In ruling H313988 (February 18, 2022), Customs and Border Protection (CBP) addressed whether certain costs should be added to the customs value as assists when using the transaction value method in situations where the products are imported from related parties. For this case, there are two entities, which are referred to as the U.S. Entity and the Foreign Entity. These two entities make up a larger, global hygiene and health company. The two entities import into the United States goods from other foreign related parties. Under this scenario, the entities declare the related party sales price under the transaction value method. For the ruling, the entities requested that CBP determine if the following costs should be added as assists or other additions under the transaction value:

  1. Global research and development,
  2. Global marketing, advertising, and promotion;
  3. Global brand, innovation, and sustainability costs; and
  4. Sales commissions for domestic sales of orthopedic products after importation to the United States.

In its analysis, CBP noted that “the primary method of appraisement is transaction value, which is defined as ‘the price actually paid or payable for the merchandise when sold for exportation to the United States,’ plus amounts for certain statutorily enumerated additions, to the extent not otherwise included in the price actually paid or payable.” Per 19 CFR §152.103(b)(1), the other enumerated statuary additions include:

  • The packing costs incurred by the buyer with respect to the imported merchandise;
  • Any selling commission incurred by the buyer with respect to the imported merchandise;
  • The value, apportioned as appropriate, of any assist;
  • Any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for exportation to the United States; and
  • The proceeds of any subsequent resale, disposal, or use of the imported merchandise that accrue, directly or indirectly, to the seller.

CBP first determined that Cost 4 – the sales commission cost – would not be added to the price payable because it is a selling commission to a domestic sales agent that takes place after importation. CBP then noted that despite the fact that Costs 1 through 3 are not under the enumerated statuary additions list, it is not to say that the costs should not be considered for determining the transaction value in the context of related party sales. This occurs because special rules apply when there is a sale between related parties. CBP notes that as defined under 19 U.S.C. §1401a(b)(2)(B), the transaction value between a related buyer and seller is acceptable only if the transaction satisfies one of two tests:  (1) circumstances of sale, or (2) test values. Under the circumstances of sales test, CBP looks for evidence that shows that the parties’ relationship did not impact the price paid or payable of the imported goods.

To demonstrate that the relationship did not impact the price paid or payable, the two entities note that in their transfer pricing policy the “pricing of the transfer of goods between enterprises belonging to an international Group can be made in different ways. The method chosen is the Cost Plus Method.” The transfer pricing policy also states that the purpose of sharing the aforementioned costs “in an arm’s length way and establishing an overall arm’s length transfer pricing policy is that each participant in the cost sharing arrangements bears their fair share of expense and all legal entities enjoy profits commensurate with their business functions, risks and assets.”

In its ruling CBP determined that while it has previously accepted transfer prices based on the Cost Plus Method (CPM), it is not their role to determine which costs should be included in the transfer pricing policy of a company. Furthermore, though CBP Regulations do not define what profit may be considered under the CPM (either gross profit or operating profit), CBP in this ruling stated that it is its “view that the operating profit margin is a more accurate measure of a company’s real profitability because it reveals what the company actually earns on its sales once all associated expenses, such as marketing, have been paid.” As such, when CPM is used, CBP determined that it is its preference to include the above related costs of research and development, marketing, advertising, promotion, innovation, and sustainability costs, though it is not a requirement.

In ruling NY N325409 (May 5, 2022), Customs and Border Protection (CBP) discussed the country of origin of stucco netting. The merchandise is identified as roles of 1.5” 17 gauge and 1” 20 gauge zinc plated round single-strand iron stucco netting. The netting is used on wall surfaces as an underlayment for plastering, cementing, stuccoing, and other forms of wall construction. In addition, the netting has galvanized woven hexagonal wire mesh that is “self-furred” (or “furred”), meaning that the wire is crimped throughout the netting. This crimping keeps the netting from lying directly on the wall and allows the netting to be embedded within the stucco, providing better reinforcement.

