Document ID: BIS-2015-0045-0001
Agency: bis
Document Type: Proposed Rule
Title: Export Controls: Conforming Change to Defense Sales Offset Reporting Requirements
Posted Date: 2015-12-02T05:00Z

[Federal Register Volume 80, Number 231 (Wednesday, December 2, 2015)]
[Proposed Rules]
[Pages 75438-75442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-30421]

 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 80, No. 231 / Wednesday, December 2, 2015 / 
Proposed Rules  

[[Page 75438]]

DEPARTMENT OF COMMERCE

Bureau of Industry and Security

15 CFR Part 701

[Docket No. 150825780-5780-01]
RIN 0694-AG38

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

AGENCY: Bureau of Industry and Security, Commerce.

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would require reporting of offsets 
agreements in connection with sales of 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 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 United States Munitions List (USML). Those reporting requirements 
would continue, unchanged by this rule. Beginning on October 15, 2013, 
some items have been removed from the USML and added to 600 series 
ECCNs as part of the Administration's Export Control Reform Initiative. 
These items were subject to offsets reporting requirements prior to 
being added to 600 series ECCNs. In addition, as part of that same 
initiative, some items that were subject to the Export Administration 
Regulations (EAR) have also been added to 600 series ECCNs. These items 
were not subject to offsets reporting requirements prior to being added 
to 600 series ECCNs. This proposed rule would require 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.
    BIS is proposing this action because, except for the vessels and 
related items noted above, items controlled in 600 series ECCNs are of 
a military nature. BIS believes that collecting information regarding 
offsets requirements in connection with the sale of such items is 
necessary to make a report to Congress mandated by the Defense 
Production Act complete.

DATES: Comments must be received no later than February 1, 2016.

ADDRESSES: You may submit comments by either of the following methods:
     By the Federal eRulemaking Portal: http://www.regulations.gov. The identification number for this rulemaking is 
BIS-2015-0045.
     By email directly to publiccomments@bis.doc.gov. Include 
RIN 0694-AG38 in the subject line.

FOR FURTHER INFORMATION CONTACT: Ronald DeMarines, Strategic Analysis 
Division, Office of Strategic Industries and Economic Security, 202-
482-3755, or ronald.demarines@bis.doc.gov.

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. app. 2172(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-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. app. 
2172(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.
    This proposed rule would require reporting of offsets agreements in 
connection with sales of all items controlled in 600 series ECCNs, 
except for certain submersible and semi-

[[Page 75439]]

submersible cargo transport vessels and related items that are not on 
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.

Nature of 600 Series ECCNs

    600 series ECCNs control items of a military nature. They are 
structured in the same manner as other ECCNs. That structure is 
described in detail at 15 CFR 738.2. However, a brief overview is given 
here. An ECCN has five characters. The first character identifies the 
category on the CCL to which the ECCN belongs. There are ten categories 
numbered 0 through 9. The second character identifies the product group 
and is one of the letters A through E. In the 600 series ECCNs, the 
third character identifies the ECCN as part of the 600 series. The 
fourth and fifth characters identify the category on the Wassenaar 
Arrangement Munitions List to which the ECCNs most closely relate. 
These last two characters also serve to identify related ECCNs across 
different product groups. The product groups and illustrative examples 
of their application in the 600 series are as follows:
    Product Group A--End items, equipment, accessories, attachments, 
parts, components, and systems. For example, ECCN 0A606 applies to 
ground vehicles and related commodities.
    Product Group B--Test, inspection and production equipment. For 
example, 0B606 applies to equipment specially designed for the 
development, production, repair, overhaul, or refurbishing of 
commodities enumerated in ECCN 0A606 or USML Category VII (the USML 
category that applies to ground vehicles).
    Product Group C--Materials. For example 0C606 applies to materials 
specially designed for commodities controlled by ECCN 0A606 not 
elsewhere specified in the USML. In some instances a product group C 
ECCN may apply to materials for its related product group B ECCN as 
well as to its related product group A ECCN.
    Product Group D--Software. For example, ECCN 0D606 applies to 
software specially designed for the development, production, operation, 
or maintenance of ground vehicles and related commodities controlled by 
ECCNs 0A606, 0B606, or 0C606. A software ECCN may apply to software for 
any or all of the items in its related product groups A, B or C.
    Product Group E--Technology. For example, ECCN 0E606 applies to 
technology required for the development, production, operation, 
installation, maintenance, repair, overhaul, or refurbishing of ground 
vehicles and related commodities in 0A606, 0B606, 0C606, or software in 
0D606. A technology ECCN may apply to technology for items in any or 
all of its related product groups A, B, C or D.
    For brevity, the discussions of ECCNs below generally will refer to 
``related'' test, inspection and production equipment, materials, 
software or technology rather than spell out the full relationship in 
terms such as ``required,'' ``specially designed,'' ``development,'' 
``production,'' etc. Detailed terms will be used only where necessary 
to draw accurate distinctions between the items being discussed. 
Readers who desire a fuller description of the relationship than that 
provided above may refer to the full text of the ECCNs in 15 CFR part 
774, Supplement No. 1.

