Taxpayers doing business abroad encounter many hazards, but how many are aware of the pitfalls that await them under U.S. anti-boycott rules?
Under I.R.C. §999, U.S. taxpayers face serious penalties – including a loss of foreign tax credits and loss of deferral of income – if they support unauthorized boycotts or embargoes.
In the July issue of the Tax Management International Journal, author Paul J. Crispino explains how U.S. companies can become entangled in anti-boycott regulations.
“Boycotts and other economic sanctions have been used to enforce various policy goals and objectives for many decades, and it continues today, as we have seen with recent sanctions on Iran, North Korea and Russia,” Crispino says.
“The rules can impose significant burdens on businesses, and it isn’t always clear that U.S. businesses and their foreign affiliates understand the complexities of the rules and how best to comply with them,” Crispino says. Periodic training is very important for ensuring compliance, he says.
In his paper, “Agreements to Comply with Applicable Laws Under the International Boycott Regime of §999,” Crispino discusses the traps created by the U.S. anti-boycott rules now in place, which date to the 1970s. When the Arab League’s long-standing boycott of Israel escalated under the OPEC oil embargo, Congress enacted tax and trade laws to discourage U.S. companies from participating in unauthorized economic boycotts or embargoes. However, Treasury’s rules and the Commerce Department’s regulations differ on key points, such as the activities subject to penalties, reporting requirements, and even the definition of what constitutes “participation” in a boycott. These differences can and do lead to significant complexity, Crispino says.
In his paper, Crispino walks us through the history of the anti-boycott rules, discusses current applications, and suggests steps that taxpayers can take to avoid incurring penalties under the regimes.
“If the U.S. supports a boycott, there should be no issue under the anti-boycott rules (although there was an issue with the boycott of South Africa back in the late 1980s, so it is still possible for penalties to apply even when they shouldn’t),” he says. “On the other hand, if the U.S. doesn’t support a boycott, a U.S. person’s (or controlled group member’s) support of the boycott could be penalized under the U.S. tax and commerce rules.”
From a tax perspective, Crispino explains, a person participates in or cooperates with an international boycott if it agrees to certain actions to further the boycott. The prohibition against such activity, it should be noted, does not extend to “primary boycotts” – which are direct trade restrictions applied as economic sanctions by one nation against another. Rather, the prohibition applies where countries require participation in or cooperation with an international boycott as a condition of doing business there.
The U.S. Treasury maintains a list of nine countries that fall into this category: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, the United Arab Emirates and Yemen. But that doesn’t mean the prohibition is limited to just those countries.
“Boycott issues occasionally arise in connection with India and Pakistan,” Crispino notes. “In many cases, it is determined that the anti-boycott rules do not apply there because the contractual restrictions are either primary boycotts or are aimed at protecting goods from damage (so-called war risk clauses) rather than being an intent to impose sanctions for doing business with the target of the boycott.”
One of the biggest hazards taxpayers face is in the crafting of contracts. Most commercial contracts contain a provision requiring compliance with generally applicable local laws; that’s basically boilerplate. But under §999, Treasury interprets such a provision as evidence that the taxpayer has agreed to participate in an unauthorized boycott and thus could be subject to penalty.
Crispino highlights the usual workaround for U.S. companies and their foreign affiliates: Insert a “savings clause” into the contract to provide that the agreement to comply with local law excludes compliance to the extent that it is penalized under U.S. laws.
But modifying a contract isn’t always an easy fix.
“In many cases, international trade and tax counsel must have multiple phone calls and emails with local sales teams trying to determine the best way to revise contractual language so that the company doesn’t lose the transaction,” he says. “Sometimes there are sales staff who simply say, ‘Let’s just go with the original language and suffer the penalties.’ U.S. companies, however, cannot do that because it likely would violate their integrity policies to adhere to all prevailing U.S. and local laws, including the anti-boycott rules, and could lead to significant penalties.”
The long-term solution, Crispino believes, is for Treasury to align its rules with the Commerce Department’s, which does not treat a general agreement to comply with local laws as an agreement to participate in a boycott. U.S. taxpayers should not be presumed to participate in an unsanctioned boycott solely because they have agreed to comply with local generally applicable law, he says. “Additional factors should be necessary before such an agreement triggers tax penalties.”
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