The manufacturing process begins in Canada where single-strand round galvanized iron wire from China and other countries (typically Vietnam and Turkey) is imported in bulk. The wire then undergoes specialized machining in order to produce the stucco netting. While this process is the same for the 17 and 20 gauge nettings, different machines are used depending on the diameter of the wire. First, coils of single-strand round wire are placed vertically onto stands. The stands are placed into the “Take-Up” of the netter, with the beginning of the coil welded to the end of the previous. As the netter runs, it pulls the wires to it. Afterwards, the netter weaves the wire into netting by twisting the wire with its mates on each side. Lastly, the “Furr Unit” places the crimps across the netting. The stucco netting is then exported to the U.S. after it is packaged and labeled.

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CBP noted that, as defined under 19 CFR 134.1(b), the country of origin is the “country of manufacture, production, or growth of any article of foreign origin entering the United States.  Further work or material added to an article in another country must effect a substantial transformation” in order to change the country of origin of the article. CBP also established that substantial transformation “occurs when an article emerges from a process with a new name, character or use different from that possessed by the article prior to processing.” For its determination, CBP noted that the machining operations that took place in Canada – which involved the furring, weaving, and twisting of the zinc plated round single-strand wire manufactured in either China, Vietnam, or Turkey into netting – result in a new name, a new character, and a new use from that of the original wire. As such, the country of origin of the subject stucco netting is Canada.

On May 10, the US International Trade Commission (ITC) issued a Federal Register notice stating that it will conduct an investigation into the economic impacts of the Section 301 and 232 (global steel and aluminum) tariffs on US industries.  See Notice.

The ITC will hold a hearing, and accept pre-hearing and post hearing briefs.  The following are the relevant dates:

  • July 6, 2022: Deadline for filing requests to appear at the public hearing.
  • July 8, 2022: Deadline for filing prehearing briefs and statements.
  • July 14, 2022: Deadline for filing electronic copies of oral hearing statements.
  • July 21, 2022: Public hearing.
  • August 12, 2022: Deadline for filing post-hearing briefs and statements.
  • August 24, 2022: Deadline for filing all other written submissions.
  • March 15, 2023: Transmittal of Commission report to Committees.

This investigation, conducted pursuant to Section 332, may be used by the USTR to determine what products should be removed from Section 301 tariffs. Importers should consider participating in the Section 332 proceedings to obtain relief from 301 tariffs. 

On May 5, the United States Trade Representative (USTR) published a Notice requesting comments from domestic industry members benefitting from the Section 301 tariffs as to whether the USTR should continue to impose Section 301 tariffs for lists 1, 2, 3, and 4A.  USTR is required to review the necessity of Section 301 actions four years after implementation.

USTR stated in its Notice that it was taking action in two Phases.  In Phase One, USTR is requesting only for comments from parties that are benefitting from the Section 301 tariffs. The comments are due and must be filed by 11:59pm on July 5 (List 1) and 11:59pm on August 22 (List 2, 3 and 4A). USTR has indicated it will not make the comments public, but will summarize them when publishing its determination on whether or not to continue the Section 301 tariffs. In Phase Two, the USTR will issue a separate notice and take comments from all interested parties on the effectiveness of the 301 action and the impact of the action on the US economy and consumers. 

Based on recent comments from the Biden administration, it is interested in easing Section 301 tariffs on certain products in order to mitigate inflation and align with this administration’s trade objectives. Accordingly, it is likely that Section 301 tariffs may be modified or reduced based on Phase Two comments. Importers should consider filing comments to obtain relief from Section 301 tariffs and protect their appeal rights.

Russia Sanctions:  The UK designated 63 individuals this week, including several war correspondents embedded with Russian forces in Ukraine that work at Channel One, a major state-owned media outlet in Russia.  The UK also designated one entity, Evraz PLC, a UK-incorporated holding company of a multinational steel manufacturing and mining company group.  Additionally, the UK made several amendments regarding previously-designated individuals and entities.

There is media reporting that the EU is considering announcing a sixth round of sanctions against Russia, but no official announcements have been released.  Still, a new package of sanctions is expected, barring material reduction of the Russian invasion of Ukraine.

