Document ID: BIS-2008-0023-0001
Agency: bis
Document Type: Rule
Title: De Minimis U.S. Content in Foreign Made Items
Posted Date: 2008-10-01T04:00Z

[Federal Register: October 1, 2008 (Volume 73, Number 191)]
[Rules and Regulations]               
[Page 56964-56970]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc08-7]                         

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Parts 730, 732, 734, 736, 762 and 774

[Docket No. 071204798-81254-01]
RIN 0694-AC17

 
De Minimis U.S. Content in Foreign Made Items

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Interim final rule.

-----------------------------------------------------------------------

SUMMARY: The Department of Commerce is revising the provisions of the 
Export Administration Regulations (EAR) that pertain to foreign-made 
items that incorporate controlled U.S.-origin items, i.e., the EAR's 
``de minimis'' rules. This rule amends the EAR to change the de minimis 
calculation for foreign produced hardware that is bundled with U.S.-
origin software. This rule also clarifies the definition of 
`incorporate' as it is applied to the de minimis rules and to the 
medical statement of understanding. This rule also removes the 
requirement to submit a one-time report to the Bureau of Industry and 
Security for foreign-made software that incorporates U.S.-origin 
software. In addition, this rule revises the ``Steps for Using the 
EAR'' and General Prohibition Two with regard to the de minimis rules 
in order to reduce redundancies in the EAR and harmonize the provisions 
with other revisions made by this rule.

DATES: This rule is effective: October 1, 2008. Comments must be 
received by December 1, 2008.

ADDRESSES: Comments on this rule may be submitted to the Federal 
eRulemaking Portal at http://www.regulations.gov (follow the 
instructions for submitting comments), by e-mail directly to BIS at 
publiccomments@bis.doc.gov (refer to regulatory identification number 
0694-AC17 in the subject line), by fax at (202) 482-3355, or on paper 
to Regulatory Policy Division, Office of Exporter Services, Bureau of 
Industry and Security, Room H2705, U.S. Department of Commerce, 14th 
Street and Pennsylvania Avenue, NW., Washington, DC 20230. Refer to 
Regulatory Identification Number (RIN) 0694-AC17 in all comments.

FOR FURTHER INFORMATION CONTACT: Sharron Cook, Office of Exporter 
Services, Bureau of Industry and Security, U.S. Department of Commerce 
at (202) 482-2440 or E-mail: scook@bis.doc.gov.

SUPPLEMENTARY INFORMATION:

Background

    The term ``de minimis'' generally refers to matters that are of 
minor significance. The de minimis provisions of the EAR promote U.S. 
export control objectives as set forth in the Export Administration Act 
of 1979, as amended, while limiting U.S. jurisdiction over non-U.S. 
products containing a de minimis percentage, by value, of sensitive 
U.S. components. To prevent the diversion of controlled U.S. items and 
foreign made items incorporating a significant amount of U.S.-origin 
controlled content, a foreign-made item that contains more than the de 
minimis amount of controlled U.S.-origin content value is subject to 
the EAR, i.e., a license may be required from BIS for the export abroad 
to another foreign country or in-country transfer of the foreign-made 
item. Prior to March 1987, the EAR set no de minimis levels for U.S. 
content in foreign made items; foreign-made items were subject to the 
EAR if they contained any amount of U.S.-origin content, no matter how 
small. A rule published March 23, 1987 (52 FR 9147) revised what were 
then called the ``parts and components'' provisions to establish 
thresholds at which the amount of U.S.-origin commodities in foreign-
made items would warrant exercise of U.S. jurisdiction over the 
foreign-made item when located outside the United States. The rule was 
established to alleviate a major trade dispute with allies who 
strenuously objected to U.S. assertion of jurisdiction over all 
reexports of non-U.S. items that contained even trivial amounts of U.S. 
content. A major revision of the EAR in 1996 (61 FR 12714) introduced 
the term ``de minimis'' and established de minimis thresholds for 
software and technology. The 1996 rule required a one-time report for 
software and technology, which had to be submitted before reexporters 
relied on the de minimis rules for such items, and it made no provision 
for the ``incorporation'' of software into commodities. These 
provisions have not been significantly revised since 1996.
    The interested public has consistently expressed concerns about de 
minimis calculations and reporting requirements in requests for 
advisory opinions, industry meetings, Technical Advisory Committee 
(TAC) meetings, seminars (especially overseas), and at the annual 
Bureau of Industry and Security (BIS) Update conference. Both U.S. 
exporters and the foreign manufacturers who are their customers have 
said that determining the applicability of the de minimis rules is 
complicated and cumbersome. BIS recognizes that the export control 
objectives of the de minimis rules will be best served if those rules 
are clarified to facilitate compliance with them.
    Accordingly, BIS intends this revision of the EAR to facilitate 
compliance efforts by foreign manufacturers and respond to both 
advances in technology and how products are manufactured and sold in 
practice. Foreign manufacturers incorporating U.S. content must 
determine their obligations under U.S. export controls, in addition to 
those of their own countries, in order to prevent the diversion of 
controlled U.S. items to destinations and end-users that would be 
inimical to the national security or foreign policy interests of the 
United States. BIS recognizes that the heavier the compliance burden 
is, the greater the incentive to purchase content elsewhere. Modifying 
U.S. rules may reduce the pressure to ``design out'' U.S. origin items 
from foreign products, and thereby provide significant benefit to U.S. 
businesses while enabling BIS to continue exercising appropriate 
jurisdiction over foreign-made items incorporating controlled U.S. 
content.

