[Federal Register Volume 63, Number 123 (Friday, June 26, 1998)]
[Notices]
[Pages 34960-34963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17059]
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DEPARTMENT OF THE TREASURY
Customs Service
Determination of Origin of Goods Processed in a Qualifying
Industrial Zone or in Israel and the West Bank or Gaza Strip
AGENCY: U.S. Customs Service, Department of the Treasury.
ACTION: General policy statement.
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SUMMARY: This document expands upon T.D. 96-58 by notifying the public
that in determining the country of origin of textile and apparel
products processed in a designated qualifying industrial zone Customs
will exclusively apply the rules of origin for textile and apparel
products set forth in section 102.21, Customs Regulations (19 CFR
102.21), which were promulgated pursuant to the authority of section
334, Uruguay Round Agreements Act (19 U.S.C. 3592). A qualifying
industrial zone is defined in General Note 3(a)(v)(G), Harmonized
Tariff Schedule of the United States (HTSUS), in part, as an area that
encompasses portions of the territory of Israel and Jordan or Israel
and Egypt.
In addition, this document advises the public that, in accordance
with the principles and policy set forth in T.D. 96-58, Customs
determines the origin of a textile or apparel product processed both in
Israel (outside of a qualifying industrial zone) and in the West Bank
or Gaza Strip by first applying the Customs rulings and administrative
practices in effect prior to December 8, 1994. If the application of
those rulings and practices results in Israel not being the origin of
the good, Customs applies the rules in section 102.21 to determine the
country of origin, with no further consideration being given to the
processing performed in Israel.
Finally, this document reminds the public that section 102.21 is
not used to determine whether foreign materials have undergone a
``double substantial transformation'' for purposes of determining
whether their cost or value may be counted toward the value-content
requirement of various special tariff treatment programs, such as the
U.S.-Israel Free Trade Implementation Act.
EFFECTIVE DATE: The portion of this policy statement concerning the
origin of textile and apparel products processed in a qualifying
industrial zone shall apply to goods entered or withdrawn from
warehouse for consumption on or after March 13, 1998. The remainder of
this policy statement shall apply to goods entered or withdrawn from
warehouse for consumption on or after July 1, 1996.
FOR FURTHER INFORMATION CONTACT: Craig Walker, Special Classification
and Marking Branch, Office of Regulations and Rulings, (202) 927-1116.
SUPPLEMENTARY INFORMATION:
Background
Section 334 of the Uruguay Round Agreements Act (``URAA'') (19
U.S.C. 3592) established rules of origin for textiles and textile
products. Section 102.21, Customs Regulations (19 CFR 102.21),
implemented the provisions of section 334, which became effective July
1, 1996.
T.D. 96-58
T.D. 96-58, published in the Federal Register on July 31, 1996 (61
FR 40076), gave notice of Customs interpretation and application of
section 334(b)(5) of the URAA. That subsection excepts from the rules
of origin governing textiles and textile products set forth in section
334, goods which under rulings and administrative practices in effect
immediately before the enactment of section 334 (December 8, 1994)
would have originated in, or been the growth, product, or manufacture
of, Israel. Section 334(b)(5) further provides that those rulings and
administrative practices in effect prior to December 8,
[[Page 34961]]
1994, will continue to be applied in determining whether goods
originate in Israel, ``unless such rulings and practices are modified
by the mutual consent of the parties to the [the U.S.-Israel Free Trade
Agreement].''
After analyzing the wording in section 334(b)(5) and the
implementing Customs Regulations (19 CFR 102.21), Customs concluded in
T.D. 96-58 that in determining whether goods originate in, or are the
growth, product, or manufacture of Israel, Customs will first apply the
rulings and administrative practices in effect prior to December 8,
1994. If that determination results in Israel not being the country of
origin of the goods, then Customs will apply the rules in 19 CFR 102.21
to determine the country of origin, with no consideration being given
to assembly or manufacturing processes performed in Israel. In other
words, if a good is determined not to be a product of Israel under the
rulings and administrative practices in effect prior to December 8,
1994, the application of the rules in section 102.21 cannot result in
Israel being the country of origin of the good. The statement of policy
in T.D. 96-58 was effective July 1, 1996.