600 Series ECCNs

    Most of the items controlled in the 600 series ECCNs were, prior to 
the creation of those ECCNs, subject to the ITAR. Those items that were 
subject to the EAR prior to inclusion in a 600 series ECCN will be 
discussed separately below.
    Military explosive devices: ECCNs 0A604, 0B604, 0D604 and 0E604. 
These ECCNs control commodities related to military explosive devices 
and parts, components, accessories and attachments therefor; related 
test, inspection and production equipment; related software and related 
technology. These ECCNs became effective on July 1, 2014.
    Ground vehicles: ECCNs 0A606, 0B606, 0C606, 0D606 and 0E606. These 
ECCNs control ground vehicles and parts, components, accessories, and 
attachments therefor; related test, inspection and production 
equipment; related materials; related software and related technology. 
These ECCNs became effective on January 6, 2014.
    Military training equipment: ECCNs 0A614, 0B614, 0D614 and 0E614. 
These ECCNs control military training equipment and parts, components, 
accessories and attachments therefor; related test, inspection and 
production equipment; related software and related technology. These 
ECCNs became effective on July 1, 2014.
    Miscellaneous military equipment: ECCNs 0A617, 0B617, 0C617, 0D617 
and 0E617. These ECCNs control miscellaneous military equipment and 
parts, components, accessories and attachments therefor; related test, 
inspection and production equipment; related materials; related 
software and related technology. These ECCNs became effective on 
January 6, 2014.
    Energetic materials: ECCNs 1B608, 1C608, 1D608 and 1E608. These 
ECCNs control energetic materials and related commodities; related 
test, inspection and production equipment; related materials; related 
software and related technology. These ECCNs became effective on July 
1, 2014.
    Armored and protective equipment: ECCNs 1A613, 1B613, 1D613 and 
1E613. These ECCNs control armored and protective equipment and parts, 
components, accessories and attachments therefor; inspection and 
production equipment; related software and related technology. These 
ECCNs became effective on July 1, 2014.
    Surface vessels: ECCNs 8A609, 8B609, 8C609, 8D609 and 8E609. These 
ECCNs control surface vessels of war and parts, components, accessories 
and attachments therefor; related test, inspection and production 
equipment; related materials; related software and related technology. 
These ECCNs became effective on January 6, 2014.
    Submersible vessels: ECCNs 8A620, 8B620, 8D620, 8E620. These ECCNs 
control submersible vessels, oceanographic and associated commodities 
and parts, components, accessories and attachments therefor; related 
test, inspection and production equipment; related software and related 
technology. These ECCNs became effective on January 6, 2014.
    Launch vehicles, missiles, and rockets: ECCNs 9A604, 9B604, 9D604, 
9E604: These ECCNs control commodities related to launch vehicles, 
missiles, and rockets and parts, components, accessories and 
attachments therefor; related test, inspection and production 
equipment; related software and related technology. These ECCNs became 
effective on July 1, 2014.
    Military aircraft: ECCNs 9A610, 9B610, 9C610, 9D610 and ECCN 9E610. 
These ECCNs control military aircraft and parts, components, 
accessories, and attachments therefor; related test, inspection and 
production equipment; related materials; related software and related 
technology. These ECCNs became effective on October 15, 2013.
    Military gas turbine engines: ECCNs 9A619, 9B619, 9D619 and 9E619. 
These ECCNs control military gas turbine engines and parts, components, 
accessories and attachments therefor; related test, inspection and 
production equipment; related software and related

