Offsets are the practice by which the award of defense contracts by foreign governments or companies is conditioned upon commitments from the defense contractor to provide some form of compensation to the purchaser. In defense trade, offsets can include activities such as mandatory co-production, credit assistance, licensed production, subcontractor production, technology transfer, purchases, training, and foreign investment.
The use of offsets is commonplace in global defense trade. Today, virtually all of United States’ defense trading partners impose some type of offset requirement. Countries require offsets for a variety of reasons including easing the burden of large defense purchases on their economy, increasing or preserving domestic employment, obtaining desired technology or promoting industrial sectors.
In 1984, the U.S. Congress added Section 309 on offsets in defense trade to the Defense Production Act (DPA) (50 U.S.C. app § 2099), requiring the President to submit a report to Congress on the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States. This provision has subsequently been amended, most recently in 2009 as Section 723 (U.S.C. App. § 2172, but the purpose of the report remains the same. Since 1992, the Secretary of Commerce has been the President’s Executive Agent for carrying out Section 723 responsibilities. Section 723 authorizes the Secretary of Commerce to develop and administer the regulations necessary to collect offset data from U.S. firms. The Secretary of Commerce has delegated this authority to the Bureau of Industry and Security (BIS), which implements Section 723 through the Offset Reporting Regulation, 15 CFR Part 701.
Any U.S. firm that enters into a contract to provide defense articles or defense services to a foreign country or foreign firm pursuant to an offset agreement exceeding $5 million in value must report that agreement. In addition, U.S. firms must also report each offset transaction completed in performance of existing offset commitments for which offset credit of $250,000 or more has been claimed from a foreign representative.
As noted in § 701.4(b) of BIS’s Offset Reporting Regulation, U.S. firms must only report to BIS on offset agreements that they are directly responsible for reporting to the foreign customer, regardless of who performs the transaction. In other words, prime contractors must report for their subcontractors if the subcontractors are not direct parties to the offset agreement.
In addition, U.S. firms should not report to BIS on offset agreements that their foreign subsidiaries or affiliates enter into with foreign countries if the U.S. firm is not a party to the offset agreement. However, if a foreign subsidiary or affiliate of a U.S. firm performs an offset transaction that is credited toward an offset agreement to which the U.S. firm is a party, the U.S. firm must report that transaction to BIS.
The deadline for reporting all new contracts and transactions signed or executed as described above is June 15th of the subsequent year in which they occurred.
Firms must submit their data in hardcopy to the Offset Program Manager, U.S. Department of Commerce, Bureau of Industry and Security, Room 3876, 14th Street and Constitution Avenue, N.W., Washington, DC 20230, and as an email attachment to This email address is being protected from spambots. You need JavaScript enabled to view it. . Email attachments must include the information in a computerized spreadsheet or database format. All submissions must include a point of contact (name and telephone number).
Reports must include the information described in § 701.4(c)(1) of BIS’s Offset Reporting Regulation.
Reports on offset transactions must include the information described in § 701.4(c)(2) of BIS’s Offset Report Regulation. U.S. firms are required to provide an itemized list of offset transactions completed during the reporting period. The list should include the elements listed below for each such transaction (numerical estimates are acceptable when actual figures are unavailable; estimated figures shall be followed by the letter “E”).
A table format is provided to assist with the reporting of export sales and related offset agreements and offset transactions. Firms may add comments or explanations relating to the information as footnotes attached to the reports. To access this table format, click on the link below.
On December 23, 2009, BIS published a final rule in the Federal Register updating its Offset Reporting Regulations. The December 23, 2009 rule clarifies the information BIS is seeking to receive from industry and requires that industry provide more precise information on the industry sectors in which offset activity occurs. Firms reporting pursuant to the Offset Reporting Regulation must use the requirements in the final rule.
The December 23, 2009 rule’s most significant new data requirement is that U.S. firms must classify products and services involved in offset agreements and transactions triggering a reporting requirement by six-digit North American Industry Classification System (NAICS) code. NAICS is the standard industrial classification system used in the United States. Prior to the publication of the December 22, 2009 rule, BIS required industry to classify offset transactions by broad industry classification and to provide a name, date, and description of the military export sale. BIS directed firms to use the Standard Industrial Classification (SIC) codes for assistance in identifying an appropriate category for offset agreements and transactions. The SIC was replaced by the NAICS in 1997 (See 62 FR 17288, Apr. 4, 1997).
