[Federal Register Volume 81, Number 40 (Tuesday, March 1, 2016)]
[Rules and Regulations]
[Pages 10472-10474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04425]


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DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Part 701

[Docket No. 150825780-6125-02]
RIN 0694-AG38


Export Control Reform: Conforming Change to Defense Sales Offset 
Reporting Requirements

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Final rule.

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SUMMARY: This rule requires reporting of offsets agreements in 
connection with sales of items controlled on the United States 
Munitions List (USML) and items controlled in ``600 series'' Export 
Control Classification Numbers (ECCNs) on the Commerce Control List 
(CCL) except for certain submersible and semi-submersible cargo 
transport vessels and related items that are not on the control lists 
of any of the multilateral export control regimes of which the United 
States is a member. Since the early 1990s, BIS has required reporting 
of offsets agreements in connection with sales of items controlled on 
the USML. Those reporting requirements will continue, unchanged by this 
rule. Beginning on October 15, 2013, some items have been removed from 
the USML and been added to 600 series ECCNs. These items were subject 
to offsets reporting requirements prior to being added to 600 series 
ECCNs. Some other items have been moved from non-600 series ECCNs to 
600 series ECCNs as part of the Administration's Export Control Reform 
Initiative. This rule requires reporting of offsets agreements in 
connection with sales of items controlled in 600 series ECCNs 
regardless of whether the item was added to a 600 series ECCN 
simultaneously with its removal from the USML or was subject to the EAR 
prior to its inclusion in a 600 series ECCN, except for certain 
submersible and semi-submersible cargo transport vessels and related 
items that are not on the control lists of any of the multilateral 
export control regimes of which the United States is a member. The 
changes made by this rule were the subject of a proposed rule for which 
BIS received no comments. This final rule adopts the text of the 
proposed rule without change.

DATES:  Effective: March 31, 2016.

FOR FURTHER INFORMATION CONTACT: Ronald DeMarines, Strategic Analysis 
Division, Office of Strategic Industries and Economic Security, 202-
482-3755, or [email protected].

SUPPLEMENTARY INFORMATION: 

Background

    Part 701 of Title 15, Code of Federal Regulations--Reporting of 
Offsets Agreements in Sales of Weapon Systems or Defense-Related Items 
to Foreign Countries or Foreign Firms (herein the Offsets Reporting 
Regulations) requires that U.S. firms report certain offset agreements 
to BIS annually. BIS uses the information so reported to develop a 
``detailed annual report on the impact of offsets on the defense 
preparedness, industrial competitiveness, employment, and trade of the 
United States'' (herein ``the offset report to Congress''), that is 
submitted to the Committee on Banking, Housing, and Urban Affairs of 
the Senate, and the Committee on Financial Services of the House of 
Representatives, as required by Section 723 of the Defense Production 
Act of 1950, as amended (DPA) (50 U.S.C. 4568(a)(1)). An offset for 
purposes of the Offsets Reporting Regulations is compensation required 
by the purchaser as a condition of the purchase in government-to-
government or commercial sales of defense articles or services. This 
compensation can take a variety of forms, including: Co-

[[Page 10473]]

production, technology transfer, subcontracting, credit assistance, 
training, licensed production, investment, and purchases. An agreement 
to provide offsets with a value exceeding $5,000,000 must be reported 
to BIS. Performance of an existing offset commitment for which offset 
credit of $250,000 or more has been claimed must also be reported to 
BIS.
    The Defense Production Act describes the items for which the offset 
report to Congress must be submitted as ``weapon system[s] or defense-
related item[s].'' (See section 723 of the DPA) (50 U.S.C. 4568(c)(1)). 
The Offsets Reporting Regulations currently require reporting of 
offsets in connection with ``defense articles and/or defense services'' 
as defined by the Arms Export Control Act and the International Traffic 
in Arms Regulations (22 CFR parts 120-130) (ITAR). See 15 CFR 701.2(a). 
The ITAR includes the USML (22 CFR part 121), which describes the 
defense articles that it regulates. Beginning on October 15, 2013, as 
part of the Administration's Export Control Reform Initiative, a series 
of rules removed a number of defense articles from the USML and added 
them to the CCL (15 CFR part 774, Supp. No. 1). BIS created a new 
series of ECCNs in the EAR, identified as the ``600 series'' because 
the third character in the ECCN is the numeral ``6,'' for those defense 
articles. The 600 series items formerly controlled on the USML were 
subject to offsets reporting requirements before being added to the 600 
series.
    Simultaneously with adding former USML defense articles to the 600 
series ECCNs, BIS added to those ECCNs some items that are of a 
military nature but that were already subject to the EAR. BIS took this 
step to provide consistent treatment for all military items that are 
subject to the EAR. Some of these items were in existing ECCNs. Others 
were subject to the EAR, but not set forth in any ECCN. Such items are 
designated under the EAR as EAR99 items. Items that were subject to the 
EAR prior to being added to 600 series ECCNs were not subject to 
offsets reporting requirements.
    On December 2, 2015, BIS published a proposed rule (see 80 FR 
75438) to require reporting of offsets agreements in connection with 
sales of all items controlled in 600 series ECCNs, except for certain 
submersible and semi-submersible cargo transport vessels and related 
items that are not on the control lists of any of the multilateral 
export control regimes of which the United States is a member, 
regardless of whether the item was controlled on the USML or subject to 
the EAR prior to being controlled under a 600 series ECCN. BIS received 
no comments on that proposed rule and this rule adopts the text of the 
proposed rule without change. The preamble to that proposed rule 
contained a description of 600 series ECCNs and a discussion of the 
antecedents to the current 600 series ECCNs, which identified items 
that were moved from the USML to 600 series ECCNs and items that were 
moved from non-600 series ECCNs to 600 series ECCNs (see 80 FR 75438, 
75439-75441, December 2, 2015). The facts presented in that discussion 
have not changed and it is not repeated here.