Paperwork Reduction Act Collection 0694-0101

    This rule revises the title of Supplement No. 1 to part 730, as 
well as the entry for Paperwork Reduction Act collection number 0694-
0101. The title corresponding to collection number 0694-0101 is changed 
from ``One-Time Report for Foreign Software or Technology Eligible for 
De Minimis Exclusion'' to ``One-Time Report for Foreign Technology 
Eligible for De Minimis Exclusion'', because this rule removes the 
requirement to submit a one-time report on de minimis calculations for 
foreign software, but retains the requirement for foreign technology. 
The entry for 0694-0101 in the table is amended by adding Supplement 
No. 2 to part 734 to the related citation for this collection, because 
much of the detail about the required report is in Supplement No. 2 to 
part 734 of the EAR.

Part 732 ``Steps for Using the EAR''

    This rule amends Sec.  732.2 ``Steps regarding scope of the EAR'' 
by revising

[[Page 56965]]

paragraph (d) ``Step 4: Foreign-made items incorporating less than the 
de minimis level of U.S.-origin items'' (revised title) and removing 
and reserving paragraph (e) ``Step 5: Foreign-made items incorporating 
more than the de minimis level of U.S. parts, components, or 
materials.'' Paragraph (d) is revised to avoid redundancies in the EAR 
by eliminating instructions, otherwise described in the newly modified 
Supplement No. 2 to part 734, for calculating the value of U.S.-origin 
content in a foreign item. Paragraph (d) is also revised to clarify 
instructions and modernize terminology regarding foreign-made items 
that incorporate U.S.-origin content. Paragraph (e) is removed and 
reserved, because Steps 4 and 5 have been combined.
    This rule amends Sec.  732.3 ``Steps regarding the ten general 
prohibitions'' by revising paragraph (e) ``Step 10: Foreign-made items 
incorporating controlled U.S.-origin items and the de minimis rules.'' 
This paragraph is revised to eliminate instructions, otherwise 
described in the newly modified Supplement No. 2 to part 734, for 
determining what constitutes `controlled' U.S.-origin content. This 
paragraph also clarifies instructions and modernizes terminology 
regarding foreign-made items that incorporate more than the de minimis 
level of U.S. content. This section has also been modified to reflect 
the fact that there are actually two de minimis rules described in part 
734 of the EAR (rather than a single de minimis rule).

Foreign-Made Items That Incorporate Controlled U.S.-Origin Items

    This rule amends Sec.  734.3 ``Items subject to the EAR'' by 
revising paragraph (a)(3) regarding foreign-made items that incorporate 
controlled U.S.-origin items. The revisions to this section clarify 
which foreign produced items that incorporate controlled U.S.-origin 
items are subject to the EAR. This rule clarifies that foreign produced 
commodities that incorporate controlled U.S.-origin commodities, 
foreign produced commodities that are `bundled' with controlled U.S.-
origin software, foreign produced software that is commingled with 
controlled U.S.-origin software, and foreign produced technology that 
is commingled with controlled U.S.-origin technology are subject to the 
EAR if the incorporated controlled U.S.-origin content exceeds the de 
minimis levels as defined in Sec.  734.4 of the EAR. Prior to the 
publication of this rule, the de minimis rules in the EAR did not allow 
U.S.-origin software to be counted as a part of a foreign commodity it 
was bundled with. Rather, calculations of U.S. content value were 
required to be performed separately for commodities, software, and 
technology. This change is in response to the way that systems and 
software are now being developed and delivered to customers. 
Furthermore, this change is necessary because software is such an 
integral part of the system in which the hardware and software work and 
is generally customized to work with a specific hardware product.
    This rule amends Sec.  734.4 of the EAR to clarify the scope of the 
de minimis rules by adding the title ``10% De Minimis Rule'' to 
paragraph (c), and the title ``25% De Minimis Rule'' to paragraph (d). 
These two paragraphs, together with the exceptions they cross-
reference, encapsulate the ``de minimis rules'' that are referenced 
elsewhere in the EAR. This rule also amends paragraphs 734.4(c)(3) and 
734.4(d)(3) of the EAR to clarify that there is a reporting requirement 
that must be fulfilled before the de minimis rules are relied upon for 
technology. The details of that reporting requirement are in Supplement 
No. 2 to part 734 of the EAR. As stated in more detail below, this 
reporting requirement previously existed for software and technology, 
but now only exists for technology. This requirement is more properly 
stated in the text of the de minimis rules rather than in the 
guidelines in Supplement No. 2 to part 734, where it was previously 
found. This rule also moves a caution regarding the applicability of 
Department of the Treasury, Office of Foreign Assets Control 
regulations to certain exports from abroad by persons subject to the 
jurisdiction of the United States (as defined therein) regardless of 
the de minimis rules in the EAR, from Sec.  732.3 of the EAR to a new 
subparagraph (a)(5) of Sec.  734.4 of the EAR. This caution is also 
reworded slightly to adopt the term ``persons subject to the 
jurisdiction of the United States'', which is a defined term in the 
Foreign Assets Control Regulations, 31 CFR. 500.329.
    In Sec.  734.4 of the EAR, this rule removes paragraph (e) and (h), 
redesignates paragraphs (f) and (g) as paragraphs (e) and (f), 
respectively, and adds a new paragraph (g). Paragraph (e) was removed 
because the provisions in that paragraph were moved to Supplement No. 1 
to part 734. Paragraph (h) was removed because the provisions in that 
paragraph were either moved to other paragraphs, or were otherwise 
redundant or outdated. The prior restriction on hot section technology 
that was in paragraph (h) is moved to paragraph (a) and amended to more 
clearly express BIS's intent with regard to this restriction. This rule 
also corrects the citation in Sec.  734.4 for hot section technology, 
which is covered by ECCN 9E003.a.1 through a.11 and .h instead of ECCN 
9E003.a.1 through a.12 and .f. The prior de minimis restriction on 
encryption software under ECCN 5D002 in paragraph (h) contradicted the 
special provisions for this software found in paragraph (b), and was 
thus outdated. The prior de minimis restriction in paragraph (h) 
concerning encryption technology under ECCN 5E002 repeated the 
restriction on the same technology in paragraph (a), and was therefore 
redundant. Only certain encryption items are eligible for de minimis 
treatment, and this rule does not change the scope of eligible 
encryption items nor the special requirements set forth in Sec.  
734.4(b) of the EAR for the application of de minimis to those items. 
As a reminder to the public, Sec.  734.4(b)(1)(iii) of the EAR 
restricts foreign products that incorporate Sec.  740.17(b)(2) EI 
software or hardware, or are bundled with Sec.  740.17(b)(2) EI 
software, from being exported from abroad to E:1 countries (see 
Supplement No. 1 to part 740 of the EAR). The new paragraph (g) sets 
forth a recordkeeping requirement for the method used to determine the 
percentage of U.S. content in foreign software or technology. This 
change is described in more detail below.

