Reporting offsets to the Bureau of Industry and Security

← All Insights

1. The obligation is on the firm, not on the government

Offsets are negotiated privately between a supplier and a foreign customer, and the United States government takes no part in them. It still counts them. The reporting duty falls on the American firm, and it comes from the Defense Production Act rather than from arms transfer law.

The trigger is a contract for the sale of a weapon system or defense related item to a foreign country or foreign firm. If that contract is subject to an offset agreement exceeding $5,000,000 in value, the firm must furnish information about the sale to the official designated in the implementing regulations (50 U.S.C. 4568(c)(1)). Those regulations are 15 CFR part 701, administered by the Bureau of Industry and Security.

2. Which contracts are inside the regime

Part 701 applies to United States firms entering contracts subject to an offset agreement exceeding $5,000,000 in value. The contract must also be for a sale, to a foreign country or foreign firm, of one of two categories of goods (15 CFR 701.3(a)).

The first category is defense articles and defense services as defined by the Arms Export Control Act and the International Traffic in Arms Regulations. The second is items controlled under an Export Control Classification Number carrying the numeral six as its third character on the Commerce Control List. That second category carries a short list of exclusions, covering certain submersible vessel entries and the equipment, software and technology tied to them (15 CFR 701.3(a)(1) and (2)).

The dollar test is applied to the offset agreement, not to the sale. A large sale carrying a small offset commitment can sit outside the regime, and a modest sale carrying a large one can sit inside it.

3. Agreements and transactions are reported separately

The regulation treats the promise and the performance as two different reportable things, which is the feature most often missed by firms reporting for the first time.

An offset agreement is the commitment. An offset transaction is a discrete act of performance against it, which the foreign customer credits. The rule reaches two populations. The first is offset transactions completed against existing commitments since 1 January 1993, where offset credit of $250,000 or more has been claimed from the foreign representative. The second is new offset agreements entered into since that date (15 CFR 701.3(b)).

A firm can therefore have nothing to report in the year it signs and a great deal to report five years later, as credits are claimed. The two thresholds are also different. The agreement threshold is $5,000,000. The transaction threshold is $250,000 of claimed credit.

4. The annual cycle

Reports cover the previous calendar year and are due no later than 15 June each year. The Department of Commerce publishes a notice in the Federal Register annually reminding firms of the requirement (15 CFR 701.4(a)).

Reporting runs on a calendar year with a mid year deadline, which does not line up with the federal fiscal year used elsewhere in security assistance. A firm that manages offset data on a fiscal year basis has to translate it.

5. Who reports for whom

A firm reports only on offset agreements it has entered into directly with a foreign customer. Where a subcontractor is performing offset work but is not itself a direct party to the offset agreement, the prime contractor reports for it (15 CFR 701.4(b)(1)).

That places a data collection burden on the prime that the regulation does not itself resolve. The information sits with suppliers who have no filing duty of their own, and the prime has to obtain it from them.

6. What is in the report

The regulation prescribes itemized content for each of the two categories (15 CFR 701.4(c)).

For an agreement, the itemized list covers:

• the foreign country, and the identity of the foreign party;
• a description and date of the military export sale, with six digit industry classification codes;
• the value of the sale and the value of the offset agreement;
• the term of the agreement in months;
• the category of performance measures, and any penalties for non-performance.

For a transaction, the list covers:

• the foreign country, and a description of the sale;
• the transaction category, with six digit industry classification codes;
• whether the transaction is direct or indirect;
• the entity performing it and the entity receiving it;
• the actual value of the offset, the offset credit value claimed, and where performance took place.

The actual value and the credit value are separate fields for a reason. A customer may credit a transaction at a multiple of its cash value, and the regulation asks for both figures rather than one.

7. Where the data ends up

The filings feed a report to Congress. The President submits to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services "a detailed annual report on the impact of offsets on the defense preparedness, industrial competitiveness, employment, and trade of the United States" (50 U.S.C. 4568(a)(1)).

The Secretary of Commerce prepares it and acts as the President's executive agent for the section. The Secretaries of Defense, the Treasury and State and the United States Trade Representative are consulted (50 U.S.C. 4568(a)(2)).

Each report identifies the cumulative effects of offset agreements on two things. One is domestic defense productive capability, with special attention paid to firms serving as lower tier subcontractors or suppliers. The other is the domestic defense technology base, as a consequence of the technology transfers associated with those agreements (50 U.S.C. 4568(b)(1)).

The prescribed contents run to five items (50 U.S.C. 4568(d)(1)):

• a net assessment of the industrial and technology base covered;
• recommendations for remedial action;
• a summary of the findings of any interagency studies conducted in the period;
• a summary of the offset arrangements reported during the period;
• a summary and analysis of bilateral and multilateral negotiations on offsets completed during it.

8. Confidentiality

Firm level data does not become public through this route. The statute directs that the regulations "shall provide protection from public disclosure for such information, unless public disclosure is subsequently specifically authorized by the firm furnishing the information" (50 U.S.C. 4568(c)(2)).

What reaches Congress is aggregate and analytical. The definitions that decide whether a given commitment is reportable at all are set out in what an offset is and who is party to it. The treatment of the resulting costs is in the United States position on offsets and cost recovery.

Key terms

Offset agreement	The commitment a firm accepts to conclude a military export sale. 15 CFR 701.2.
Offset transaction	An act of performance against an offset agreement for which credit is claimed.
ECCN	Export Control Classification Number, the entry that classifies an item on the Commerce Control List.
NAICS	North American Industry Classification System, the six digit code the report requires.
BIS	Bureau of Industry and Security, the Commerce bureau that collects the reports under 15 CFR part 701.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

How Sentfore supports this

Reporting obligations follow the paperwork. Operational obligations follow the equipment. Sentfore provides the in country layer around a delivery, from secure movement and protective security to accommodation and site support, and its principals have worked on overseas defense and security programs. Requirements can be sent through the contact page.