Rulemaking Requirements

    1. Executive Orders 13563 and 12866 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). This rule 
does not materially change any regulatory burden on the public and is 
consistent with the goals of Executive Order 13563. This rule has been 
determined to be not significant for purposes of Executive Order 12866.
    2. Notwithstanding any other provision of law, no person is 
required to respond to, nor shall any person be subject to a penalty 
for failure to comply with, a collection of information subject to the 
requirements of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et 
seq.) (PRA), unless that collection of information displays a currently 
valid Office of Management and Budget (OMB) Control Number. The 
collection of offset reports has been approved by OMB under control 
number 0694-0084. The estimated number of annual responses is 30 and 
the estimated number of burden hours is 360. BIS believes that this 
rule will not materially change the number of responses or burden hours 
authorized under 0694-0084 because the primary impact of this rule is 
to restore reporting requirements that have lapsed since those 
estimates were made, and to retain reporting requirements that 
otherwise will lapse in the coming months. Although this rule will 
create new reporting requirements for some items that were subject to 
Department of Commerce export control jurisdiction prior to being added 
to 600 series ECCNs, the impact of those additions on the burden is 
likely to be insignificant because those items are primarily low value 
items such as military ground vehicles designed for non-combat use, 
which are not usually the subject of offset agreements. The higher 
value items that typically trigger offset requirements by the foreign 
government purchaser, such as combat aircraft, strategic airlifter 
aircraft, ships, missiles and missile defense systems, are remaining on 
the USML and their offset reporting requirements have not changed. In 
addition, any increase in the reporting burden by the imposition of 
offsets reporting requirements on items that have moved to 600 series 
ECCNs is likely to be offset by a reduction in that burden resulting 
from the removal of some items from the USML and their addition to non-
600 series ECCNs, which are not subject to offsets reporting 
requirements. Those items are: Commercial spacecraft including 
satellites and related items, and certain energetic materials. Send 
comments regarding this burden estimate or any other aspect of these 
collections of information, including suggestions for reducing the 
burden, to Jasmeet K. Seehra, Office of Management and Budget, by email 
at [email protected] or by fax to (202) 395-7285 and to William Arvin 
at [email protected].
    3. This rule does not contain policies with Federalism implications 
as that term is defined under Executive Order 13132.
    4. The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), 5 U.S.C. 
601 et seq., generally requires an agency to prepare a regulatory 
flexibility analysis of any rule subject to the notice and comment 
rulemaking requirements under the Administrative Procedure Act (5 
U.S.C. 553) or any other statute, unless the agency certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities. Under section 605(b) of the RFA, however, if 
the head of an agency certifies that a rule will not have a significant 
impact on a substantial number of small entities, the statute does not 
require the agency to prepare a regulatory flexibility analysis. 
Pursuant to section 605(b), the Chief Counsel for Regulation, 
Department of Commerce, certified to the Chief Counsel for Advocacy, 
Small Business Administration that this rule will not have a 
significant impact on a substantial number of small entities for the 
reasons explained below. BIS received no comments regarding the 
certification. Consequently, BIS has not prepared a final regulatory 
flexibility analysis.
    Small entities include small businesses, small organizations and

[[Page 10474]]

