OK, here is the scenario: A U.S. baker wants to make birthday cakes outside the U.S. The baker provides cake mix, sugar, eggs, frosting and birthday candles free of charge to the foreign bakery. The U.S. baker pays the foreign bakery $2.00 per cake to combine, bake, and finish these ingredients into finished birthday cakes, which are then imported into the U.S. You are the customs broker for these transactions. The U.S. baker believes they only pay duty on the added value – the $2.00 per cake paid to the foreign bakery. Is this correct?
In a word – no.
A common misconception is that if a U.S. company provides parts and materials free of charge to a foreign company to make them into a product, the U.S. company will only pay duty on the “added value”. That may sound reasonable but it is not the way the Harmonized Tariff Schedule and the regulations work.
First, let’s take a look at the value provisions in Part 152 of the Customs Regulations. Part 152.102(a) includes the following:
‘(a) Assist. (1) “Assist” means any of the following if supplied directly or indirectly, and free of charge or at reduced cost, by the buyer of imported merchandise for use in connection with the production or the sale for export to the United States of the merchandise:
(i) Materials, components, parts, and similar items incorporated in the imported merchandise.”
Thus any parts, materials, or similar items provided without charge to make a product outside the U.S. fall within the definition of an “assist” and are thus part of the value. As an assist they would be valued at their acquisition cost, or cost of production. If the U.S. company prepaid the charges, the cost of freight and insurance from the U.S. to the foreign company would be included in the cost of the parts and materials.
The definition of an assist in Part 152.102 also includes “merchandise consumed in the production of the imported merchandise.” This would include attrition loss – parts and materials that are damaged or scrapped during production.
You may ask, “isn’t there a duty free exemption in Chapter 98 for exported U.S. components?” Yes there is, but you need to read it very carefully. HTS 9802.00.80 is an exemption for products that are “assembled abroad in whole or in part of fabricated components, the product of the United States, which (a) were exported in condition ready for assembly without further fabrication, (b) have not lost their physical identity in such articles by change in form, shape, or otherwise, and (c) have not been advanced in value or improved in condition abroad except by being assembled and except by operations incidental to the assembly process such as cleaning, lubricating, and painting.”
That is a lengthy description with a number of requirements included in the text. First is the requirement that the components must be products of the United States. The U.S. importer must be able to prove this by providing manufacturer’s affidavits or other acceptable evidence that the components were made in this country. If the U.S. company exported 100 parts for assembly and those parts were made by 50 different manufacturers, they would need to be able to produce at least 50 manufacturers affidavits.
Next the exported components cannot undergo a change in form or shape except by being assembled. This means that components such as liquids, powders, gasses, food ingredients, solder, paint and glue do not qualify for exemption under 9802.00.80 because they are exported in one form and completely change their form during the processing outside the U.S. The same would apply to materials exported from the U.S. in raw or bulk form, made into components then assembled, such as plastic exported in bulk and molded into a component and the component assembled into the product (or cake mix exported as a powder, made into a cake layer then assembled into a cake).
The way 9802.00.80 reads is that the importer pays duty on the full value of the imported product (which would include the cost of parts and materials exported by the U.S. company) less the cost of the qualifying U.S. components. If the importer can’t prove the components are made in the U.S., or if the components undergo a change in form or shape, they don’t qualify for the exemption, and are included in the dutiable cost of the imported product.
Anyone contemplating use of 9802.00.80 should carefully read the requirements in Part 10.11-10.26 of the Customs Regulations and the audit guidelines in Exhibit 5H of the Focused Assessment Manual.
Isn’t there anything else? HTS 9802.00.60 is an exemption for articles of metal exported for processing and returned to the U.S. for additional processing. That is a narrow purpose and not many transactions are going to qualify.
HTS 9802.00.40/50 applies to articles exported for repairs or alterations. “Repairs” means just that – fixing a product that is broken or defective. “Alterations” in this context means physically altering an exported product, but not making it into something new or different – such as altering the measurements of a suit or dress. In contrast, making a suit or dress from exported fabric would not be an alteration for this provision.
Beyond these limited examples there are no exemptions for exported parts and materials used to make a product outside the U.S.
If the production was done in a country with whom the U.S. has a free trade agreement, such as NAFTA or Korea-U.S. Free Trade Agreement, the exported U.S. parts and materials could help qualify the imported product for FTA benefits, providing the product satisfied the applicable rules of origin – but that is another discussion.
What about the birthday cake? None of the exported ingredients would qualify for 9801.00.80. If it could be proven that the candles were made in the U.S. they could possibly qualify for the exemption, but there would be a question of whether putting candles into soft frosting is an act of assembly. If done in Canada or Mexico, the cake could qualify for NAFTA benefits, but one would need to apply the specific rules of origin to know for sure.
Piece of cake!