Bundled Software

    The amendment to Sec.  734.3 of the EAR described above introduces 
the concept of `bundled' software, which will require de minimis 
calculations to include certain software within the calculated value of 
U.S. origin content in a foreign made commodity. Previously, 
calculations of U.S. content value were required to be performed 
separately for commodities, software, and technology. This interim rule 
will allow foreign made commodities `bundled' with de minimis amounts 
of U.S. origin software to become not subject to the EAR in many 
instances.
    This rule adds three notes to paragraph (c)(1) and to paragraph 
(d)(1) of Sec.  734.4 of the EAR. The notes are substantively identical 
for each paragraph. The first note explains that U.S.-origin software 
(like hardware components) remains subject to the EAR when exported or 
reexported separately from (i.e., not incorporated or bundled with) a 
foreign-made commodity. Exports or reexports of software for additional 
users and upgrades of the software are considered separate exports or 
reexports of the software.

[[Page 56966]]

    The second note explains the meaning of `bundled'. The term 
`bundled' refers to software that is configured for a specific 
commodity, but is not necessarily physically integrated into the 
commodity. For instance, printer driver software is generally not 
incorporated into a printer but is customarily delivered with the 
printer so that it may be loaded onto the computer to which it will be 
connected.
    The third note provides the scope of software that may be bundled 
with foreign-made commodities for the purposes of the de minimis rules 
set forth in Sec. Sec.  734.4(c)(1) and 734.4(d)(1) of the EAR. 
Eligible software is software that is listed on the Commerce Control 
List (CCL) and is controlled for anti-terrorism (AT) reasons or 
software that is designated EAR99 (subject to the EAR, but not listed 
on the CCL). Software that is listed on the CCL and does not require a 
license to the destination of a given foreign-made commodity is not 
considered ``controlled'' for purposes of the shipment of that 
commodity and should not be included in de minimis calculations for 
that shipment. Software that does not meet these criteria will not be 
considered to be `bundled' with any commodity for purposes of the de 
minimis rules. BIS is limiting bundling for software to that which is 
controlled for AT reasons because some software controlled for non-
proliferation or national security reasons can be used to enhance the 
capabilities of equipment controlled for the same reasons.

Supplement No. 2 to Part 734--Calculation of Values for De Minimis 
Rules

    Supplement No. 2 to part 734 is amended to clarify the guidelines 
for `controlled' U.S.-origin content and for determining content values 
for purposes of the de minimis rules. The supplement also is amended to 
clarify the definition of the term `incorporate', and remove the 
reporting requirement for foreign-made software that incorporates a de 
minimis level of controlled U.S.-origin software. Further, this 
supplement will now be the sole reference point for persons seeking 
details on how to determine whether their foreign-made item is subject 
to the EAR on the basis of the de minimis rules in Sec.  734.4. 
Previously, guidance on performing de minimis calculations, and 
specifically on identifying `controlled' U.S.-origin content, was also 
contained in part 732 of the EAR.
    This rule revises the term `controlled' for the purpose of 
determining if the U.S.-origin content value should be counted in the 
de minimis percentage calculation. This explanation is a clarification 
of BIS's existing interpretation. U.S.-origin content is considered 
controlled for the purpose of the de minimis rules when it requires a 
license to the intended ultimate country of destination of the foreign-
made item. When making this license determination you should only use 
the Export Control Classification Number (ECCN) based on the Commerce 
Control List in Supplement No. 1 to part 774 of the EAR, the Commerce 
Country Chart in Supplement No. 1 to part 738 of the EAR, License 
Exception GBS (if applicable), and the special controls and embargo 
provisions in part 746 of the EAR. Note that items classified as EAR99 
may be controlled content when going to some destinations. End-user and 
end-use provisions in part 744 of the EAR are not to be considered when 
determining if U.S.-origin content in a foreign-made item is 
controlled. This is because the de minimis rules are not intended to 
identify licensing requirements for the foreign-made item, but rather 
to identify whether the foreign-made item is subject to the EAR because 
it contains an amount of U.S. content that is significant not only in 
value, but also due to its sensitivity with regard to the intended 
ultimate country of destination. If it is determined the foreign-made 
item is subject to the EAR because of the percentage of controlled 
U.S.-origin content it contains, then the relevant provisions of the 
EAR (including end-use and end-user requirements) must be applied to 
the foreign-made item to make a license requirement determination.
    This rule clarifies the definition of ``incorporated'' to be 
consistent with common business practices concerning the way equipment 
and systems are being sold today. In addition, the new definition is 
consistent with the way that classifications are performed in BIS and 
the way BIS interprets the export of a commodity. Previously, 
Supplement No. 2 to part 734 of the EAR stated only that the term 
``incorporated'' did not include peripheral or accessory devices that 
were merely rack mounted with or cable connected into foreign 
equipment, even though intended for use with products made abroad. 
Under this new rule, U.S. items are ``incorporated'' when all of the 
following conditions are met: (1) They are essential to the functioning 
of the foreign equipment, (2) they are customarily included in the sale 
of foreign-made items, and (3) they are reexported with the foreign 
produced item.
    This rule removes the one-time reporting requirement for foreign-
made software that incorporates controlled U.S.-origin software. From 
its inception, the one-time report was intended to be a temporary 
measure to verify that industry understood how to perform the de 
minimis calculation. BIS, as well as the Departments of Defense and 
State, have reviewed numerous one-time reports for foreign-made 
software, and have concluded that industry is performing the de minimis 
calculation correctly. Therefore, the one-time reporting requirement 
for foreign-made software is removed. However, the requirement for one-
time reports for foreign-made technology that incorporate controlled 
U.S.-origin technology will not be removed at this time, because there 
has not been a sufficient number of these reports to verify that 
industry is performing these correctly and the scope and value of 
technology is more difficult to calculate.
    As stated above, the recordkeeping requirement for the method by 
which you determined the percentage of U.S. content in foreign software 
or technology is moved from Supplement No. 2 to part 734 to a new 
paragraph (g) in Sec.  734.4 of the EAR, as requirements should be 
found in the main body related to de minimis rather than in the 
guidance for de minimis calculations found in Supplement No. 2 to part 
734 of the EAR. The recordkeeping requirement is also more clearly 
stated, explicitly cross-referencing the EAR's general recordkeeping 
provision in part 762. In addition, this rule adds a reference to Sec.  
734.4(g) in Sec.  762.2(b) because this paragraph lists references to 
record retention requirements in the EAR.

General Prohibition Two

    This rule amends General Prohibition two in part 736 of the EAR by 
revising the title, harmonizing the text with Sec.  734.4, and 
clarifying that foreign-made items that incorporate more than the de 
minimis amount of controlled U.S.-origin items are subject to all the 
provisions of the EAR and not just the license requirements indicated 
by the ECCN and the Commerce Country Chart. The title of General 
Prohibition two is amended to revise the parenthetical short title from 
``parts and components reexports'' to ``U.S.-content reexports,'' in 
order to clarify that the de minimis rules apply to technology and 
software reexports, in addition to commodity reexports.

Statement of Understanding--Medical Equipment

    This rule amends guidance on the Wassenaar Arrangement statement of 
understanding on medical equipment in Supplement No. 3 to part 774 by

[[Page 56967]]

revising the note defining ``incorporate.'' The revision harmonizes the 
definition of ``incorporate'' as it relates to U.S. commodities and 
software incorporated into medical equipment with the definition of 
``incorporate'' as it is applied to the de minimis rules in part 734 of 
the EAR. This new definition is consistent with common business 
practices concerning the way equipment and systems are being sold 
today.
    Although the Export Administration Act expired on August 20, 2001, 
the President, through Executive Order 13222 of August 17, 2001, 3 CFR, 
2001 Comp., p. 783 (2002), as extended by the Notice of July 23, 2008, 
73 FR 43603 (July 25, 2008), has continued the Export Administration 
Regulations in effect under the International Emergency Economic Powers 
Act.

Rulemaking Requirements

    1. 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 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. This rule involves a 
collection of information that has been approved by the OMB under 
control number 0694-0088, ``Multi-Purpose Application,'' which carries 
a burden hour estimate of 58 minutes to prepare and submit form BIS-
748. Miscellaneous and recordkeeping activities account for 12 minutes 
per submission. This rule contains a collection that has been approved 
by the Office of Management and Budget under control number 0694-0101, 
which carries a burden hour estimate of 25 hours. Send comments 
regarding these burden estimates or any other aspect of these 
collections of information, including suggestions for reducing the 
burden, to Jasmeet Seehra, OMB Desk Officer, by e-mail at 
jseehra@omb.eop.gov or by fax to (202) 395-7285; and to the Regulatory 
Policy Division, Bureau of Industry and Security, Department of 
Commerce, 14th & Pennsylvania Ave., NW., Room 2705, Washington, DC 
20230.
    3. This rule does not contain policies with Federalism implications 
as that term is defined under Executive Order 13132.
    4. Pursuant to 5 U.S.C. 553(a)(1), this rule is exempt from the 
provision of the Administrative Procedure Act (5 U.S.C. 553) (APA) 
requiring notice and an opportunity for public comment because this 
regulation involves a military and foreign affairs function of the 
United States. For the same reason, good cause exists to waive the 30-
day delay in effectiveness otherwise required by the APA. Further, no 
other law requires that a notice of proposed rulemaking and an 
opportunity for public comment be given for this interim final rule. 
Accordingly, no regulatory flexibility analysis is required and none 
has been prepared. Although notice and opportunity for comment are not 
required, BIS is issuing this rule in interim final form and is seeking 
public comments on these revisions. The period for submission of 
comments will close December 1, 2008. BIS will consider all comments 
received before the close of the comment period in developing a final 
rule. Comments received after the end of the comment period will be 
considered if possible, but their consideration cannot be assured. BIS 
will not accept public comments accompanied by a request that a part or 
all of the material be treated confidentially because of its business 
proprietary nature or for any other reason. BIS will return such 
comments and materials to the persons submitting the comments and will 
not consider them in the development of the final rule. All public 
comments on this interim rule must be in writing (including fax or e-
mail) and will be a matter of public record, available for public 
inspection and copying. The Office of Administration, Bureau of 
Industry and Security, U.S. Department of Commerce, displays these 
public comments on BIS's Freedom of Information Act (FOIA) Web site at 
http://www.bis.doc.gov/foia. This office does not maintain a separate 
public inspection facility. If you have technical difficulties 
accessing this Web site, please call BIS's Office of Administration at 
(202) 482-0953 for assistance.

List of Subjects

15 CFR Part 730

    Administrative practice and procedure, Advisory committees, 
Exports, Reporting and recordkeeping requirements, Strategic and 
critical materials.

15 CFR Part 732

    Administrative practice and procedure, Exports, Reporting and 
recordkeeping requirements.

15 CFR Part 734

    Administrative practice and procedure, Exports, Inventions and 
patents, Research Science and technology.

15 CFR Part 736

    Exports.

15 CFR Part 762

    Administrative practice and procedure, Business and industry, 
Confidential business information, Exports, Reporting and recordkeeping 
requirements.

15 CFR Part 774

    Exports, Reporting and recordkeeping requirements.

0
Accordingly, parts 730, 732, 734, 736, 762 and 774 of the Export 
Administration Regulations (15 CFR parts 730-774) are amended as 
follows:

PART 730--[AMENDED]

0
1. The authority citation for 15 CFR part 730 continues to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
10 U.S.C. 7420; 10 U.S.C. 7430(e); 22 U.S.C. 287c; 22 U.S.C. 2151 
note; 22 U.S.C. 3201 et seq.; 22 U.S.C. 6004; 30 U.S.C. 185(s), 
185(u); 42 U.S.C. 2139a; 42 U.S.C. 6212; 43 U.S.C. 1354; 46 U.S.C. 
app. 466c; 50 U.S.C. app. 5; 22 U.S.C. 7201 et seq.; 22 U.S.C. 7210; 
E.O. 11912, 41 FR 15825, 3 CFR, 1976 Comp., p. 114; E.O. 12002, 42 
FR 35623, 3 CFR, 1977 Comp., p. 133; E.O. 12058, 43 FR 20947, 3 CFR, 
1978 Comp., p. 179; E.O. 12214, 45 FR 29783, 3 CFR, 1980 Comp., p. 
256; E.O. 12851, 58 FR 33181, 3 CFR, 1993 Comp., p. 608; E.O. 12854, 
58 FR 36587, 3 CFR, 1993 Comp., p. 179; E.O. 12918, 59 FR 28205, 3 
CFR, 1994 Comp., p. 899; E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp., 
p. 950; E.O. 12947, 60 FR 5079, 3 CFR, 1995 Comp., p. 356; E.O. 
12981, 60 FR 62981, 3 CFR, 1995 Comp., p. 419; E.O. 13020, 61 FR 
54079, 3 CFR, 1996 Comp. p. 219; E.O. 13026, 61 FR 58767, 3 CFR, 
1996 Comp., p. 228; E.O. 13099, 63 FR 45167, 3 CFR, 1998 Comp., p. 
208; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; E.O. 13224, 
66 FR 49079, 3 CFR, 2001 Comp., p. 786; E.O. 13338, 69 FR 26751, May 
13, 2004; Notice of July 23, 2008, 73 FR 43603 (July 25, 2008); 
Notice of November 8, 2007, 72 FR 63963 (November 13, 2007).

Supplement No. 1 to Part 730 [Amended]

0
2. Supplement No. 1 to part 730 is amended by:
0
a. Revising the title for Collection Number 0694-0101 to read ``One-
Time Report For Foreign Technology Eligible For De Minimis Exclusion''; 
and
0
b. Revising the Reference in the EAR for Collection Number 0694-0101 to 
read ``Sec.  734.4 and Supp. No. 2 to part 734''.

[[Page 56968]]

PART 732--[AMENDED]

0
3. The authority citation for 15 CFR part 732 is revised to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 
FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of July 23, 2008, 73 FR 
43603 (July 25, 2008).

0
4. Section 732.2 is amended by:
0
a. Revising paragraph (d), as set forth below; and
0
b. Removing and reserving paragraph (e).

Sec.  732.2  Steps Regarding Scope of the EAR.

* * * * *
    (d) Step 4: Foreign-made items incorporating controlled U.S.-origin 
items. This step is appropriate only for items that are made outside 
the United States and not currently located in the United States. 
Special requirements and restrictions apply to foreign-made items that 
incorporate U.S.-origin encryption items (see Sec.  734.4(a)(2), (b), 
and (g) of the EAR).
    (1) Determining whether your foreign made item is subject to the 
EAR. Using the guidance provided in Supplement No. 2 to part 734 of the 
EAR, determine whether controlled U.S.-origin items are incorporated 
into the foreign-made item and are above the de minimis level set forth 
in Sec.  734.4 of the EAR.
    (2) If no U.S.-origin controlled items are incorporated or if the 
percentage of incorporated U.S.-origin controlled items are equal to or 
below the de minimis level described in Sec.  734.4 of the EAR, then 
the foreign-made item is not subject to the EAR by reason of the de 
minimis rules, and you should go on to consider Step 6 regarding the 
foreign-produced direct product rule.
    (3) If the foreign-made item incorporates more than the de minimis 
level of U.S.-origin items, then that item is subject to the EAR and 
you should skip to Step 7 at Sec.  732.3 of this part and consider the 
steps regarding all other general prohibitions, license exceptions, and 
other requirements to determine applicability of these provisions to 
the foreign-made item.
* * * * *

0
5. Section 732.3 is amended by revising paragraph (e), to read as 
follows:

Sec.  732.3  Steps regarding the ten general prohibitions.

* * * * *
    (e) Step 10: Foreign-made items incorporating controlled U.S.-
origin items and the de minimis rules-- (1) De minimis rules. If your 
foreign-made item abroad is a foreign-made commodity that incorporates 
controlled U.S.-origin commodities, a foreign-made commodity that is 
`bundled' with controlled U.S.-origin software, foreign-made software 
that is commingled with controlled U.S.-origin software, or foreign-
made technology that is commingled with controlled U.S.-origin 
technology, then it is subject to the EAR if the U.S.-origin controlled 
content exceeds the de minimis levels described in Sec. 734.4 of the 
EAR.
    (2) Guidance for calculations. For guidance on how to calculate the 
U.S.-controlled content, refer to Supplement No. 2 to part 734 of the 
EAR. Note, U.S.-origin technology controlled by ECCN 9E003.a.1 through 
a.11, and .h, and related controls, and encryption software controlled 
for ``EI'' reasons under ECCN 5D002 (not eligible for de minimis 
treatment pursuant to Sec.  734.4(b) of the EAR) or encryption 
technology controlled for ``EI'' reasons under ECCN 5E002 (not eligible 
for de minimis treatment pursuant to Sec.  734.4(a)(2) of the EAR) do 
not lose their U.S.-origin when redrawn, used, consulted, or otherwise 
commingled abroad in any respect with other software or technology of 
any other origin. Therefore, any subsequent or similar software or 
technology prepared or engineered abroad for the design, construction, 
operation, or maintenance of any plant or equipment, or part thereof, 
which is based on or uses any such U.S.-origin software or technology 
is subject to the EAR.