General Licenses and Clarifications:  The UK issued a general license to allow the continuation of business with the North American subsidiaries of the recently designated Evraz PLC until September 2, 2022.

The U.S. published three new general licenses (“GLs”) and updated two previously-issued GLs this week.  The new general licenses authorize: (i) transactions with Gazprom Germania GmbH (and entities owned 50 percent or more by Gazprom Germania GmbH) until September 30, 2022; (ii) wind-down transactions with Amsterdam Trade Bank NV until July 12, 2022; and (iii) certain transactions in connection with patent, trademark, copyright, or other forms of intellectual property protection in the U.S. or Russia.  The updated GLs: (i) added Sberbank Switzerland to GL 26A, which authorizes wind-down transactions until July 12, 2022; and (ii) clarified that GL 7A, which authorizes overflight payments, emergency landings, and air ambulance services in the Russian Federation, does not authorize any debit to an account on the books of a U.S. financial institution of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.

Export:  The UK announced a ban on services exports to Russia.  This will include a ban on providing management consulting, accounting, and public relations services to Russia, but the full scope of the services that will be covered has not been announced.

The EU removed Russia from all European Union general export authorizations.  Previously exporters were able to utilize the following general export authorizations for exports to Russia: (i) EU003 for items that are re-exported after being repaired or replaced in the EU, (ii) EU004 for items that are temporarily exported for the purpose of an exhibition or fair, and (iii) EU005 for certain telecommunications items.

The U.S. issued several new FAQs clarifying its export regulations with respect to Russia and Belarus.  These FAQs cover topics including: (i) licensing requirements, (ii) the license application review policy, (iii) the Foreign Direct Product Rule, (iv) the De Minimis Rules, (v) excluded countries, (vi) luxury goods, (vii) license exceptions, and (viii) updates to Country Group designations and the Country Chart.

In ruling NY N325496 (April 22, 2022), Customs and Border Protection (CBP) discussed the tariff classification of an emergency hammer from China. The merchandise under consideration is a composite good that is designed for use in vehicles. It consists of a stainless-steel window breaker, a stainless-steel hammer, a stainless-steel seat belt cutter, a plastic ice scraper, and an analog tire pressure gauge all in one tool. The pressure gauge portion of the tool provides measurements in pounds per inch (PSI). The item is made of 80% plastic components and 20% base metal components, measures 6 inches tall by 3 inches wide by 1 inch thick, and weighs approximately 0.25 kilograms.

In order to classify the emergency hammer, CBP turned to the General Rules of Interpretation (GRIs) within the Harmonized Tariff Schedule of the United States (HTSUS). Per CBP, the merchandise is considered a composite good within the meaning of GRI 3(b), which states that “mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.” CBP also determined that no one component of the emergency hammer imparts the essential character, and as such turned to GRI 3(c). This GRI states that “when goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.”

CBP stated in its decision that the tire pressure gauge in heading 9026, HTSUS, merits equal consideration to the item’s window breaker, hammer, seat belt cutter, and ice scraper. Because the tire pressure gauge’s classification occurs last in numerical order, the tire pressure gauge would be used to determine the classification of the merchandise. As such, CBP determined that the applicable subheading for the emergency hammer was 9026.20.8000, HTSUS, which provides for “Instruments and apparatus for measuring or checking the flow, level, pressure or other variables of liquids or gases (for example, flow meters, level gauges, manometers, heat meters), excluding instruments and apparatus of heading 9014, 9015, 9028 or 9032; parts and accessories thereof: For measuring or checking pressure: Other.” The rate of duty is free.

Additionally, pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, Chinese products under subheadings 9026.20.8000, HTSUS, unless specifically excluded, are subject to an additional 7.5% ad valorem duty rate. As such, the chapter subheading 9903.88.15 must be reported in addition to subheading 9026.20.8000, HTSUS.

