Treatment of Direct Labor Fringe Benefits under Generalized System of Preferences

HQ 555043 November 21, 1988 CLA-2 CO:R:C:V 555043 BJO CATEGORY: Classification Mr. Murray Citron Director of Purchasing MagneTek Universal Manufacturing 200 Robin Road Paramus, New Jersey 07652 RE: Treatment of Direct Labor Fringe Benefits under Generalized System of Preferences Dear Mr. Citron: This is in response to your letter dated June 2, 1988, asking whether certain cost items constitute "direct costs of processing operations" within the meaning of section 10.176 of the Customs Regulations (19 CFR 10.176), and, therefore, may be counted toward the 35 percent value-content requirement of the Generalized System of Preferences (GSP) provided for in 19 U.S.C. 2461-2466. FACTS: You advise that your company has opened an assembly operation in Matamoros, Mexico. No other information about the product or the assembly operation has been provided. However, you ask whether direct labor fringe benefits, which include Mexican social security payments, medical benefits, holiday pay, vacation pay, bonuses, and a nursery for young children of employees, are direct costs of processing under the GSP. ISSUE: Whether social security payments, medical benefits, holiday pay, vacation pay, bonuses, and a nursery for children of employees constitute direct costs of processing operations within the meaning of section 10.176, Customs Regulations (19 CFR 10.176). - 2 - LAW AND ANALYSIS: Under the GSP, duty-free treatment is provided for eligible articles imported directly from designated beneficiary countries. Sections 10.171 through 10.178, Customs Regulations (19 CFR 10.171-10.178), implement the GSP. "Direct costs of processing operations" are those costs which are either directly incurred in, or which can be reasonably allocated to, the growth, production, manufacture, or assembly of the specific merchandise under consideration. 19 CFR 10.178(a). They include "all actual labor costs involved in the growth, production, manufacture, or assembly of the specific merchandise, including fringe benefits," but do not include general expenses of doing business which are not so related, such as administrative salaries. 19 CFR 10.178(a)(1) and (b). In previous rulings, the question whether a particular labor cost is a direct cost of processing generally has been determined by the function the employee performs. We have held that the salary, fringe benefits, including a Christmas bonus and group insurance, and payroll taxes for employees directly involved in the production of GSP eligible articles are direct costs of processing, C.S.D. 80-246 (HQ 542097, dated April 23, 1980); Internal Advice Request 143/77 (HQ 541689, dated March 7, 1978); Internal Advice Request 41/76 (HQ 541215, dated February 25, 1977), but costs of employees who perform administrative functions, such as a general manager, a personnel manager, or accounting and payroll employees, are not, Internal Advice Request 83/76 (HQ 541249, dated February 24, 1977). In accordance with the foregoing, it is our opinion that the cost items described in your letter, to the extent they are incurred for services of employees who are directly engaged in the assembly of GSP eligible articles, are direct costs of processing operations. Therefore, if any portion of the described fringe benefits and liabilities are not paid or incurred for services of employees who are not directly engaged in assembly of GSP eligible articles, that portion may not be counted toward the 35 percent value-content requirement. In particular, if the nursery is a fringe benefit provided to both assembly workers and those who perform administrative functions, only that portion of the cost of the nursery which can be reasonably allocated to assembly employees is a direct cost of processing. - 3 - HOLDING: Social security payments, medical benefits, holiday pay, vacation pay, bonuses, and a nursery for children of employees are direct costs of processing operations, to the extent they are incurred for services of employees directly engaged in assembly of GSP eligible articles. Sincerely, John Durant, Director Commercial Rulings Division