Offset Liabilities in Defense Industry 23 May 2017
1. What is “Offset Liability”?
Operations, which will be performed within the frame of procurement of product and services needed in defense area in order to increase manufacture, opportunity and capabilities of country’s industry and service sector and/or market shares/competitive power in international area and reduce the adverse impacts that can occur in balance of payments, are called offset[1].
Offset liabilities appear as exportation and other operations which bring foreign exchange in order to partially or completely eliminate negativities in balance of payments due to related project especially in projects that require advanced technology such as defense and aerospace[2].
Simply, offset liabilities are the liabilities that are undertaken to be fulfilled by foreign contractor company as a result of international tenders. There are two different offset types as direct and indirect offset.
2. What is the aim of offset liabilities?
Under offset liabilities, foreign contractor company is imposed an obligation to receive local company support while executing the project undertaken within the scope of the tender. The purpose of this liability is to enable local companies to improve themselves especially in related area.
Within the scope of projects, operations - which are performed in order to use the capabilities and abilities of local industrial companies to increase their international competitive capacity via exportation and to provide technologic cooperation, investment and research and development opportunities - are named as “Industrial Participation and Offset”[3].
Besides, one of the most significant purposes of offset liabilities is to reduce outflow of foreign exchange as far as possible.
3. Which legislation regulates offset liabilities?
In Turkey, there is not any code regarding offset liabilities. Although the related directives were published in 2003 and 2007 by Undersecretariat for Defense Industries (“SSM”), the latest regulation regarding the offset liabilities is the Industrial Participation/Offset (“IP/O”) Guideline, which was issued by SSM in 2011. Pursuant to Article 2.1 of IP/O Guideline, the principles in this Guideline covers the IP/O activities under the Projects executed by SSM and the IP/O activities assigned to SSM. The mentioned IP/O Guideline includes the areas of defense, homeland security and aerospace.
4. What are the consequences of breach of offset liabilities?
Breach of offset liabilities may cause serious consequences for the Contractor. Article 11.3 of IP/O Guideline regulates that “In case the IP/O activities are not fulfilled, as a penalty sanction, Contractor shall pay an amount of 6% (six percent) of the IP/O commitments to SSM account within 30 (thirty) days upon the written request of SSM. In case the subject penalty is not paid within 30 (thirty) days upon SSM’s written request, penalty amount shall be deducted from the payments to be made to the Contractor under Procurement Contract and/or other contracts if available and/or withdrawn from the Contractor’s Letter(s) of Guarantee into cash in order to collect the claim.”
Notwithstanding the penalty sanction regulated under this article, the responsibility of the Contractor to fulfill the IP/O liabilities shall not be terminated; and liabilities shall remain unaffected despite of the application of the penalty sanction. Due to this reason, offset liabilities are of the essence and fulfilling these liabilities is highly important for the Contractor in order not to confront with severe sanctions.
[1] http://docplayer.biz.tr/7121567-Savunma-sanayii-mustesarliginin-ssm-tedarik-faaliyetleri-ve-hukuki-cerceve.html
[2] http://www.kto.org.tr/d/file/offset-uygulamalari.pdf
[3] http://docplayer.biz.tr/7121567-Savunma-sanayii-mustesarliginin-ssm-tedarik-faaliyetleri-ve-hukuki-cerceve.html
Türkçe Versiyonu İçin
http://www.kasaroglu.av.tr/tr/31081/Savunma-Sanayii-Alaninda-Offset-Yukumlulukleri