Russia Sanctions:  The UK designated 63 individuals this week, including several war correspondents embedded with Russian forces in Ukraine that work at Channel One, a major state-owned media outlet in Russia.  The UK also designated one entity, Evraz PLC, a UK-incorporated holding company of a multinational steel manufacturing and mining company group.  Additionally, the UK made several amendments regarding previously-designated individuals and entities.

There is media reporting that the EU is considering announcing a sixth round of sanctions against Russia, but no official announcements have been released.  Still, a new package of sanctions is expected, barring material reduction of the Russian invasion of Ukraine.

General Licenses and Clarifications:  The UK issued a general license to allow the continuation of business with the North American subsidiaries of the recently designated Evraz PLC until September 2, 2022.

The U.S. published three new general licenses (“GLs”) and updated two previously-issued GLs this week.  The new general licenses authorize: (i) transactions with Gazprom Germania GmbH (and entities owned 50 percent or more by Gazprom Germania GmbH) until September 30, 2022; (ii) wind-down transactions with Amsterdam Trade Bank NV until July 12, 2022; and (iii) certain transactions in connection with patent, trademark, copyright, or other forms of intellectual property protection in the U.S. or Russia.  The updated GLs: (i) added Sberbank Switzerland to GL 26A, which authorizes wind-down transactions until July 12, 2022; and (ii) clarified that GL 7A, which authorizes overflight payments, emergency landings, and air ambulance services in the Russian Federation, does not authorize any debit to an account on the books of a U.S. financial institution of the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation.

Export:  The UK announced a ban on services exports to Russia.  This will include a ban on providing management consulting, accounting, and public relations services to Russia, but the full scope of the services that will be covered has not been announced.

The EU removed Russia from all European Union general export authorizations.  Previously exporters were able to utilize the following general export authorizations for exports to Russia: (i) EU003 for items that are re-exported after being repaired or replaced in the EU, (ii) EU004 for items that are temporarily exported for the purpose of an exhibition or fair, and (iii) EU005 for certain telecommunications items.

The U.S. issued several new FAQs clarifying its export regulations with respect to Russia and Belarus.  These FAQs cover topics including: (i) licensing requirements, (ii) the license application review policy, (iii) the Foreign Direct Product Rule, (iv) the De Minimis Rules, (v) excluded countries, (vi) luxury goods, (vii) license exceptions, and (viii) updates to Country Group designations and the Country Chart.

Russia Sanctions:  There were limited developments this week.  There has been speculation that the EU would release its sixth round of sanctions against Russia, but no updates have been reported thus far.  The new package of sanctions is still expected soon.  The U.S. and UK also did not expand their list of designations this week.  However, the UK published amendments for nearly 200 previously-designated individuals that remain subject to an asset freeze.  The amendments were limited to revising reported dates of birth, addresses, and additional information regarding the basis of the designation.

General Licenses and Clarifications:  The UK published a general license that allows transactions with Sberbank CIB (UK) Ltd, or any entity it owns or controls in the UK for the UK subsidiary, to make payments for (i) basic needs, fees; (ii) service charges from holding and maintenance of funds; and (iii) the provision of legal services.

The UK issued separate a general license that permits officers of (i) the Financial Conduct Authority and (ii) any other organization authorized by Her Majesty’s Treasury to carry out any action necessary to comply with a UK court order, a forfeiture notice, or external orders.  The general license also permits activities for asset recovery purposes.

This week, European Commission President Ursula von der Leyen clarified during a press conference that paying for Russian gas in rubles is a breach of EU sanctions.  “To pay in rubles – if this is not foreseen in the contract – is a breach of our sanctions…Companies with such contracts should not accede to the Russian demands.  This would be a breach of the sanctions, so a high risk for the companies.”  This statement came after Russia suspended gas deliveries to Poland and Bulgaria after they refused to pay with rubles.

EU Proposal to Suspend All Duties on Imports from Ukraine

The EU announced a proposal to suspend import duties on all Ukrainian goods for one year.  This would also apply to all anti-dumping and safeguard measures on Ukrainian steel.  The proposal must still be approved by the European Parliament and the Council of the European Union.