All companies conducting business with the U.S. Government, including those involved in military export sales with associated offset contracts, are required to classify their products and services in accordance with the NAICS. The U.S. Census Bureau posts instructions on its website on how to properly classify products and services in accordance with the NAICS. The Census website also contains a search feature that allows users to identify NAICS codes for their products and services based upon a keyword search. BIS’s December 23, 2009 rule also lists illustrative examples. Note that if an offset agreement or transaction involves more than one NAICS code, firms should report all of the appropriate codes as well as the value of the transaction related to each NAICS code.
The December 23, 2009 rule also updates the definitions used by firms in preparing their submissions for BIS. For example, the definition of “offset transaction” in § 701.2(f), removes reference to activities not commonly reported to BIS (i.e., countertrade, barter, counterpurchase, and buy back) and adds reference to frequently reported activities (i.e., credit assistance, training, and purchases).
The December 23, 2009 rule also provides additional clarity for U.S. firms by adding examples for each type of offset transaction found in the illustrative list in § 701.2(f). For instance, Example 1 to § 701.2(f), clarifies that “co-production” includes transactions that are based upon government-to-government agreements authorizing the transfer of technology necessary for a foreign company to manufacture all or part of a U.S.-origin defense article. Such transactions are based upon agreements specifically referenced in Foreign Military Sales (“FMS”) Letters of Offer and Acceptance (LOA) and government-to-government co-production Memorandums of Understanding. If the LOA does not specifically address the transfer of technology, then the transaction is more appropriately classified as “licensed production.”
Additionally, in Example 4 to § 701.2(f), BIS clarifies that a U.S. company making arrangements for a line of credit at a financial institution should be classified as “credit assistance” (distinguishable from the use of credited or “banked” offset credits, which would be classified as “other”).
In order to clarify the individual status of performance measures and non-performance penalties, the December 23, 2009 rule separates their reporting requirements by moving them from old § 701.4(e)(1)(vii) to new § 701.4(c)(1)(viii) and new § 701.4(c)(1)(ix), respectively. The rule also includes lists of examples for each.
New § 701.4(c)(2)(ii) requires companies to report for each offset transaction the date when the related offset agreement was signed. This data will allow BIS to better track the fulfillment of offset agreements and to identify trends in offset transaction activity.
Finally, the December 23, 2009 rule adds new § 701.6 describing the penalties available under the Defense Production Act (50 U.S.C. App. 2155) should companies not comply with BIS’s regulation. Willful violation of the Defense Production Act may result in punishment by fine or imprisonment, or both. The maximum penalty provided by the Defense Production Act is a $10,000 fine, one year in prison, or both. The U.S. Government may also seek an injunction from a court of appropriate jurisdiction to prohibit the continuance of any violation of, or to enforce compliance with, the Defense Production Act.
On March 1, 2016, BIS published an amendment to its offset regulation in the Federal Register. The amendment clarifies that companies reporting offset activity not only for items controlled under the International Traffic in Arms Regulations (ITAR), but also under the “600 series” of the EAR. The offset regulation had defined defense exports as being items subject to the ITAR, however, subsequent to the last amendment to the offset regulation, the Export Control Reform initiative moved certain items formerly controlled under the ITAR to the EAR under the “600 series” and the amendment made it clear that companies are required to report offsets associated with the sale of “600 series” items as they are defense articles.[1] BIS has required reporting of offset agreements in connection with sales of items subject to the ITAR since the early 1990s.[2] Those reporting requirements will continue, unchanged by this rule.[3]
For assistance, you may contact Ron DeMarines, Offset Program Manager, at (202) 482-3755 or (202) 482-4506, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. . Alternately, you may contact Emily Noel at (202) 482-6383, or by email at This email address is being protected from spambots. You need JavaScript enabled to view it. .
[1] See 81 Fed. Reg. 40, 10472 (March 1, 2016).
[2] See 81 Fed. Reg. 40, 10472 (March 1, 2016).
