into account in calculating total cost, section 7 of the ROR provides:

(13) For purposes of determining whether a good is an originating good, packing materials and containers in which the good is packed

(a) shall be disregarded for purposes of determining whether

(i) the non-originating materials used in the production of the good undergo an applicable change in tariff classification, and

(ii) the good satisfies a regional value-content requirement; and

(b) if the good is subject to a regional value-content requirement, the value of the packing materials and containers shall be the costs thereof that are recorded on the books of the producer of the good.

19 C.F.R. pt. 181, app., section 7(13); see also, NAFTA, Article 410.

Thus, to restate, the cost of packing materials and containers is disregarded for purposes of determining the regional value content of a good. In the instant case, the cost of the shipping tubs is recorded on GSC's books rather than the producer's; consequently, the value of the shipping tubs and pallets is not reflected in the total cost of the good, and no adjustment to the total cost calculation is necessary. On the other hand, if the value of the shipping tubs and pallets were recorded on the producer's books, section 7(13) of the ROR would require that they be disregarded in determining the good's regional value content, and an appropriate adjustment would be necessary.

When the imported seat belts are used by GSC to produce seat belt retractor assemblies they are considered to be a material rather than a good. From this perspective, please note that GSC should include the value of the shipping tubs and pallets in calculating the value of materials that GSC uses in the production of the assemblies. For purposes of determining the value of materials under section 7 of the ROR, the shipping tubs and pallets would assume the same status as the good (i.e., originating or non-originating), and their value would be determined with respect to their customs value in accordance with Schedule VIII of the ROR.

HOLDING:

The value of the shipping tubs and pallets should be disregarded for purposes of determining whether a good satisfies a regional value-content requirement.

Sincerely,

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