HQ 555043: Treatment of Direct Labor Fringe Benefits under Generalized System of Preferences

Native CBP ruling rendition. Applicability is fact-specific; modification/revocation relationships and original publisher date are retained. Publisher sentinel year0001 means unknown date, not a historical legal adoption.

                                         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