IMPORT ADMINISTRATION POLICY BULLETIN Number 94.6 Date of Issue 3/25/94 Topic: Treatment of adjustments and selling expenses in calculating the cost of production ("COP") and constructed value ("CV") Author: James Terpstra Approved: (Signed 3-25-94) Joseph A. Spetrini Acting Assistant Secretary for Import Administration Statement of Issue This bulletin describes the treatment of movement charges, discount and rebates, indirect taxes, and selling expenses when calculating COP and CV. Statement of Policy - COP For purposes of determining whether home market, or if appropriate third country (both hereinafter referred to as home market), sales are below COP, we compare net home market prices for individual sales to net COPs of the products sold ("the cost test"). The total COP is based on the cost of manufacturing ("COM") of the home market product plus the actual home market selling, general, and administrative expenses ("SG&A"), plus actual interest expenses incurred (taken from the financial statement) and home market packing. The COM, actual interest cost, and home market packing are based on information in the section D COP/CV questionnaire response. The SG&A is comprised of the G&A, which is based on data from the section D COP/CV questionnaire response, and the S, which is based on data from the section B home market sales questionnaire response. It is important to note that the selling expenses are transaction-specific, i.e., actual for or allocated to each observation on the sales tape, and the COM, G&A, actual interest cost and packing are product-specific, i.e., actual for or allocated to each unique product identified by a control number ("CONNUM"). Both the net COP and the net home-market prices should be on the same basis, e.g., packed, ex-factory, net of selling expenses; otherwise, the comparison would be distorted. To conduct the cost test we compare home market prices, net of discounts and rebates, movement charges, and direct and indirect selling expenses, to a COP which is composed of COM, G&A, actual interest cost and home market packing. We subtract selling expenses from the price rather than include them in SG&A because direct and indirect selling expenses are sales- specific and are contained on the sales tape. We make these adjustments to avoid distortions caused by comparing prices with transaction-specific selling expenses to COPs with average selling expenses. Although calculating COPs with sales-specific selling expenses would achieve the same result, it would be more complex without increasing accuracy. However, as long as all actual costs are either in the COP or are subtracted from the price, the calculation is accurate. To calculate the net home market price for the cost test, the following are subtracted from the gross unit price: 1) all movement charges; 2) discounts and rebates; 3) all actual direct and indirect selling expenses. No deduction is made for imputed expenses (i.e., imputed credit and inventory carrying costs). To determine whether a given producer is engaged in below-cost sales: 1) in substantial quantities; 2) over an extended period of time; and 3) at prices which do not permit cost recovery within a reasonable period of time, we limit our analysis to actual costs reflected on the producer's financial records. Thus, as discussed below, imputed expenses are not included in the cost test analysis. Movement charges are a direct cost of making the sale to the producer, and are always deducted from the price. However, some companies record the cost of freight to customers as a selling expense. In such cases, we must ensure that we do not subtract both the transaction-specific freight charge and the direct selling expenses which included this charge. Doing so would lead to distortion because we would double count the freight cost. We must either reduce the direct selling expenses by the amount of the freight charge or not subtract the transaction-specific freight charge. Discounts are reductions in revenue to the producer and should always be deducted from the price. Rebates are adjustments to the price, even though in practice we program our calculations to directly deduct the rebates from the price. As with freight, some companies record rebates as direct selling expenses (rather than netting rebates against sales revenue, as is usually done). In such cases, we must follow the procedures discussed above for freight. All actual direct selling expenses are deducted from the price. Imputed credit expenses, on the other hand, are not deducted from the price because they are not actual expenses per se; rather, they represent the calculated amount of the opportunity cost of a company's extending credit to its customers for individual sales transactions. Because the COP is derived from the actual expenses found on the records of the producer, it does not include a separate amount for opportunity costs incurred by the producer. All actual indirect selling expenses are deducted from the price. Imputed inventory carrying costs are not deducted from the price. In purchase price situations where indirect selling