On August 15, 2012, the IRS published the updated list of countries that require or may require participation in, or cooperation with, an international boycott within the meaning of I.R.C. Section 999(b)(3). The following countries are on this list: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen. Note that Iraq is a new addition to the list.
Under I.R.C. Section 999, 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. Even if a taxpayer does not participate in an international boycott, the taxpayer may have a reporting obligation under §999. This is a duty to report to the IRS any request for participation in an international boycott if a taxpayer or any related person had “operations” related to a boycotting country, its companies or nationals. 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 a taxpayer does not file electronically.
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 operations that are 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. These activities include selling, purchasing, leasing, licensing, banking, financing, extracting, processing, manufacturing, producing, constructing, transporting and performing activities related to these activities.
I.R.C. §999 penalizes taxpayers for participation in certain international boycotts. This section specifically deals with secondary and tertiary boycotts. Restrictions on the import or export of goods from a specific country, defined as a “primary boycott,” are not addressed by I.R.C. §999. A request to participate in a primary boycott need not be reported.
A secondary boycott is where a country refuses to deal with a company because that company (or a related corporation) deals with a boycotted nation, even if no products of the boycotted nation are involved in the transaction. 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 dealings with other companies that deal with the boycotted nation.
Participation in a Boycott
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
• Doing business with anyone who does business with a boycotted nation
• Doing business with any company whose management consists of people of a particular nationality, race or religion
• Hiring people of a particular nationality, race or religion
• Shipping or insuring products bound for the boycotting nation if the shipper or insurer does not cooperate with the boycott
To constitute participation in a boycott, a taxpayer must agree to certain prescribed conduct as a condition for doing business with a boycotting country. An agreement can be specific or can be inferred by conduct. The agreement terms must require the taxpayer to “comply” with the boycotting country, not merely state the boycotting laws of the country “apply.”
Penalties and Loss of Tax Benefits
I.R.C. §999 sets forth penalties and loss of tax benefits for participation in certain international boycotts. Where the taxpayer participates in or cooperates with an international boycott, such taxpayer is not entitled to any foreign tax credit for foreign income taxes imposed on income from the operation. If the participating entity is a controlled foreign corporation (“CFC”), income earned from the operation is taxed directly to the U.S. shareholder instead of being deferred, even if subpart F rules do not apply to the income. In addition, taxpayers may lose a portion of the deferral of taxation of IC-DISC income and exclusion of extraterritorial income from gross income. Penalties for willfully failing to file Form 5713 are a $25,000 fine, imprisonment for no more than one year, or both.
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