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Most companies recognize the need for anti-boycott review and compliance, however, the laws are complex, at times seemingly contradictory, and can apply to activities both within and outside of the United States, as well as non-U.S. entities. This article provides a brief overview of the U.S. anti-boycott laws, followed by areas within the law that may require a second look for proper compliance.
PART I – OVERVIEW OF THE U.S. ANTI-BOYCOTT REGULATIONS
The U.S. Anti-boycott regulations are drafted to cover any boycott not sanctioned by the U.S. That is, any country with which the U.S. is friendly, but is currently being boycotted by another country. In practice, the Anti-boycott regulations apply almost exclusively to the Arab Boycott of Israel.
THE ARAB BOYCOTT
There are three tiers to the Arab Boycott. The primary boycott prohibits members of the Arab League countries from doing business with Israel, including the import of Israeli goods, or the hiring of Israeli employees. The secondary tier of the boycott prohibits doing business with persons or entities that conduct business with Israel. For this particular group, a blacklist is maintained at the Arab Boycott Office in Damascus. The final tertiary tier prohibits members of the Arab League from doing business with companies who do business with blacklisted companies. Not all members of the Arab League states participate in the boycott, and the enforcement of the boycott is sporadic.
THE U.S. ANTI-BOYCOTT LAWS
In the mid-70’s the U.S. government drafted two laws designed to prevent cooperation with unsanctioned boycotts and the Arab Boycott of Israel. One is contained within the Internal Revenue Code and is typically referred to as the Tax regulations. The other is found in the Export Administration Regulations and is often called the Commerce regulations. Each law is separately administered by the Office of Anti-boycott Compliance within the Commerce department for the Commerce regulations and the Treasury Department for the Tax regulations.
Commerce does not issue a formal list of boycotting countries, but the Treasury Department publishes a notice each year indicating countries which may require participation in or cooperation with, a boycott. The current list of countries includes Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Yemen.
PROHIBITIONS AND PENALTIES
The Commerce regulations dictate permitted and prohibited forms of boycott requests, and both are generally reportable. Violations of prohibited requests carry both civil and criminal penalties of up to the greater of $250,000 per violation, or twice the value of the transaction on the civil side, and up to $1 million in penalties and twenty years in prison on the criminal side. Denial of export privileges may also be imposed.
Tax does not delineate between permissible and prohibited actions, but instead deems certain activities to be subject to penalty. Penalties on the Tax side include loss of tax benefits of U.S. exporters, including foreign tax credits and tax deferrals. Failure to report is also subject to a fine of up to $25,000.
PART II – ITEMS TO WATCH
ARE YOU PROPERLY EVALUATING JURISDICTION?
The jurisdiction for each anti-boycott law is different.
On the Commerce side, the anti-boycott regulations apply to “U.S. Persons” and “controlled in fact” foreign subsidiaries, in relation to activities within U.S. commerce, all of which are defined in the regulations. For multinational companies with a variety of international entities, manufacturing sources, customers, and employees, determining jurisdiction can often come down to a case-by-case basis.
On the Treasury side, it is not as simple as the entity being a U.S. taxpayer, or a foreign subsidiary which directly rolls-up into a U.S. entity. Foreign affiliates within the same control group as a U.S. taxpayer may also be subject to the regulations. Multinationals should review with their tax group to determine if jurisdiction exists.
ARE YOU RECOGNIZING BOYCOTT LANGUAGE?
Some boycott requests are easy to spot. If you see the word “boycott” or “Israel” or “blacklist”, you likely have a boycott request. However, the language can be much more subtle and in addition, Commerce and Tax interpret boycott requests differently. Below are a few examples of boycott requests that are subject to penalty under the Tax regulations.
- In a contract: “Vendor agrees to comply with the laws of the United Arab Emirates.”
- Supplying a certificate from an insurance company stating that the insurance company has a duly authorized agent or representative within a boycotting country, and/or the name and address of such agent.
- A “Vessel Eligible” Certificate containing the following language:
“The undersigned does hereby declare on behalf of the owner or master of the above-named vessel that said vessel is not registered in Israel or owned by nationals or residents of Israel and will not call at or pass through any Israeli port en route to its boycotting country destination. The undersigned further declares that said vessel is otherwise eligible to enter into Arab ports in conformity with its laws and regulations.”
Although subject to penalties on the Tax side, none of the three examples listed above are either prohibited or reportable under the Commerce regulations. However, a slight change to the third example and the language becomes reportable and prohibited, and may be subject to penalty by both Tax and Commerce.
“The undersigned does hereby declare on behalf of the owner, master, or agent of the above-named vessel that said vessel is not registered in Israel or owned by nationals or residents of Israel, and will not call at, or pass through, any Israeli port en route to its boycotting country destination. The undersigned further declares that said vessel is otherwise eligible to enter into Arab ports in conformity with its laws and regulations.”
In this scenario, the addition of the word agent makes the phrase prohibited.
ARE YOU REPORTING CORRECTLY?
Commerce requires the reporting of boycott requests on a quarterly basis. U.S. entities must file their report within 30 days of the end of each business quarter. The reports of foreign affiliates are due within 60 days of the end of the quarter.
The form for Tax reporting is part of a company’s annual tax return.
It’s important to note that given the distinctions of the two laws, each boycott request should be tracked and labeled as Commerce, Treasury, or both. While it may be tempting to use previously submitted Commerce reports to compile your Tax report, it will likely not be an accurate filing. Additionally, requests must be reported regardless of whether or not the recipient complies, or even responds, to the request.
Thanks to Tish Jones for her assistance in preparing this primer.