expenses may not be reported on the section B sales tape, we must ensure that, in this case, the COP contains SG&A inclusive of actual indirect selling expenses. In cases where indirect taxes are paid on transactions in the home market, we must ensure that the amount of taxes added to home market price is the same as the amount added to the cost of materials in the COP. In other words, we want to make an apples-to-apples comparison without skewing the analysis by including different tax amounts in the price and COP. This is accomplished by adding the transaction- specific indirect tax, e.g., VAT, to both the net home market price and the COP just prior to running the cost test. Finally, we compare the net home market price (i.e., minus discounts, rebates, movement charges, and non-imputed selling expenses (inclusive of indirect taxes)) for each transaction to the COP net of selling expenses (i.e., COM, actual interest cost, G&A, indirect taxes, and packing) for the respective unique product ("CONNUM"). Statement of Policy - CV The statute directs that CV include an amount for general expenses based on sales in the home market, and that these expenses be no less than ten percent of COM. These general expenses comprise SG&A and actual interest cost. The COM of the product exported to the United States is calculated based on the information in the section D COP/CV questionnaire response. The home market SG&A is comprised of the G&A based on the section D COP/CV questionnaire response, and the S which is calculated based on the section B home market sales questionnaire response. The S is a weighted-average of all direct and indirect selling expenses reported for home market sales, including imputed credit and inventory carrying costs. We use the weighted-average direct and indirect selling expenses for all home market sales and incorporate them with home market G&A from the section D COP/CV questionnaire response. The SG&A is added to the COM of the U.S. product. We conduct a test to ensure that this SG&A plus actual interest cost is at least ten percent of COM. If it is not, the SG&A plus actual interest cost is increased to ten percent of COM. We then add actual profit; if the actual profit is less than eight percent of COM and SG&A plus actual interest cost, we increase profit to eight percent. Finally, U.S. packing is added for a complete CV. Note that CV is different from COP in that it includes imputed costs as well. Imputed credit and inventory carrying cost contain elements of both hypothetical and actual (e.g., actual interest cost) costs. We recognize both of these costs in our price-to-price comparisons. We also recognize both of these costs in CV because the SG&A is supposed to reflect the home market selling expenses which would ordinarily be used in price-to-price comparisons. However, we must ensure that the actual interest costs are not double counted. The imputed credit and inventory carrying costs contain some actual cost which is also reported in the section D COP/CV questionnaire response. Accordingly, we calculate an offset to actual interest expenses, using the company's financial statement. As with COP, in purchase price situations where indirect selling expenses may not be reported on the section B home market sales tape, we must ensure that the SG&A calculation appropriately reflects both direct and indirect selling expenses. After CV is calculated we make circumstance-of-sale adjustments for differences between CV and United States Price (USP), in the same way as in price-to-price comparisons. In purchase price situations this involves subtracting home market direct selling expenses from CV and adding U.S. direct selling expenses. Pursuant to the CIT's decision in Zenith Electronics Corp. v. U.S., 812 F. Supp. 225, the subtraction of home market selling expenses cannot reduce the general expenses component of CV below the statutory minimum of 10 percent. In exporter's sales price (ESP) situations, this involves subtracting both direct and indirect selling expenses from both CV and USP, with the home market indirect selling expenses limited by the amount of the U.S. indirect selling expenses--the ESP cap. Note that, unlike in price-to-price comparisons, when CV is the basis for foreign market value, we do not make an adjustment for indirect taxes in the home market--the VAT style offset. This is because CV is a hypothetical value used in the absence of actual sales. Therefore, no tax is actually paid for CV. Implementation The practices described in this bulletin should be used in all investigations and reviews for which a preliminary determination has not been reached by the issue date of this bulletin, and in all final determinations in which the issue has been raised in comments from interested parties. If an action following this policy is challenged in comments after a preliminary determination, you should use the reasoning expressed in the bulletin, as well as citing to any appropriate cases. In responding to the comment, the bulletin itself, standing alone, cannot be cited as authority for an action, as it not a regulation.