Tax Deduction for Processing in Maquilas: Mere Assembly or Fabrication

The regulations of U.S. Customs and Border Protection (CBP) 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 and have retained their physical identity without change in form or shape. CBP also requires that the components not be 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 (manufacturing operations in a free trade zone area overseas and often re-export to the raw material’s country of origin) (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 Tucson, Arizona, to neighboring Nogales, Mexico, for use in luggage, which was later imported into the United States. CBP 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; that is, 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 CBP was justified.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.

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