U.S. persons with operations in or related to a “boycotting country,” or with the government, a company or a national of a boycotting country, must file Form 5713 to report certain transactions with respect to such operations. The form is also required to report receipt of boycott requests and agreements made that would constitute cooperation with, or participation in, an international boycott.
The Secretary of the Treasury maintains the list of boycotting countries. As of July 29, 2010, the list includes: Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and the Republic of Yemen.
A taxpayer is considered to have operations in a boycotting country if it has an operation that is carried out, in whole or in part, in a boycotting country, either for or with the government, a company or a national of a boycotting country. A taxpayer is considered to have operations “related to” a boycotting country if it has an operation that is carried on outside a boycotting country for the government, a company, or a national of the non-boycotting country if the taxpayer knows or had reason to know that specific goods or services produced by the operation are intended for use in a boycotting country, or for use in forwarding or transporting to a boycotting country. The term “operations” means all forms of business and commercial activities, whether or not income is produced.
Covered boycotts are: (1) a secondary boycott, where a country refuses to deal with a company because that company (or a related corporation) deals with a boycotted nation; and (2) a tertiary boycott is where a country refuses to deal with a U.S. company that does no business with the boycotted nation, but which has dealing with other companies that deal with the boycotted nation.
I.R.C. §999 provides that a taxpayer cooperates with an international boycott if the taxpayer agrees to refrain from doing business with a boycotted nation or with anyone who does business with a boycotted nation, doing business with any company whose hiring practices (including management) exclude persons of a particular nationality, race or religion, and shipping or insuring products bound for the boycotting nation if the shipper or insurer does not cooperate with the boycott.
I.R.C. §999 sets forth penalties and loss of tax benefits for participation in certain international boycotts, including loss of foreign tax credits, loss of deferral of income from foreign corporations, loss of IC-DISC and extraterritorial income benefits. Penalties for willfully failing to file Form 5713 are a $25,000 fine, imprisonment for no more than 1 year, or both.
Form 5713 is due with the income tax return, including extensions. A copy is required to be filed with the IRS Center in Ogden, Utah if you do not file electronically. There are special reporting rules for members of controlled groups as defined by §1563, partners in partnerships, U.S. subsidiaries of foreign corporations and foreign corporations engaged in a U.S. trade or business through a U.S. branch.
All U.S. taxpayers with international operations or transactions with multinational companies need to review their dealings for application of these rules. Reporting compliance is vital to avoiding the loss of substantial tax benefits and monetary penalties. Schneider Downs & Co. can assist taxpayers with understanding and meeting the reporting requirements under this code section.
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