Internal Advice Regarding the "Value of Materials" Under the U.S./Canada Free Trade Agreement

HQ 544834 December 3, 1991 VAL CO:R:V:C 544834 ML CATEGORY: Valuation Regional Director Regulatory Audit Division Northeast Region RE: Internal Advice Regarding the "Value of Materials" Under the U.S./Canada Free Trade Agreement Dear Mr. Battaglioli: This is in response to a request for internal advice, dated October 24, 1991 (AUD-1-0:RA JMP), regarding the "value of materials" which you believe are assists. In order for you to complete your calculation of the "50 percent test" you query as to whether the value of materials includes "the price paid...and, when not included in the price paid...the following costs...the value of goods and services relating to all materials determined in accordance with Subparagraph 1(b) of Article 8 of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade...." FACTS: The first situation you describe involves non-territorial transmissions sold by Company X, a foreign corporation located in a non-CFTA country, to Company Z, a U.S. corporation, for $600. Company Z, then sold these transmissions to Company Y, a Canadian corporation, for $300. Company Y then assembled the transmissions into automobiles which were subsequently imported into the United States by Company P, the U.S. parent company of Company Z. You inquire as to whether an additional $300 should be added to the value of the non-originating transmissions. The second situation you have presented relates to transmissions sold by Company X directly to Company Y for $300. You found that identical transmissions were sold by Company X to Company Z for $600 and that prior to the implementation of the CFTA, Company X still sold transmissions to Company Z for $600. Therefore, it appears to you that the relationship of the three parties has affected the price as between Company X and Company Y. You ask if a $300 assist should be added to the value of all transmissions. ISSUE: Under the situations described above: (1) Whether the price paid by the producer, Company Y, to Company Z for transmissions must be accepted. (2) Whether an addition should be made to the value of all transmissions sold to Company Y. LAW AND ANALYSIS: According to the US/Canada Free Trade Agreement, Article 304, the value of materials originating in the territory of either Party or both Parties means the aggregate of: a) the price paid by the producer of an exported good for materials originating in the territory of either Party or both Parties or for materials imported from a third country used or consumed in the production of such originating materials; and b) when not included in that price, the following costs related thereto: i) freight, insurance, packing and all other costs incurred in transporting any of the materials referred to in subparagraph (a) to the location of the producer; ii) duties, taxes and brokerage fees on such materials paid in the territory of either Party or both Parties iii) the cost of waste or spoilage resulting from the use or consumption of such materials, less the value of renewable scrap or by-product; and iv) the value of goods and services relating to such materials determined in accordance with subparagraph 1(b) of Article 8 of the Agreement on Implementation of Article VII of the General Agreement of Tariffs and Trade (GATT); Subparagraph 1(b) of Article 8 of the Agreement on Implementation of Article VII of the GATT states in relevant part, that in determining the customs value, there shall be added to the price actually paid or payable for the imported goods: (b) the value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of the imported goods, to the extent that such value has not been included in the price actually paid or payable; (i) materials, components, parts and similar items incorporated in the imported goods;... . Your first question was whether the $300 price paid by the producer, Company Y, to Company Z for transmissions that Company Z paid Company X $600 for must be accepted. According to the provisions cited above, an additional $300 would be added to the price Company Y paid Company Z for the transmissions as the transmissions were sold at reduced cost for use in connection with the production of the imported goods. Your second inquiry was whether a $300 addition should be made to the value of all transmissions sold to Company Y, even when sold directly from Company X. Consistent with Article 304 of the U.S./Canada Free Trade Agreement, in situations where Company X sold transmissions directly to Company Y the price paid by Company Y was the price of the materials. That was the price paid by the producer of the exported good for materials imported from a third country used in the production of the originating material. HOLDING: (1) An additional amount would be added to the price Company Y paid Company Z for transmissions which were sold to Company Z by Company X at a greater price, according to subparagraph 1(b) of Article 8 of the Agreement on Implementation of Article VII of the Gatt. (2) An addition would not be made for transmissions sold directly to Company Y by Company X as the price paid by the producer was the price of the materials, consistent with Article 304 of the U.S./Canada Free Trade Agreement. Sincerely, Harvey B. Fox, Director Office of Regulations and Rulings