Non-listed countries can also present compliance issues under both IRS and Commerce Department Requirements.
On August 5, the US Department of the Treasury’s Internal Revenue Service (IRS) published in the Federal Register an updated List of Countries Requiring Cooperation with an International Boycott, as follows:
In accordance with section 999(a)(3) of the Internal Revenue Code of 1986, the Department of the Treasury is publishing a current list of countries which require or may require participation in, or cooperation with, an international boycott (within the meaning of section 999(b)(3) of the Internal Revenue Code of 1986). On the basis of the best information currently available to the Department of the Treasury, the following countries require or may require participation in, or cooperation with, an international boycott (within the meaning of section 999(b)(3) of the Internal Revenue Code of 1986): Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen.
In real-world terms, the “international boycott” referred to in the IRS notice involves the boycott of Israel by many Arab or Muslim countries. Both the IRS and the US Department of Commerce Anti-Boycott Regulations have requirements for US Persons and taxpayers to report merely receiving a boycott request.
It is very important to note that a reportable boycott request can originate from any country, not just those listed in the above IRS notice. As such, you cannot assume—if a boycott-related request vis-à-vis Israel originates from a country not named in the above list—that you have nothing to worry about.
IRS Form 5713 is used to report, among other things, certain taxpayers’ receipt of boycott requests. The instructions for IRS Form 5713 make clear that the above list is not exclusive by stating that “a boycotting country” is any country on the IRS list or “any other country in which you. . .have operations and which you know (or have reason to know) requires any person to cooperate with or participate in an international boycott.”
Failure to report as and when required on IRS Form 5713 can result in the loss of certain tax benefits. A willful failure to file Form 5713 can result in imprisonment for no more than one year along with a possible maximum $25,000 fine. As such, companies should advise their tax departments about the need to consider filing IRS Form 5713 when required by IRS regulations.
The Commerce Department’s Office of Anti-Boycott Compliance (OAC), with regard to its own set of boycott reporting regulations (Export Administration Regulations (EAR) 15 CFR § 760.5), has made clear that reportable boycott requests can and do come from countries not named in the IRS list.
OAC has no formal list of boycotting countries. However, OFAC cites boycott request examples from the following countries that are not on the above IRS list: Bahrain, Bangladesh, and Oman. We have also received anecdotal reports of boycott requests having originated in Malaysia.
Failure to report a reportable boycott request to OAC can carry a civil penalty of $284,582 (recently increased due to inflation from $250,000) per violation, or twice the value of the underlying transaction to which the violation relates—whichever is greater. A person who willfully fails to file may, upon conviction, be fined not more than $1 million or, if a natural person, may be imprisoned for not more than 20 years, or both.
Morgan Lewis’s International Trade and Economic Sanctions team can assist you with evaluating your anti-boycott compliance posture. If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: