Problem

Tax Deduction for Processing in Maquilas: Mere Assembly or Fabrication?

Customs regulations in the United States provide for deduction of the costs of U.S. components or materials assembled abroad upon importation into the United States. In order to qualify for this exemption from duty assessment, the components must be exported in a condition ready for assembly without fabrication, having not lost their physical identity by change in form or shape. United States Customs also requires that the components are not advanced in value abroad except by mere assembly or operations incidental to the assembly process such as cleaning, lubricating, and painting. This has largely facilitated the establishment of maquilas (in- bond plants) along the U.S. Mexico border in order to assemble U.S. components for re- export to the United States. ABC Corporation of Phoenix, Arizona attempted to take advantage of this opportunity by shipping U.S. components to Mexico for assembly and re- export. The company shipped straight steel strips from Tuscon, Arizona to neighboring Nogales, Mexico for use in luggage, which was later imported into the United States. However, U.S. Customs denied a deduction from the value of the luggage for the cost of the steel strips, stating that shaping the steel strips before placing them within the luggage constituted a further fabrication and not mere assembly. In other words, the bending process was not incidental to the assembly of a component exported from the United States. ABC Corporation does not believe that the denial by U.S. Customs was justified.

Do you agree with U.S. Customs?