United States-Mexico-Canada Agreement; Inventory Management; Average Method

H326310 August 17, 2022 OT:RR:CTF:VS H326310 JMV CATEGORY: ORIGIN John M. Peterson, Esq. Neville Peterson LLP One Exchange Plaza 55 Broadway, Suite 2602 New York, NY 10006 RE: United States-Mexico-Canada Agreement; Inventory Management; Average Method Dear Mr. Peterson, This is in response to your request, received July 20, 2022, filed on behalf of numerous Tier 1 suppliers to the automotive industry (“Suppliers”). In your letter, you request a binding ruling regarding whether the “average method” of inventory management may be used to account for commingled inventories of fungible goods and materials for purposes of accounting for “originating” and “non-originating” goods under the United States-Mexico-Canada Agreement (“USMCA”). FACTS: In your letter, you state that the Suppliers previously used the average method of inventory supply management to account for commingled inventories of fungible goods and materials for purposes of determining the originating status of such goods under the North American Free Trade Agreement (“NAFTA”). Although you did not provide a specific contemplated transaction, you ask U.S. Customs and Border Protection (“CBP”) to determine whether the Suppliers may continue to use the average method under USMCA. Under the average method under NAFTA, a producer would track its inventory of product on a one- or three-month basis by averaging the originating product mixed with non-originating product. Upon calculation of the ratio from the relevant period, a producer would apply that ratio over the shipments for the subsequent period to determine the quantity of product that is eligible for preferential tariff treatment as “originating” under NAFTA. For instance, if the ratio calculated in an inventory period was 60% originating and 40% non-originating, and 10,000 units of material were withdrawn from the inventory in the next period, the recordkeeper could designate 6,000 units of the material withdrawn as NAFTA-originating and 4,000 would be designated as non-originating. Now that the USMCA has replaced NAFTA, Suppliers seek guidance as to whether they may continue to use the average method when determining the originating status of their goods under USMCA. ISSUE: Whether Suppliers may continue to use the average method of inventory management for purposes of accounting for “originating” and “non-originating” goods under the USMCA. LAW AND ANALYSIS: The United States-Mexico-Canada Agreement (“USMCA”) was signed by the Governments of the United States, Mexico, and Canada on November 30, 2018. The USMCA was approved by the U.S. Congress with the enactment on January 29, 2020, of the USMCA Implementation Act, Pub. L. 116-113, 134 Stat. 11, 14 (19 U.S.C. § 4511(a)). General Note (“GN”) 11 of the Harmonized Tariff Schedule of the United States (“HTSUS”) implements the USMCA. GN 11(f) relates to fungible goods and materials. It states: (i) Fungible materials used in production.—Subject to subparagraph (f)(iii) below, if originating and nonoriginating fungible materials are used or consumed in the production of a good, the determination of whether the materials are originating may be made on the basis of any of the inventory management methods set forth in regulations implementing this note. (ii) Fungible goods commingled and exported.—Subject to subparagraph (f)(iii) below, if originating and nonoriginating fungible goods are commingled and exported in the same form, the determination of whether the goods are originating may be made on the basis of any of the inventory management methods set forth in regulations implementing this note. An importer may claim that a fungible material or good is originating if the importer, producer, or exporter has physically segregated each fungible material or good as to allow their specific identification. (iii) Use of inventory management method.—A person that selects an inventory management method for purposes of paragraph (f)(i) or (f)(ii) of this subdivision shall use that inventory management method throughout the fiscal year of the person. A portion of the regulations implementing GN 11, HTSUS, the USMCA Rules of Origin Regulations are found in the appendix to Customs Regulations 19 C.F.R. Part 182 (“UR”). UR Part IV Section 8. Materials, (18) states that a fungible material or good is originating if: when originating and non-originating fungible materials (i) are withdrawn from an inventory in one location and used in the production of the good, or (ii) are withdrawn from inventories in more than one location in the territory of one or more of the USMCA countries and used in the production of the good at the same production facility, the determination of whether the materials are originating is made on the basis of an inventory management method recognized in the Generally Accepted Accounting Principles of, or otherwise accepted by, the USMCA country in which the production is performed or an inventory management method set out in Schedule VIII; or (b) when originating and non-originating fungible goods are commingled and exported in the same form, the determination of whether the goods are originating is made on the basis of an inventory management method recognized in the Generally Accepted Accounting Principles of, or otherwise accepted by, the USMCA country from which the good is exported or an inventory management method set out in Schedule VIII. Emphasis added. Like the regulations under NAFTA, the UR permit the use of an inventory management method recognized in the Generally Accepted Accounting Principles to determine whether a fungible good or material is originating or non-originating for purposes of determining USMCA preference eligibility. Schedule VIII of the UR provides further guidance on inventory management methods. The various inventory management methods set out in the UR (Schedule VIII, Part 1, Section 2, and Part 2, Section 11) include: (a) specific identification method; (b) FIFO method; (c) LIFO method; and (d) average method. To the extent the Suppliers’ originating and non-originating product is fungible, as defined in GN 11(l)(iii),  an inventory management method prescribed in the UR may be used to determine what product is an originating or non-originating good or material for USMCA purposes. For both fungible goods and materials, Schedule VIII of the UR state that under the average method, originating status of fungible goods and materials may be determined based on the ratio of originating and non-originating goods or materials in inventory. Therefore, the Suppliers may continue to use the average method to determine the originating status of goods and materials under the USMCA, provided the goods or materials meet the definition of fungible in GN 11(l)(iii) and the Supplier uses the same inventory management method throughout the fiscal year as required by GN 11(f)(iii). Additionally, Suppliers must ensure that their calculations are consistent with the Generally Accepted Accounting Principles of the exporting country, and with the requirements outlined in Schedule VIII, Sections 5-8 for fungible materials and Sections 14-15 for fungible goods. HOLDING: Suppliers may continue to use the average method for purposes of for purposes of determining the originating status of fungible goods and materials under the USMCA. A copy of this ruling letter should be attached to the entry documents filed at the time the goods are entered. If the documents have been filed without a copy of this ruling, it should be brought to the attention of the CBP officer handling the transaction. Sincerely, Monika R. Brenner, Chief Valuation and Special Programs Branch