 

Russia Sanctions:  The U.S., UK, and EU continue to apply pressure on Russia through the implementation of additional sanctions.  The U.S. designated dozens of additional individuals and entities under E.O. 14024, including Russian oligarch Konstantin Malofeyev – who had been previously designated by OFAC in 2014 under E.O. 13660 – and more than 40 individuals and entities associated with him.  The U.S. also designated Transkapitalbank (TBK) and its subsidiary Joint Stock Company Investtradebank.  The UK made 26 additional designations.  These designations included several Generals in the Russian military.  Finally, the EU designated two prominent businessmen, Serhiy Vitaliyovich Kurchenko and Yevgeniy Viktorovich Prigozhin.

General Licenses and Clarifications:  The U.S. and UK issued a handful of general licenses and provided additional clarifications regarding the applicability of their respective sanctions.  The U.S. issued a general license authorizing a range of activities by nongovernmental organizations, including of humanitarian, democracy building, education, non-commercial development, and environmental or natural resource protection activities in Ukraine or the Russian Federation.  The U.S. also issued a general license related to the recently designated TBK (and entities owned more than 50 percent by TBK), granting a one-month wind-down period, until May 20, 2022, and another general license allowing certain transactions destined for or originating from Afghanistan in support of efforts to address the humanitarian crisis to continue for six months, until October 20, 2022.  Finally, the U.S. issued guidance through an OFAC FAQ clarifying that U.S. operators of credit card systems are prohibited from processing transactions involving certain sanctioned foreign financial institutions, and that non-U.S. operators of credit systems whose payment cards are issued by sanctioned foreign financial institutions may violate U.S. sanctions if they permit those cards to be used in the U.S.  The UK also issued a general license authorizing certain energy-related payments to be made to Gazprombank. 

Export Enforcement:  The U.S. took enforcement action against a Russian cargo airline, Aviastar, for operating in violation of U.S. export controls.  The U.S. issued a Temporary Denial Order which bans Aviastar from participating in any transactions subject to the EAR, including a ban on exports from the United States and reexports of items subject to the EAR from abroad.Maritime:  President Biden issued a declaration prohibiting Russian-affiliated vessels from entering into U.S. ports.  The banned vessels include Russian flagged vessels, Russian owned vessels, and Russian operated vessels.  The restriction will come into effect on April 28, 2022

In ruling NY N324932 (Apr. 13, 2022), Customs and Border Protection (CBP) discussed the tariff classification of an outdoor security camera system from China. The camera system, known as the Outdoor Wire-free Security Camera, is a wireless home security camera that consists of the following items: two wire-free outdoor cameras “EufyCam 2C” (model number T8113S), the “HomeBase 2” (model number T8010X), a user manual, marketing materials, a power adapter, an Ethernet cable, wall mounts, a reset pin needle, two mounting screw packs, a USB charging cable, a HomeKit card, and an installation positioning card. All of the items are imported together and packaged for retail sale as a set.

Once imported, the two wire-free cameras are connected to the HomeBase unit via Wi-Fi – which allows the user to view live footage or recordings captured by the cameras. The cameras have a 135-degree field of view, a built-in spotlight, a 100-decibel siren, and motion detection capabilities for both pets and humans. If motion is detected, the camera will begin to capture video and transmit the “real-time” video back to the HomeBase unit and the user’s mobile phone for remote viewing or recording. The cameras have no internal recording capabilities.

CBP stated that the outdoor cameras impart the essential character of the set. As such, the cameras, which are used as electronic surveillance tools to provide security to the user’s home, are used to classify the product. CBP determined that the applicable subheading for the outdoor camera security system is 8525.89.3000, HTSUS, which provides for “transmission apparatus for radio-broadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras, digital cameras and video camera recorders: Television cameras, digital cameras and video camera recorders: Television cameras: Other.”  The rate of duty is free.

Additionally, pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, Chinese products under subheadings 8525.89.3000, HTSUS, unless specifically excluded, are subject to an additional 25% ad valorem duty rate. As such, the chapter subheading 9903.88.03 must be reported in addition to subheading 8525.89.3000, HTSUS.