PART 734--[AMENDED]

0
6. The authority citation for 15 CFR part 734 is revised to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp., p. 950; E.O. 13020, 61 
FR 54079, 3 CFR, 1996 Comp. p. 219; E.O. 13026, 61 FR 58767, 3 CFR, 
1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 
783; Notice of July 23, 2008, 73 FR 43603 (July 25, 2008); Notice of 
November 8, 2007, 72 FR 63963 (November 13, 2007).

0
7-8. Section 734.3 is amended by revising paragraph (a)(3) to read as 
follows:

Sec.  734.3  Items subject to the EAR.

* * * * *
    (a) * * *
    (3) Foreign-made commodities that incorporate controlled U.S.-
origin commodities, foreign-made commodities that are `bundled' with 
controlled U.S.-origin software, foreign-made software that is 
commingled with controlled U.S.-origin software, and foreign-made 
technology that is commingled with controlled U.S.-origin technology:
    (i) In any quantity, as described in Sec.  734.4(a) of this part; 
or
    (ii) In quantities exceeding the de minimis levels, as described in 
Sec. Sec.  734.4(c) or 734.4(d) of this part;
* * * * *

0
9. Section 734.4 is amended by:
0
a. Adding new paragraphs (a)(4) and (a)(5);
0
b. Revising the introductory text of paragraph (c);
0
c. Revising paragraph (c)(1) and adding notes to paragraph (c)(1);
0
d. Adding a sentence to the end of paragraph (c)(3);
0
e. Revising the introductory text of paragraph (d);
0
f. Revising paragraph (d)(1) and adding notes to paragraph (d)(1); and
0
g. Adding a sentence to the end of paragraph (d)(3);
0
h. Removing paragraph (e);
0
i Redesignating paragraphs (f) and (g) as paragraphs (e) and (f);
0
j. Adding new paragraph (g); and
0
k. Removing paragraph (h).
    The revisions and additions read as follows:

Sec.  734.4  de minimis U.S. content.

    (a) * * *
    (4) There is no de minimis level for U.S.-origin technology 
controlled by ECCN 9E003a.1 through a.11, and .h. when redrawn, used, 
consulted, or otherwise commingled abroad.
    (5) Under certain rules issued by the Office of Foreign Assets 
Control, certain exports from abroad by U.S.-owned or controlled 
entities may be prohibited notwithstanding the de minimis provisions of 
the EAR. In addition, the de minimis rules do not relieve U.S. persons 
of the obligation to refrain from supporting the proliferation of 
weapons of mass-destruction and missiles as provided in Sec.  744.6 of 
the EAR.
* * * * *
    (c) 10% De Minimis Rule. Except as provided in paragraphs (a) and 
(b)(1)(iii) of this section and subject to the provisions of paragraphs 
(b)(1)(i), (b)(1)(ii) and (b)(2) of this section, the following 
reexports are not subject to the EAR when made to any country in the 
world. See Supplement No. 2 of this part for guidance on calculating 
values.
    (1) Reexports of a foreign-made commodity incorporating controlled 
U.S.-origin commodities or ``bundled'' with U.S.-origin software valued 
at 10% or less of the total value of the foreign-made commodity;

    NOTES to paragraph (c)(1): (1) U.S.-origin software is not 
eligible for the de minimis exclusion and is subject to the EAR when

[[Page 56969]]

exported or reexported separately from (i.e., not bundled or 
incorporated with) the foreign-made item.
    (2) For the purposes of this section, `bundled' means software 
that is reexported together with the item and is configured for the 
item, but is not necessarily physically integrated into the item.
    (3) The de minimis exclusion under paragraph (c)(1) only applies 
to software that is listed on the Commerce Control List (CCL) and 
has a reason for control of anti-terrorism (AT) only or software 
that is designated as EAR99 (subject to the EAR, but not listed on 
the CCL). For all other software, an independent assessment of 
whether the software by itself is subject to the EAR must be 
performed.

* * * * *
    (3) * * * Before you may rely upon the de minimis exclusion for 
foreign-made technology commingled with controlled U.S.-origin 
technology, you must file a one-time report. See Supplement No. 2 to 
part 734 for submission requirements.
* * * * *
    (d) 25% De Minimis Rule. Except as provided in paragraph (a) of 
this section and subject to the provisions of paragraph (b) of this 
section, the following reexports are not subject to the EAR when made 
to countries other than those listed in Country Group E:1 of Supplement 
No. 1 to part 740 of the EAR. See Supplement No. 2 to this part for 
guidance on calculating values.
    (1) Reexports of a foreign-made commodity incorporating controlled 
U.S.-origin commodities or ``bundled'' with U.S.-origin software valued 
at 25% or less of the total value of the foreign-made commodity;

    NOTES to paragraph (d)(1): (1) U.S.-origin software is not 
eligible for the de minimis exclusion and is subject to the EAR when 
exported or reexported separately from (i.e., not bundled or 
incorporated with) the foreign-made item.
    (2) For the purposes of this section, ``bundled'' means software 
that is reexported together with the item and is configured for the 
item, but is not necessarily physically integrated into the item.
    (3) The de minimis exclusion under paragraph (d)(1) only applies 
to software that is listed on the Commerce Control List (CCL) and 
has a reason for control of anti-terrorism (AT) only or software 
that is classified as EAR99 (subject to the EAR, but not listed on 
the CCL). For all other software, an independent assessment of 
whether the software by itself is subject to the EAR must be 
performed.