Qualifying Industrial Zones
On October 2, 1996, the U.S.-Israel Free Trade Area Implementation
Act of 1985 (19 U.S.C. 2112 note), was amended, creating a new section
9, to authorize the President to proclaim the elimination of duties for
articles produced in the West Bank, Gaza Strip, and a ``qualifying
industrial zone.'' Pursuant to that authority, the President issued
Proclamation No. 6955 dated November 13, 1996 (published in the Federal
Register on November 18, 1996 (61 FR 58761)), which modified General
Note 3(a), Harmonized Tariff Schedule of the United States (HTSUS), to
provide duty-free treatment to articles which are the product of the
West Bank, Gaza Strip or a qualifying industrial zone (``QIZ''),
provided certain requirements are met. Such treatment was effective for
products of the West Bank, Gaza Strip or a QIZ entered or withdrawn
from warehouse for consumption on or after November 21, 1996. In
Proclamation 6955, the President delegated to the U.S. Trade
Representative the authority to designate QIZs.
Under General Note 3(a)(v)(A), HTSUS, articles the product of the
West Bank, Gaza Strip or a QIZ which are imported directly to the U.S.
from the West Bank, Gaza Strip, a QIZ or Israel qualify for duty-free
treatment, provided the sum of (1) the cost or value of materials
produced in the West Bank, Gaza Strip, a QIZ or Israel, plus (2) the
direct costs of processing operations performed in the West Bank, Gaza
Strip, a QIZ or Israel, is not less than 35% of the appraised value of
such articles when imported into the U.S. An article is considered to
be a product of the West Bank, Gaza Strip or a QIZ if it is either
wholly the growth, product or manufacture of one of those areas or a
new or different article of commerce that has been grown, produced or
manufactured in one of those areas. General Note 3(a)(v)(C), HTSUS,
states that ``[t]he term ``new or different article of commerce'' means
that articles must have been substantially transformed in the West
Bank, the Gaza Strip or a qualifying industrial zone into articles with
a new name, character or use.''
General Note 3(a)(v)(G), HTSUS, defines a qualifying industrial
zone as any area that: ``(1) Encompasses portions of the territory of
Israel and Jordan or Israel and Egypt; (2) has been designated by local
authorities as an enclave where merchandise may enter without payment
of duty or excise taxes; and (3) has been designated by the U.S. Trade
Representative in a notice published in the Federal Register as a
qualifying industrial zone.''
By letters dated June 30, 1997, and July 1, 1997, to the U.S. Trade
Representative, the Governments of Jordan and Israel, respectively,
requested the designation of the industrial zone in Irbid, Jordan, as a
QIZ. Pursuant to subsequent consultations among the three Governments,
the Governments of Israel and Jordan entered into a written agreement
dated November 16, 1997, relating to the establishment of the Irbid
QIZ, which included the following provision, entitled ``Rules of
Origin':
The [Governments of Israel and Jordan] agree that the origin of
any textile or apparel product that is processed in the Irbid
Qualifying Industrial Zone, regardless of the origin or place of
processing of any of its imputs or materials prior to entry into, or
subsequent to withdrawal from, the zone, will be determined solely
pursuant to the rules of origin for textile and apparel products set
out in Section 334 of Uruguay Round Agreements Act, 19 U.S.C. 3592.
By notice published in the Federal Register on March 13, 1988 (63
FR 12572), the Office of the U.S. Trade Representative formally
designated the Israeli-Jordanian Irbid Qualifying Industrial Zone as a
QIZ, effective upon publication of the notice in the Federal Register.
To date, this is the only QIZ designated by the U.S. Trade
Representative.
Thus, pursuant to the agreement between the Governments of Israel
and Jordan, and by the mutual consent of the U.S. and Israel, Customs
will exclusively apply the textile and apparel rules of origin set
forth in 19 CFR 102.21 in determining the country of origin of a
textile or apparel product processed in the Irbid QIZ. This means that
the section 102.21 rules will be used not only with regard to
processing performed with respect to a textile or apparel article in
the Jordanian and/or Israeli portion of the Irbid Zone, but also with
regard to processing, if any, performed outside of the Zone in Israel
or in any other country either prior to the article's entry into the
Zone for processing or subsequent to its withdrawal from the Zone after
processing.
Example
The following example is set forth to illustrate the application of
the 19 CFR 102.21 rules of origin to determine the origin of articles
processed in the Irbid QIZ from imputs processed in Israel:
Fabric woven in China is cut in Israel (outside of the Irbid
QIZ) into components for a simple shirt. Those components are
assembled into the completed shirt in the Jordanian portion of the
Irbid QIZ by sewing.
Pursuant to section 334(b)(5) of the URAA, the U.S. and Israel
have determined by mutual consent that the section 102.21 rules of
origin rather than the rulings and administrative practices in
effect prior to December 8, 1994, shall be used to determine the
country of origin of textile and apparel products processed in the
Irbid QIZ. Therefore, Customs must apply section 102.21 to determine
the origin of the shirt.
