Turkey: Outline Of Turkey's New Military Offset Guideline

Defense Industry Agency of Turkey (“SSB”) published its offset guideline (“Guideline”) for the year 2023 on December 7, 2022, which aims to introduce the procedures and principles on the industrialization process operations applicable to the industrialization and offset operations in projects executed by the SSB.

The Guideline outlines terms and principles for the different types of liabilities relevant for domestic and foreign contractors and provides detailed information for application and assessment principles as well as possible penalties.

General Principles

For projects whose contractor is domestic, an Industrialization Liability consisting of the Local Content Liability and Technology and Product Acquisition (“TÜK”) Liability is defined and an industrialization agreement (“Industrialization Agreement”), which is an annex to the supply agreement between the SSB and the contractor for the supply process under a project (“Supply Agreement”), is signed with the contractor. Under the Industrialization Agreement, a guarantee equal to 6% of the total Industrialization Liabilities applicable on the date the Industrialization Agreement comes into force is received from the contractor.

Local Content Liability consists of Turkish Added Value (“YİKD”) Liability, Sub-Industry/SME (“YS/SME”) Work Share Liability, and Industrial Competency Assessment and Support Program (“EYDEP”) Work Share Liability. Operations undertaken by the contractor under the TÜK do not qualify as Local Content Liability. The contractor shall fulfill its YİKD, YS/SME Work Share, and EYDEP Work Share liability in line with the Industry Participation Plan annexed to the Industrialization Agreement. Items in the SSB's Product Library that are to be used under the Supply Agreement are specified in the Industry Participation Plan. Services to be performed or items to be developed jointly with local solution partners under the Supply Agreement as well as the local subcontractors involved in the relevant design, development, production, and/or service activities are also specified under the Industry Participation Plan.

For projects whose contractor is foreign, an Offset Liability is defined and an offset agreement (“Offset Agreement”), which is an annex to the Supply Agreement, is signed by the contractor. An Offset Liability is defined, and an Offset Agreement is signed with the foreign subcontractors approved by the SSB under the domestic contractors as well.

Offset Liability consists of the Export Type Offset, Technological Cooperation Type Offset, and, if approved by the SSB, Industrial Cooperation. Products or services that are provided by the contractor under the tenders, procurements, or projects that are executed by SSB and/or other public entities and institutions are not counted towards the liabilities defined in the Offset Agreement. Under the Offset Agreement, a letter of guarantee equal to 6% of the total Offset Liabilities applicable on the date the Offset Agreement comes into force is received from the contractor or the foreign subcontractor.

Local Content Liability

Local Content Liability refers to the obligation of the contractor to use domestic products and services in the production of the project. The Guideline outlines the rules and regulations set by the SSB regarding Local Content Liability, which is mandatory for all contractors to follow.

The YİKD Liability, the YS/SME Work Share Liability, and the EYDEP Work Share Liability ratios are set by the SSB and defined in the Industrialization article of the Supply Agreement and in the Industrialization Agreement. The YİKD Liability is a specific percentage of the bid value, and the YS/SME Work Share Liability is a minimum of 21% of the bid value. If the contractor is an SME, the works carried out directly by the contractor count as YS/SME Work Share. The EYDEP Work Share Liability is a minimum of 70% of the work to be carried out by the YS/SMEs.

The YİKD Liability includes all raw materials, materials, products, services, labor, etc., that are locally sourced, overhead management expenses (excluding administrative ones such as travel, accommodation, meals, consultancy services, mail, etc.), and the profits and relevant taxes generated by local companies that relate to the course of the production of the product or service. The contractor shall ensure that all companies involved in the project apply for the EYDEP and that all products of the companies involved in the project (including the contractor) are registered at the SSB's Talent Inventory (“YETEN”) Portal.