[[Page 75440]]

technology. These ECCNs became effective on October 15, 2013.
    Military electronics: ECCNs 3A611, 3B611, 3D611 and 3E611. These 
ECCNs control military electronics and parts, components accessories 
and attachments therefor; related test, inspection and production 
equipment; related software and related technology. These ECCNs became 
effective on December 30, 2014.
    Cryogenic and superconducting equipment for vehicles: ECCNs 9A620, 
9B620, 9D620, 9E620: These ECCNs control cryogenic and superconducting 
equipment for military vehicles (land, sea or air); related test, 
inspection and production equipment; related software and related 
technology. These ECCNs became effective on December 20, 2014.
    All of the items in the 600 series ECCNs discussed above were on 
the USML, and therefore subject to offsets reporting requirements, 
prior to the dates on which the ECCNs became effective except the items 
discussed below.

Items Controlled in 600 Series ECCNs That Previously Were Subject to 
the EAR

    Certain unarmed armored vehicles that are derived from civilian 
vehicles are controlled under ECCN 0A606.b. Prior to the effective date 
of ECCN 0A606, these vehicles were controlled under ECCN 9A018.b.
    Induction hardening machines for tank turret rings and sprockets 
are controlled within the general paragraph 0B606.a. Prior to the 
effective date of ECCN 0A606, these machines were controlled under ECCN 
2B018.m. Related software for these machines is controlled in ECCN 
0D606. Prior to the effective date of ECCN 0D606, this software was 
EAR99. Related technology for these machines is controlled in ECCN 
0E606. Prior to the effective date of ECCN 0E606, this software was 
EAR99.
    Construction equipment built to military specifications, including 
equipment specially designed for airborne transport; and specially 
designed parts and accessories for such construction equipment, 
including crew protection kits used as protective cabs, is controlled 
in ECCN 0A617.y.1 and .y.2. Prior to the effective date of ECCN 0A617, 
this equipment was controlled in ECCN 0A018.m. Related test, inspection 
and production equipment, software and technology were EAR99. The 
related software and technology for the test, inspection and production 
equipment was also EAR99.
    Power controlled searchlights controlled in ECCN 0A617.y.5 were, 
prior to the effective date of ECCN 0A617, controlled in 0A918.a. 
Related test, inspection and production equipment, related software and 
related technology were EAR99. Related software and technology for the 
test, inspection and production equipment was also EAR99.
    Test, inspection and production equipment in ECCN 1B608.a (related 
to energetic materials in ECCN 1C608.a) prior to the effective date of 
ECCN 1B608 were controlled in ECCN 1B018.a, .b and .x. Related software 
for 1B608.a was EAR99. Related technology for development and 
production of equipment in ECCN 1B608.a was controlled in ECCN 1E001. 
Related technology for operation, installation, maintenance, repair, 
overhaul or refurbishing of energetic materials in ECCN 1C608.a was 
EAR99.
    Energetic materials and related commodities in ECCN 1C608.b through 
.m were controlled under ECCN 1C018.b through .m prior to the effective 
date of ECCN 1C608. Related technology for the development and 
production of equipment in 1B608.a was controlled in ECCN 1E001. 
Related software for the energetic materials in ECCN 1C608.b through .m 
was EAR99. Related technology for the development and production of 
energetic materials in ECCN 1C608.b through .m was controlled in ECCN 
1E001. Related technology for operation, installation, maintenance, 
repair, overhaul or refurbishing of energetic materials in ECCN 1C608.b 
through .m was EAR99.
    Military helmets providing less than National Institute of Justice 
(NIJ) level III protection controlled in ECCN 1A613.c and conventional 
military steel helmets controlled in ECCN 1A613.y were controlled under 
ECCN 0A018 prior to the effective date of ECCN 1A613. Related test, 
inspection and production equipment for these helmets controlled in 
ECCN 1B613, and related software controlled in 1D613 for the helmets 
and the test, inspection and production equipment was EAR99. Related 
technology controlled in 1E613 for the helmets, the test, inspection 
and production equipment and the software was also EAR99.
    Diesel engines controlled in ECCN 8A609.b were controlled in ECCN 
8A018.b.3 prior to the effective date of ECCN 8A609. Related test, 
inspection and production equipment for those engines controlled in 
ECCN 8B609, related materials for those engines controlled in ECCN 
8C609, related software for those engines controlled in ECCN 8D609 and 
related technology controlled in ECCN 8E609 for those engines were 
EAR99. Additionally, related software controlled in ECCN 8D609 for the 
test, inspection and production equipment and the materials was EAR99. 
Related technology controlled in 8E609 for the test, inspection and 
production equipment, the materials and the software was EAR99.
    Submarine and torpedo nets controlled in ECCN 8A620.e, and closed 
circuit and semi-closed circuit rebreathing apparatus controlled in 
ECCN 8A620.f were controlled in ECCN 8A018.b.4 and 8A018.a, 
respectively, prior to the effective date of ECCN 8A620. Test, 
inspection and production equipment for those nets and rebreathing 
apparatus was EAR99. Software for those nets, rebreathing apparatus and 
test, inspection and production equipment was EAR99. Technology for 
those nets, rebreathing apparatus, test inspection and production 
equipment was EAR99.
    Ground equipment for aircraft controlled in ECCN 9A610.f, 
pressurized breathing equipment controlled in ECCN 9A610.g and military 
parachutes, canopies, harnesses, platforms and electronic release 
mechanisms controlled in ECCN 9A610.h were controlled in ECCN 9A018.c, 
.d and .e, respectively, prior to the effective date of ECCN 9A610. 
Related test, inspection and production equipment controlled in ECCN 
9B610 for that ground equipment, pressurized breathing equipment, and 
those military parachutes, canopies, harnesses, platforms and 
electronic release mechanisms were EAR99 prior to the effective date of 
ECCN 9B610. Related materials controlled in ECCN 9C610 for that ground 
equipment, pressurized breathing equipment, those military parachutes, 
canopies, harnesses, platforms and electronic release mechanisms, and 
that test, inspection and production equipment was EAR99 prior to the 
effective date of ECCN 9C610. Related software controlled in ECCN 9D610 
for the development or production of that ground equipment, pressurized 
breathing equipment, and those military parachutes, canopies, 
harnesses, platforms and electronic release mechanisms was controlled 
in ECCN 9D018 prior to the effective date of ECCN 9D610, and related 
software for the operation or maintenance of those commodities was 
EAR99. Related software for that test, inspection and production 
equipment and those materials was EAR99. Related technology controlled 
in ECCN 9E610 for the use of that ground equipment, pressurized 
breathing equipment, those military parachutes, canopies, harnesses, 
platforms and electronic