(a) Section 102.21 requires that the General Rules, found in
section 102.21(c), be applied in sequential order. Section
102.21(c)(1) states that the country of origin of a good is the
single country, territory, or insular possession in which the good
was wholly obtained or produced. Since the shirt in the above
example was not wholly obtained or produced in a single country,
that section is not applicable.
(b) Section 102.21(c)(2) requires that the good comply with the
applicable tariff shift rule in section 102.21(e). The applicable
tariff shift rule for the shirt in the above example is a change to
the heading in which that garment is classified from any other
heading, provided that the change is the result of the garment being
wholly assembled in a single country, territory, or insular
possession. The shirt in the above example meets this requirement
because it was wholly assembled in the Jordanian portion of the
Irbid QIZ. Therefore, the shirt is considered to be the ``growth,
product or manufacture'' of the QIZ for purposes of obtaining duty-
free treatment under General Note 3(a)(v), HTSUS. It should also be
noted that, because the country of origin marking statute (19 U.S.C.
1304) provides that, unless excepted, every imported foreign article
(or its container) shall be marked with the ``name of the country of
origin of the article'' (emphasis
[[Page 34962]]
added), merely marking the shirt to indicate that it is a product of
the Irbid QIZ would not satisfy the requirements of 19 U.S.C. 1304.
Therefore, since the processing which determines the origin of the
shirt under 19 CFR 102.21 takes place in the Jordanian portion of
the QIZ, the country of origin of the shirt for marking purposes is
Jordan, and it must be so marked.
West Bank and Gaza Strip
As previously stated, articles produced in the West Bank or Gaza
Strip which meet the requirements set forth in General Note 3(a)(v),
HTSUS, are entitled to duty-free treatment when imported into the U.S.,
effective for articles entered on or after November 21, 1996.
Example
The following example illustrates how a determination is made as to
the country of origin of a textile or apparel product which is
processed in the West Bank or Gaza Strip from imputs processed in
Israel (outside of the Irbid QIZ):
Fabric woven in country A is cut in Israel (outside the Irbid
QIZ) into components for men's boxer shorts of the underwear type.
The components are assembled into the completed boxer shorts in the
West Bank or Gaza Strip.
In this example, no processing is performed in the Irbid QIZ.
Therefore, pursuant to section 334(b)(5) of the URAA and the
statement of policy set forth in T.D. 96-58, Customs must first
apply the rulings and administrative practices in effect prior to
December 8, 1994, to determine whether Israel is the country of
origin of the good. It is only when the first determination results
in Israel not being the country of origin of the good that resort is
made to the section 102.21 rules of origin to determine the good's
country of origin, with no further consideration being given to the
processing performed in Israel.
With regard to the example, Customs has a long line of
administrative rulings predating December 8, 1994, holding that the
cutting of fabric into garment components results in a substantial
transformation of the fabric, while the assembly of those components
into a simple garment does not. Thus, in this example, since the
cutting of the garment parts is performed in Israel, Israel is the
country of origin of the boxer shorts, and there is no application
of the section 102.21 rules.
Double Substantial Transformation
In addition to the North American Free Trade Agreement (``NAFTA'')
(General Note 12, HTSUS), there are a number of special tariff
preference programs which Congress has implemented to promote economic
development in certain parts of the world by permitting duty-free entry
of certain products from designated countries, provided certain
requirements are met. These include the Generalized System of
Preferences (``GSP'') (19 U.S.C. 2461 et seq.), the Caribbean Basin
Economic Recovery Act (``CBERA'') (19 U.S.C. 2701 et seq.), the Andean
Trade Preference Act (``ATPA'') (19 U.S.C. 3201 et seq.), the U.S.-
Israel Free Trade Area Implementation Act (``IFTA'') (19 U.S.C. 2112
note), General Note 3(a)(iv), HTSUS (relating to products from U.S.
insular possessions), and General Note 3(a)(v), HTSUS (relating to
products from the West Bank, Gaza Strip or a QIZ).
To receive duty-free treatment under these programs, an eligible
article must be a ``product of'' the beneficiary country, it must be
imported directly to the U.S., and it must satisfy a value-content
requirement. The value content requirements in the GSP, CBERA, ATPA,
IFTA, and General Note 3(a)(v), HTSUS, are nearly identical and provide
that the sum of (1) the cost or value of the materials produced in the
beneficiary country (or countries), plus (2) the direct costs of
processing operations performed in the beneficiary country (or
countries), must represent at least 35% of the appraised value of the
article at the time it is entered into the U.S.