The Industry Participation Plan, which specifies the services to be performed and the items to be developed jointly with the solution partner under the Supply Agreement, is required to be submitted for the approval of the SSB within the time periods specified in the Industrialization Agreement. Any and all changes to the Industry Participation Plan are subject to the SSB's approval, and the Industry Participation Plan needs to be updated without any contract amendment.

If the contractor uses other items set out in the subsequent Product Library versions or in the Product Library attached to the Agreement, the Industry Participation Plan needs to be updated accordingly. If the contractor completes the YİKD Liability and carries out the YS/SME Work Share Liability more than the one undertaken in the Industrialization Agreement, and the over-performed YS/SME Work Share Liability is attributable to the contractor's use of other items set out in the Product Library, the contractor may transfer 5% of the total sum paid by the contractor for other items set out in the Product Library to the contractor's realizations under the TÜK Liability, subject to the approval of the SSB.

Technology and Product Acquisition (TÜK) Liability

TÜK Liability refers to the provision of support by companies and entities in Turkey (other than the contractor itself) towards the design, development, manufacture, production, integration, verification and testing, certification, qualification and infrastructural operations of the contractor that shall be carried out by the companies and entities in Turkey in connection with the contractor's technology and/or product acquisition in the fields of the defense, aviation, homeland security and aerospace industries.

The TÜK Liability ratio is determined in the Industrialization article of the Supply Agreement and the Industrialization Agreement, with a minimum of 2% of the Bid Value set by the SSB. The contractor is required to complete the TÜK Preliminary Approval Application Table attached to the Guideline and apply to the SSB for preliminary approval for each operation before any agreement or purchase order is signed, and any official action is started toward the operations planned to be carried out under the TÜK Liability.

The TÜK Operations do not extend to the supports provided by the contractor for the realization of the operations under the YİKD Liability, the YS/SME Work Share Liability, and the EYDEP Work Share Liability. The SSB has the right to determine and notify the operations planned to be carried out under the TÜK Liability, and the contractor is obliged to perform them.

Within 30 days after the requirements set out in the relevant preliminary approval are met and the TÜK Operation is completed, the contractor is required to submit the TÜK Report to the SSB for examination. The SSB has the right to ask for all kinds of information, documentation, and papers in connection with the TÜK Report and to examine them on-site if deemed necessary. If necessary, the SSB may hire the services of a national/international independent auditor at the sole expense of the contractor to conduct such an examination.

Offset Liability

Foreign contractors are required to have an Offset Liability of at least 70% of the bid amount and foreign subcontractors are required to have an Offset Liability of at least 70% of the agreement value with the domestic contractor unless an Industrial Cooperation Liability is present. The contractor needs to complete a preliminary approval application and receive written approval from the SSB before signing any agreement or purchase order. Failure to obtain written approval results in the operation not being accepted and credited as an offset. Preliminary approval applications are evaluated by the SSB and any preliminary application whose results are not reported within 60 days following the application date will be deemed rejected. Additionally, the SSB may restrict preliminary approvals in terms of the time period, price, company, country, product, or intellectual property rights. The contractor is required to submit a crediting report, along with supporting documents, to the SSB for any offset operations performed. The SSB will evaluate the crediting request and report the outcome to the contractor.

The crediting of Offset operations is subject to specific coefficients designated by the SSB, and the conditions and framework set out in the SSB's Preliminary Approval. Administrative expenses incurred by the contractor in performing Offset Liabilities are not credited as Offset operations.

Export Type Offset operations are credited based on the YİKD, which is verified by the SSB. The contractor is required to submit all necessary documents and evidence as required by the SSB, and if necessary, these documents may be inspected by an independent auditor at the expense of the contractor.

For Technological Cooperation Type Offset operations, the fair market value and/or arm's length value of the acquired technology, investment, or other operations are taken as a basis, and only the portion borne by the contractor is credited. The contractor is required to export products/services using the technology and/or investments acquired by the relevant local firm under Technological Cooperation, and the realized exports shall be further credited.

