International Law Advisory - U.S. Department of the Treasury Publishes Statistics Regarding International Boycott Reports

On June 30, 2009, the U.S. Department of the Treasury, Internal Revenue Service (“IRS”) updated its International Boycott Statistics webpage to provide information about the number of persons receiving boycott requests, number of requests received, number of agreements, and lost tax benefits due to boycott participation for 2005 and 2006. 

By way of background, Section 999 of the Internal Revenue Code of 1986, as amended, imposes penalties, e.g., the loss of a portion of a U.S. taxpayer’s foreign tax credits and loss of a portion of the deferral of taxation of income of a U.S. taxpayer’s controlled foreign corporation, where there is participation in or cooperation with an international boycott not sanctioned by the United States. The U.S. Department of the Treasury has published a series of guidelines establishing substantive rules for interpreting Section 999.  Additionally, Section 8 of the U.S. Export Administration Act of 1977 makes it a criminal or civil violation for a U.S. person to take any one of a number of prohibited actions to participate in or cooperate with any foreign boycott not sanctioned by the United States, or to fail reporting boycott-related requests received by a U.S. person.  The provisions of the EAA are elaborated on in substantial detail by the Export Administration Regulations, 15 C.F.R. Part 760, promulgated by the U.S. Department of Commerce, Office of Antiboycott Compliance.

The published data through 2006 have been compiled from IRS Form 5713, which U.S. taxpayers file annually with the IRS to report about operations in or related to boycotting countries.  (The statistics do not include boycott-related information reported to the U.S. Department of Commerce by U.S. persons.)  Although the information does not provide statistics for more recent years, the IRS updates the statistics infrequently, and the data provide several important points that U.S. taxpayers should recognize.

First, for antiboycott compliance and reporting purposes, U.S. taxpayers should be aware of the U.S. Department of the Treasury’s List of Countries Requiring Cooperation with an International Boycott (“List”), most recently published at 74 Fed. Reg. 15828 (Apr. 7, 2009) and updated quarterly.  (The U.S. Department of Commerce does not publish a similar List of boycotting countries.)  Because the newly-published data are for prior years, the international boycott statistics include data for some countries, such as Oman and Bahrain, which have been removed from the List.  In addition, the IRS provides boycott report and agreement information for Iraq.  Even though Iraq is no longer formally on the List, the country’s status with respect to future Lists for cooperation with international boycotts remains under review.  As discussed below, however, the List is not dispositive as to whether operations in or related to other countries which may require participation with an unsanctioned boycott must be reported.

Second, even though the number of boycott-cooperating countries has declined, the number of boycott agreements as compared to the number of boycott requests received increased from 13.3 percent in 2005 to 18.5 percent in 2006.  This is a substantial number of boycott agreements, with 2006 ranking higher in percentage terms than in 2002 through 2005, but the data do not provide insight into why this increase occurred.

Third, the IRS reported a significant number of boycott requests and boycott agreements for non-Listed countries.  Indeed, boycott agreements for non-Listed countries rose from 14 in 2005 to 40 in 2006.  Even though the statistics do not provide further information about which non-Listed countries were involved with the requests and agreements, or why there has been such an increase in the number of boycott agreements from non-Listed countries, the fundamental point to recognize is that U.S. taxpayers filed Form 5713s reporting operations in or related to countries other than those named on the List.   U.S. taxpayers therefore must monitor whether boycott-related requests have been received and whether boycott agreements have been concluded for any other non-Listed country which may support or require participation in an international boycott not sanctioned by the United States.  Based on such oversight, U.S. taxpayers should determine whether a Form 5713 filing is warranted given the specific factual circumstances, i.e., as part of a parallel report to the U.S. Department of Commerce regarding prohibited boycott-related requests, agreements, and/or conduct.

Should you have any questions about the International Boycott Statistics or related issues, please contact Ed Krauland at 202.429.8083, Lucinda Low at 202.429.8051, Stan Smilack at 202.429.6464, or Jack Hayes at 202.429.6491 in our Washington, DC office.