small governmental jurisdictions. For purposes of assessing the impact 
of this rule on small entities, a small entity is defined as: (1) A 
small business according to the ``Table of Small Business Size 
Standards Matched to North American Industry Classification System 
Codes,'' effective January 22, 2014, published by the Small Business 
Administration (the SBA size standards); (2) a small governmental 
jurisdiction that is a government of a city, town, school district or 
special district with a population of less than 50,000; and (3) a small 
organization that is any not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field. BIS 
has determined that this rule will not affect any of these categories 
of small entities.
    SBA's size standards classify businesses in various North American 
Industry Classification System (NAICS) codes as small based on their 
annual revenue or number of employees. For example, in 2014, the 
maximum annual revenue for a small business was $33.5 million and the 
maximum number of employees was 1,500. Since BIS began collecting data 
in 1994, virtually all of the submissions that it has received have 
been from a small number of very large companies that exceed the SBA 
size standards for a small business. Since 1994, the number of 
companies that submitted data to BIS pursuant to this regulation has 
not exceeded 26 per year. On average, the companies that submit data to 
BIS have annual revenues well in excess of $1 billion. For instance, in 
2014, the most recent year for which BIS has data collected pursuant to 
this regulation, only one of the 26 companies that submitted data had 
reported revenue of less than $1 billion. That company had revenue of 
$120 million.
    Some small businesses likely are involved in fulfilling offset 
obligations by acting as subcontractors to the large prime contractors 
that report directly to BIS, meaning that they report indirectly to BIS 
pursuant to this section. However, this rule will not significantly 
increase the burden on such companies. Most of the information 
collected by BIS pursuant to this section is already collected by such 
small businesses so that they can accurately account for their 
obligations under the offset agreement (which is imposed at the behest 
of the foreign buyer) and report them to the prime contractor. The only 
data element required by this rule that might not be needed for those 
reports to the prime contractor is the classification of offset 
agreements and transactions by NAICS code. Even subcontractors involved 
in the manufacture of defense articles are likely to conduct business 
with the U.S. government and, therefore, be required to classify their 
products and services in accordance with the NAICS (See System for 
Award Management User Guide--V. 1.8, July 23, 2012, Section 3.4, page 
92, available at https://www.sam.gov/sam/transcript/SAM_User_Guide_v1.8.pdf). In addition, the U.S. government takes steps 
to facilitate selection of the correct NAICS code by private parties. 
The U.S. Census Bureau posts instructions on its Web site on how to 
properly classify products and services in accordance with the NAICS. 
BIS has included illustrative examples in Sec.  701.4(c)(1)(iii) and 
(c)(2)(iv) on classifying military export sales and offset transactions 
by NAICS codes.
    In addition, small governmental entities and small organizations 
are not likely to be involved in international defense trade, and will 
therefore have no reason to submit data to BIS pursuant to this 
regulation. Consequently, this rule will not have a significant impact 
on a substantial number of small entities.

List of Subjects in 15 CFR Part 701

    Administrative practice and procedure, Arms and munitions, Business 
and industry, Exports, Government contracts, Reporting and 
recordkeeping requirements.
    Accordingly, 15 CFR part 701 is amended as follows:

PART 701--[AMENDED]

0
1. The authority citation for part 701 continues to read as follows:

    Authority:  50 U.S.C. 4568; E.O. 12919, 59 FR 29525, 3 CFR, 1994 
Comp., p. 901; E.O. 13286, 68 FR 10619, 3 CFR, 2003 Comp., p. 166.


0
2. In Sec.  701.2, revise paragraphs (a) and (b) to read as follows:


Sec.  701.2  Definitions.

    (a) Offsets--Compensation practices required as a condition of 
purchase in either government-to-government or commercial sales of:
    (1) Defense articles and/or defense services as defined by the Arms 
Export Control Act and the International Traffic in Arms Regulations; 
or
    (2) Items controlled under an Export Control Classification Number 
(ECCN) that has the numeral ``6'' as its third character in the 
Commerce Control List found in Supplement No. 1 to part 774 of this 
chapter other than semi-submersible and submersible vessels specially 
designed for cargo transport and parts, components, accessories and 
attachments specially designed therefor controlled under ECCN 8A620.b; 
test, inspection and production equipment controlled in ECCN 8B620.b, 
software controlled in ECCN 8D620.b and technology controlled in ECCN 
8E620.b.
    (b) Military Export Sales--Exports that are either Foreign Military 
Sales (FMS) or commercial (direct) sales of:
    (1) Defense articles and/or defense services as defined by the Arms 
Export Control Act and International Traffic in Arms Regulations; or
    (2) Items controlled under an Export Control Classification Number 
(ECCN) that has the numeral ``6'' as its third character in the 
Commerce Control List found in Supplement No. 1 to part 774 of this 
chapter other than semi-submersible and submersible vessels specially 
designed for cargo transport and parts, components, accessories and 
attachments specially designed therefor controlled under ECCN 8A620.b; 
test, inspection and production equipment controlled in ECCN 8B620.b; 
software controlled in ECCN 8D620.b; and technology controlled in ECCN 
8E620.b.
* * * * *
0
3. In Sec.  701.3, revise paragraph (a) to read as follows:


Sec.  701.3  Applicability and scope.

    (a) This part applies to U.S. firms entering contracts that are 
subject to an offset agreement exceeding $5,000,000 in value and that 
are for the sale to a foreign country or foreign firm of: (1) Defense 
articles and/or defense services as defined by the Arms Export Control 
Act and International Traffic in Arms Regulations; or
    (2) Items controlled under an Export Control Classification Number 
(ECCN) that has the numeral ``6'' as its third character in the 
Commerce Control List found in Supplement No. 1 to part 774 of this 
chapter other than semi-submersible and submersible vessels specially 
designed for cargo transport and parts, components, accessories and 
attachments specially designed therefor controlled under ECCN 8A620.b; 
test, inspection and production equipment controlled in ECCN 8B620.b; 
software controlled in ECCN 8D620.b and technology controlled in ECCN 
8E620.b.
* * * * *

    Dated: February 24, 2016.
Kevin J. Wolf,
Assistant Secretary for Export Administration.
[FR Doc. 2016-04425 Filed 2-29-16; 8:45 am]
 BILLING CODE 3510-JT-P