The value-content requirement set forth in General Note 3(a)(iv),
HTSUS, is somewhat different. It provides that products of a U.S.
insular possession must not contain foreign materials which represent
more than 70% of the goods' total value, or in the case of goods
ineligible for duty-free treatment under the CBERA, more than 50% of
their total value.
In determining whether products meet the value-content requirements
in the above programs, a concept known as ``double substantial
transformation'' is used. According to this concept, the value of
foreign material (that is, material that does not originate in the
applicable country, territory or possession) may be considered as part
of the value of materials produced in that country, territory or
possession for purposes of the value-content requirement only if it
undergoes two substantial transformations in the country, territory or
possession. That is, the foreign material must be substantially
transformed in the beneficiary country, territory or possession into a
new and different intermediate article of commerce, which is then
transformed a second time during production of the final article which
is exported to the U.S.
Customs application of the double substantial transformation
requirement in the context of the GSP received judicial approval in The
Torrington Company v. United States, 596 F.Supp. 1083 (CIT 1984),
aff'd. 764 F.2d 1563 (Fed.Cir. 1985). See also Azteca Milling Co. v.
United States, 703 F.Supp. 949 (CIT 1988), aff'd 890 F.2d 1150 (Fed.
Cir. 1989), and F.F. Zuniga, a/c Refractarios Monterrey, S.A. v. United
States, 16 CIT 459 (1992), aff'd 996 F.2d 1203 (Fed.Cir. 1993). T.D.
88-17, published in the Federal Register on April 13, 1988 (53 FR
12143), applied the double substantial transformation concept to
products of U.S. insular possessions for purposes of determining
whether the products meet the foreign value limitation under General
Note 3(a)(iv), HTSUS.
The GSP, CBERA, and ATPA statutes specifically exclude most textile
and apparel articles from eligibility for duty-free treatment under
those programs. However, all textile and apparel articles are eligible
for duty-free treatment under the IFTA, General Note 3(a)(iv), HTSUS,
and General Note 3(a)(v), HTSUS, provided that they meet the applicable
requirements of those programs.
In T.D. 95-69 (the Final Rule document promulgating 19 CFR 102.21),
which was published in the Federal Register on September 5, 1995 (60 FR
46189), Customs responded to certain comments received in response to
the Notice of Proposed Rulemaking concerning the effect of the section
102.21 rules of origin on existing Customs rulings holding that the
cutting of garment parts and the assembly of those parts into garments
constitute a double substantial transformation for purposes of the
foreign value limitation in General Note 3(a)(iv), HTSUS. Customs
stated that:
[s]ince section 334 deals with the country of origin of textile
and apparel products and not with value requirements for purposes of
duty preferences, section 334 will not affect either foreign
material value determinations required under General Note 3(a)(iv)
or value-added requirements contained in other statutory provisions.
Accordingly, Customs intends to continue its current tariff
treatment of garments which are cut and assembled in insular
possessions.
Consistent with the above response, Customs wishes to remind the
public that the section 102.21 rules of origin are not used to
determine whether foreign materials have undergone a double substantial
transformation for purposes of determining whether their cost or value
may be considered as part of the value of materials produced in the
beneficiary country, territory or possession under the tariff
preference programs referenced above.
[[Page 34963]]
Conclusion
In determining the country of origin of textile and apparel
products processed in a designated QIZ, Customs will exclusively apply
the rules of origin for textile and apparel products set forth in 19
CFR 102.21. However, pursuant to the principles and policy set forth
T.D. 96-58, Customs determines the origin of a textile or apparel
product processed both in Israel (outside of a QIZ) and in the West
Bank or Gaza Strip by first applying the rulings and administrative
practices in effect prior to December 8, 1994. If that determination
results in Israel not being the origin of the good, Customs applies the
rules in section 102.21 to determine the country of origin, with no
further consideration being given to the processing performed in
Israel.
Finally, section 102.21 is not used to determine whether foreign
materials have undergone a double substantial transformation so that
their cost or value may be considered as part of the value of materials
produced in the beneficiary country, territory or possession for
purposes of the value-content requirements set forth in the above-
specified tariff preference programs.
Dated: June 22, 1998.
Stuart P. Seidel,
Assistant Commissioner, Office of Regulations and Rulings.
[FR Doc. 98-17059 Filed 6-25-98; 8:45 am]
BILLING CODE 4820-02-P