Any support required to export a product/service under Export Type Offset shall not be credited under Technological Cooperation, and the contractor is also required to instill a capability to the relevant local company for carrying out other products/services not specifically related to the planned export. Technology acquisition and investments made under Technological Cooperation cannot be transferred to third parties without the approval of the SSB. If these conditions are not met, the Offset Credit will be null and void.

Temporary crediting may be applied to offset operations that are not carried out within a specific time frame despite being launched. The contractor is required to submit a temporary crediting request along with supporting documents to the SSB for evaluation. Once the offset operations subject to the temporary crediting are successfully completed, the contractor needs to submit a crediting request for evaluation.

The excess credit that exceeds the Offset Liability may be transferred by the contractor to those liabilities that have not been performed and are in other categories under the Offset Agreement, subject to certain conditions. The excess offset credit carried out under the export may not be transferred to those liabilities that are not carried out under the Technological Cooperation Type Offset. The excess offset credit carried out under the Technological Cooperation may be transferred to those liabilities that are not carried out under the Export Type Offset by multiplying it by 0.5, provided that it shall not exceed 20% of the total liability under the Export Type Offset. The excess credit may also be transferred to those liabilities that have not been performed and are under another offset agreement to which the contractor is a party. However, it may not be transferred to those liabilities that remain unperformed under the Technology Cooperation.

Upon request of the contractor, the offset operations carried out by the subcontractor of the contractor may be transferred to the contractor's Offset Liabilities by multiplying it with 0.5 provided it shall not exceed 50% of their total commitment. The offset credit value will be based on the Offset Agreement where the extra offset has arisen. However, the transferred offset credit cannot be used to settle the contractor's offset penalty that accrues within one month following the date of the transfer application.

If the contractor carries out extra offset operations, they can request an advance credit from the SSB, which will be counted towards the contractor's future potential Offset Liabilities. The advance credit will remain valid for three years from the date of the SSB's advance crediting letter, after which any unused credit will become null and void. The details of the use of the advance credit are required to be defined in the offset Agreement, and the request for using it will be evaluated within the contractor's existing offset liabilities. The advance crediting will be converted to the final crediting if an application is made by the end of the first program period in the event of a new offset agreement with the contractor. Export Type Offset advance credits will be counted towards the Export Type Offset liabilities on a one-to-one basis, while Technological Cooperation Type Offset advance credits will be counted towards the Technological Cooperation Type Offset liabilities on a one-to-one basis. They will also be counted towards the unrealized liabilities under the Export Type Offset by multiplying it with 0.5, subject to a cap of 20% of the total liability. If a company/entity obtains preliminary approval for advance crediting, they are required to make a request for it within six months following the completion of the relevant offset operations. Otherwise, no advance crediting will be carried out.

TÜK Operations Outside of TÜK Liability

TÜK operations that are to be carried out with the preliminary approval of the SSB by a company or entity with no existing TÜK Liability towards the SSB may be counted towards their potential future TÜK Liabilities. All terms of the TÜK Liability are also applicable for the performance of such TÜK operations. The SSB may transfer the TÜK performance determined by the SSB on a one-to-one basis against the TÜK Liabilities under an Industrialization Agreement, provided that the contractor makes a written request, and it is acceptable to the SSB. Any unused realization against the TÜK Liability within five years after it is determined by the SSB and notified to the relevant company or entity is canceled.

Offset Operations Outside of Offset Liability

Companies that currently have no Offset Liability towards the SSB may, with the preliminary approval of the SSB, carry out offset operations and apply to the SBS for advance crediting in order to be counted towards the potential future Offset Liabilities. The company can make an application for advance crediting to the SSB, which will remain valid for three years from the date of the SSB's advance crediting letter. Any advance credit that is not utilized during this period will become null and void. All terms of the Offset Liability apply to all preliminary approval, crediting, advance crediting, and credit transfer activities carried out in such a manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.