[[Page 75441]]

release mechanisms was controlled in ECCN 9E018 prior to the effective 
date of ECCN 9E610. Related technology controlled in ECCN 9E610 for the 
operation, installation, maintenance, repair, overhaul or refurbishing 
of those commodities was EAR99 prior to the effective date of ECCN 
9E610. Related technology controlled in ECCN 9E610 for the test, 
inspection and production equipment; materials and software was EAR99 
prior to the effective date of ECCN 9E610.

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 impose 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 would 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 would lapse in the coming months. Although this rule would 
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 items from the USML and additions 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 
jseehra@omb.eop.gov or by fax to (202) 395-7285 and to William Arvin at 
william.arvin@bis.doc.gov.
    3. This proposed 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 proposed rule, if promulgated, 
will not have a significant impact on a substantial number of small 
entities for the reasons explained below. Consequently, BIS has not 
prepared a regulatory flexibility analysis.
    Small entities include small businesses, small organizations and 
small governmental jurisdictions. For purposes of assessing the impact 
of this proposed 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 proposed rule would 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 
2013, the most recent year in which BIS collected data 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 proposed rule will not 
significantly increase the burden on such companies. 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 
new reporting requirement in this proposed rule 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

[[Page 75442]]

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 
Sec.  701.4(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 would 
therefore have no reason to submit data to BIS pursuant to this 
regulation. Consequently, this proposed rule, if promulgated, 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 proposed to be amended as follows:

PART 701--[AMENDED]

0
1. The authority citation for 15 CFR part 701 is revised to read as 
follows:

    Authority:  50 U.S.C. app. 2061 et. seq., E.O. 13603, 77 FR 
16651, 3 CFR, 2012 Comp., p. 225.

0
2. Revise paragraphs (a) and (b) of Sec.  701.2 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. Revise paragraph (a) of Sec.  701.3 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: November 24, 2015.
Kevin J. Wolf,
Assistant Secretary for Export Administration.
[FR Doc. 2015-30421 Filed 12-1-15; 8:45 am]
 BILLING CODE 3510-JT-P