* * * * *
    (3) * * * Before you may rely upon the de minimis exclusion for 
foreign-made technology commingled with controlled U.S.-origin 
technology, you must file a one-time report. See Supplement No. 2 to 
part 734 for submission requirements.
* * * * *
    (g) Recordkeeping requirement. The method by which you determined 
the percentage of U.S. content in foreign software or technology must 
be documented and retained in your records in accordance with the 
recordkeeping requirements in part 762 of the EAR. Your records should 
indicate whether the values you used in your calculations are actual 
arms-length market prices or prices derived from comparable 
transactions or costs of production, overhead, and profit.

0
10. Supplement No. 2 to part 734 is revised to read as follows:

SUPPLEMENT NO. 2 TO PART 734--GUIDELINES FOR DE MINIMIS RULES

    (a) Calculation of the value of controlled U.S.-origin content 
in foreign-made items is to be performed for the purposes of Sec.  
734.4 of this part, to determine whether the percentage of U.S.-
origin content is de minimis. (Note that you do not need to make 
these calculations if the foreign made item does not require a 
license to the destination in question.) Use the following 
guidelines to perform such calculations:
    (1) U.S.-origin controlled content. To identify U.S.-origin 
controlled content for purposes of the de minimis rules, you must 
determine the Export Control Classification Number (ECCN) of each 
U.S.-origin item incorporated into a foreign-made product. Then, you 
must identify which, if any, of those U.S.-origin items would 
require a license from BIS if they were to be exported or reexported 
(in the form in which you received them) to the foreign-made 
product's country of destination. For purposes of identifying U.S.-
origin controlled content, you should consult the Commerce Country 
Chart in Supplement No. 1 to part 738 of the EAR and controls 
described in part 746 of the EAR. Part 744 of the EAR should not be 
used to identify controlled U.S. content for purposes of determining 
the applicability of the de minimis rules. In identifying U.S.-
origin controlled content, do not take account of commodities, 
software, or technology that could be exported or reexported to the 
country of destination without a license (designated as ``NLR'') or 
under License Exception GBS (see part 740 of the EAR). Commodities 
subject only to short supply controls are not included in 
calculating U.S. content.

    Note to paragraph (a)(1): U.S.-origin controlled content is 
considered `incorporated' for de minimis purposes if the U.S.-origin 
controlled item is: Essential to the functioning of the foreign 
equipment; customarily included in sales of the foreign equipment; 
and reexported with the foreign produced item. U.S.-origin software 
may be `bundled' with foreign produced commodities; see Sec.  734.4 
of this part. For purposes of determining de minimis levels, 
technology and source code used to design or produce foreign-made 
commodities or software are not considered to be incorporated into 
such foreign-made commodities or software.

    (2) Value of U.S.-origin controlled content. The value of the 
U.S.-origin controlled content shall reflect the fair market price 
of such content in the market where the foreign product is being 
produced. In most cases, this value will be the same as the actual 
cost to the foreign manufacturer of the U.S.-origin commodity, 
technology, or software. When the foreign manufacturer and the U.S. 
supplier are affiliated and have special arrangements that result in 
below-market pricing, the value of the U.S.-origin controlled 
content should reflect fair market prices that would normally be 
charged to unaffiliated customers in the same foreign market. If 
fair market value cannot be determined based upon actual arms-length 
transaction data for the U.S.-origin controlled content in question, 
then you must determine another reliable valuation method to 
calculate or derive the fair market value. Such methods may include 
the use of comparable market prices or costs of production and 
distribution. The EAR do not require calculations based upon any one 
accounting system or U.S. accounting standards. However, the method 
you use must be consistent with your business practice.
    (3) Foreign-made product value-- (i) General. The value of the 
foreign-made product shall reflect the fair market price of such 
product in the market where the foreign product is sold. In most 
cases, this value will be the same as the actual cost to a buyer of 
the foreign-made product. When the foreign manufacturer and the 
buyer of their product are affiliated and have special arrangements 
that result in below-market pricing, the value of the foreign-made 
product should reflect fair market prices that would normally be 
charged to unaffiliated customers in the same foreign market. If 
fair market value cannot be determined based upon actual arms-length 
transaction data for the foreign-made product in question, then you 
must determine another reliable valuation method to calculate or 
derive the fair market value. Such methods may include the use of 
comparable market prices or costs of production and distribution. 
The EAR do not require calculations based upon any one accounting 
system or U.S. accounting standards. However, the method you use 
must be consistent with your business practice.
    (ii) Foreign-Made Software. In calculating the value of foreign-
made software for purposes of the de minimis rules, you may make an 
estimate of future sales of that foreign software. The total value 
of foreign-made software will be the sum of: The value of actual 
sales of that software based on orders received at the time the 
foreign software incorporates U.S.-origin content and, if 
applicable; and an estimate of all future sales of that software.

    Note to paragraph (a)(3): Regardless of the accounting systems, 
standard, or conventions you use in the operation of your business, 
you may not depreciate reported fair market values or otherwise 
reduce fair market values

[[Page 56970]]

through related accounting conventions. Values may be historic or 
projected. However, you may rely on projected values only to the 
extent that they remain consistent with your documentation.

    (4) Calculating percentage value of U.S.-origin items. To 
determine the percentage value of U.S-origin controlled content 
incorporated in, commingled with, or ``bundled'' with the foreign 
produced item, divide the total value of the U.S.-origin controlled 
content by the foreign-made item value, then multiply the resulting 
number times 100. If the percentage value of incorporated U.S.-
origin items is equal to or less than the de minimis level described 
in Sec.  734.4 of the EAR, then the foreign-made item is not subject 
to the EAR.
    (b) One-time report. As stated in paragraphs (c) and (d) of 
Sec.  734.4, a one-time report is required before reliance on the de 
minimis rules for technology. The purpose of the report is solely to 
permit the U.S. Government to evaluate whether U.S. content 
calculations were performed correctly.
    (1) Contents of report. You must include in your report a 
description of the scope and nature of the foreign technology that 
is the subject of the report and a description of its fair market 
value, along with the rationale and basis for the valuation of such 
foreign technology. Your report must indicate the country of 
destination for the foreign technology reexports when the U.S.-
origin controlled content exceeds 10%, so that BIS can evaluate 
whether the U.S.-origin controlled content was correctly identified 
based on paragraph (a)(1) of this Supplement. The report does not 
require information regarding the end-use or end-users of the 
reexported foreign technology. You must include in your report the 
name, title, address, telephone number, E-mail address, and 
facsimile number of the person BIS may contact concerning your 
report.
    (2) Submission of report. You must submit your report to BIS 
using one of the following methods:
    (i) E-mail: rpd2@bis.doc.gov;
    (ii) Fax: (202) 482-3355; or
    (iii) Mail or Hand Delivery/Courier: Regulatory Policy Division, 
U.S. Department of Commerce, Bureau of Industry and Security, 
Regulatory Policy Division, 14th and Pennsylvania Avenue, NW., Room 
2705, Washington, DC 20230.
    (3) Report and wait. If you have not been contacted by BIS 
concerning your report within thirty days after filing the report 
with BIS, you may rely upon the calculations described in the report 
unless and until BIS contacts you and instructs you otherwise. BIS 
may contact you with questions concerning your report or to indicate 
that BIS does not accept the assumptions or rationale for your 
calculations. If you receive such a contact or communication from 
BIS within thirty days after filing the report with BIS, you may not 
rely upon the calculations described in the report, and may not use 
the de minimis rules for technology that are described in Sec.  
734.4 of this part, until BIS has indicated that such calculations 
were performed correctly.

PART 736--[AMENDED]

0
11. The authority citation for 15 CFR part 736 continues to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
22 U.S.C. 2151 note; E.O. 12938, 59 FR 59099, 3 CFR, 1994 Comp., p. 
950; E.O. 13020, 61 FR 54079, 3 CFR, 1996 Comp. p. 219; E.O. 13026, 
61 FR 58767, 3 CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 
CFR, 2001 Comp., p. 783; E.O. 13338, 69 FR 26751, May 13, 2004; 
Notice of July 23, 2008, 73 FR 43603 (July 25, 2008); Notice of 
November 8, 2007, 72 FR 63963 (November 13, 2007).

0
12. Section 736.2 is amended by revising the heading of paragraph 
(b)(2) and the introductory paragraph to (b)(2)(i) to read as follows:

Sec.  736.2  General Prohibitions and Determination of Applicability.

* * * * *
    (b) * * *
    (2) General Prohibition Two--Reexport and export from abroad of 
foreign-made items incorporating more than a de minimis amount of 
controlled U.S. content (U.S. Content Reexports). (i) You may not, 
without a license or license exception, reexport or export from abroad 
foreign-made commodities that incorporate controlled U.S.-origin 
commodities, foreign-made commodities that are ``bundled'' with 
controlled U.S.-origin software, foreign-made software that is 
commingled with controlled U.S.-origin software, or foreign-made 
technology that is commingled with controlled U.S.-origin technology if 
such items require a license according to any of the provisions in the 
EAR and incorporate or are commingled with more than a de minimis 
amount of controlled U.S. content, as defined in Sec.  734.4 of the EAR 
concerning the scope of the EAR.
* * * * *

PART 762--[AMENDED]

0
13. The authority citation for 15 CFR part 762 is revised to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., p. 783; Notice of July 
23, 2008, 73 FR 43603 (July 25, 2008).

0
14. Section 762.2 is amended by:
0
a. Revising paragraphs (b)(44) and (b)(45); and
0
b. Adding a new paragraph (b)(46), to read as follows:

Sec.  762.2  Records to be retained.

* * * * *
    (b) * * *
    (44) Sec.  745.2, End-use certificates;
    (45) Sec.  758.2(c), Assumption writing; and
    (46) Sec.  734.4(g), de minimis calculation (method).
* * * * *

PART 774--[AMENDED]

0
15. The authority citation for 15 CFR part 774 continues to read as 
follows:

    Authority: 50 U.S.C. app. 2401 et seq.; 50 U.S.C. 1701 et seq.; 
10 U.S.C. 7420; 10 U.S.C. 7430(e); 22 U.S.C. 287c, 22 U.S.C. 3201 et 
seq., 22 U.S.C. 6004; 30 U.S.C. 185(s), 185(u); 42 U.S.C. 2139a; 42 
U.S.C. 6212; 43 U.S.C. 1354; 46 U.S.C. app. 466c; 50 U.S.C. app. 5; 
22 U.S.C. 7201 et seq.; 22 U.S.C. 7210; E.O. 13026, 61 FR 58767, 3 
CFR, 1996 Comp., p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001 Comp., 
p. 783; Notice of July 23, 2008, 73 FR 43603 (July 25, 2008).

0
16. Supplement No. 3 to part 774 is amended by revising Note 2 to read 
as follows:

SUPPLEMENT NO. 3 TO PART 774--STATEMENTS OF UNDERSTANDING

* * * * *
    Notes applicable to State of Understanding related to Medical 
Equipment:
* * * * *
    (2) Commodities or software are considered ``incorporated'' if 
the commodity or software is: Essential to the functioning of the 
medical equipment; customarily included in the sale of the medical 
equipment; and exported or reexported with the medical equipment.
* * * * *

    Dated: September 25, 2008.
Christopher R. Wall,
Assistant Secretary for Export Administration.
 [FR Doc. E8-23142 Filed 9-30-08; 8:45 am]

BILLING CODE 3510-33-P