Overview
The Treasury Department has removed the United Arab Emirates (“UAE”) from its 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). Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, and Yemen remain on the Treasury list.
According to the Treasury Department, the UAE has been removed from the list due to the issuance of Federal Decree-Law No. 4 of 2020, which repealed its law mandating a boycott of Israel, and the subsequent actions that the UAE government has taken to implement the new policy. The change in law followed the 2020 normalization agreement between Israel and the United Arab Emirates.
The United States has two anti-boycott regimes, originally enacted in the 1970s as a response to the Arab League boycott of Israel. Under the tax rules, a taxpayer may be subject to certain negative tax consequences (often colloquially referred to as “tax penalties”), such as the loss of foreign tax credits or full U.S. taxation of certain foreign income, if the taxpayer or a member of its controlled group agrees to participate in or cooperate with an unsanctioned international boycott. The tax rules also impose reporting obligations on taxpayers who receive requests to participate in or cooperate with a boycott, agree to comply with a boycott, or have operations in or related to a boycotting country.
Under the separate Anti-Boycott Regulations administered by the U.S. Department of Commerce, Office of Anti-Boycott Compliance (OAC), 15 CFR Part 760, U.S. persons (as defined) are prohibited from agreeing to participate and/or participating in unsanctioned foreign boycotts of countries friendly to the United States, such as the Arab boycott of Israel. The prohibitions, subject to certain exceptions, restrict activities undertaken in the interstate or foreign commerce of the United States (as defined) with intent to further such boycotts. In addition, there are reporting requirements placed on U.S. persons that receive requests to participate in a boycott. Certain exceptions may apply to both the substantive prohibitions and reporting requirements. Unlike the Treasury Department, OAC does not publish a list of countries imposing or fostering a boycott.
Under the tax rules, a taxpayer is considered to participate in or cooperate with an international boycott if it agrees to refrain from certain activities, such as refraining from doing business with a boycotted country or the government, companies, or nationals of that country, subject to certain exceptions. The existence of an "agreement" is central to a finding of participation in or cooperation with an international boycott. Under the Commerce Department anti-boycott regulations, although an agreement to participate in a boycott is prohibited, an agreement is not necessary, and any refusal to deal with a boycotted country or its nationals, including furnishing certain types of information about business relationships with boycotted countries, discrimination against U.S. persons on the basis of race, religion, sex, or national origin, or evasion of the Anti-Boycott Regulations, regardless of an explicit or implicit agreement, can be the basis for a violation.
Critically, an agreement penalized under the tax rules can arise even where there is no explicit reference to a boycott, such as when a person agrees to comply with the laws of a boycotting country. The tax rules contrast an agreement that the laws of a boycotting country “apply” with an agreement that a taxpayer will “comply” with the laws of a boycotting country. The latter is penalizable, unless language is inserted that excepts out compliance if penalized by U.S. law or inconsistent with U.S. law. So-called “comply with laws” provisions often present a trap for the unwary, as a taxpayer may become subject to tax penalties under the tax boycott rules even where there is no intent to comply with a boycott but the taxpayer simply agrees to comply with local law. This is in contrast to the Commerce Department anti-boycott regulations where an agreement to comply with the general laws of a boycotting country, without more, would not be considered a prohibited agreement or participation.
The formal removal of the UAE from the Treasury list provides helpful clarity that agreements to comply with the laws of the UAE do not give rise to penalizable agreements and should reduce compliance burdens associated with reporting to the IRS of requests to comply with the laws of the UAE.
The change to the Treasury list will impact other tax reporting obligations. In addition to reporting boycott requests and penalizable agreements, taxpayers must also report with their federal tax returns when the taxpayer or a controlled group has operations in or related to (1) a country (or with the government, a company, or a national of a country) which is on the list maintained by Treasury or (2) any other country (or with the government, a company, or a national of that country) involving operations if such person has reason to know that participation in an international boycott is a condition of doing such business. Thus, unless the knowledge or reason to know condition is implicated, operations in or related to the UAE will no longer be reportable. It also appears that reporting is based on the current Treasury list as of the date a federal tax return is filed, though we are not aware of specific guidance on this point.
As for the implications of the de-listing of the UAE for the Commerce Department Anti-Boycott regulations, to date OAC has not taken any formal action to indicate that the regulations no longer apply to U.S. person activities in the UAE. Therefore, U.S. persons should continue to abide by the Anti-Boycott regulations when conducting business in or with the UAE. However, the Treasury Department action, combined with the revocation of the UAE boycott laws via Federal-Decree Law No. 4, raises a question as to whether the requisite “intent” to support an unsanctioned boycott would now exist. Nonetheless, U.S. persons should continue to exercise caution when conducting business in the UAE. In the event one were to encounter a “boycott” request (such as in a contractual document, request for a certificate of origin, or a question/questionnaire for conducting business), one should seek the deletion or retraction of any such request, noting the issuance of Federal-Decree Law No. 4 and the removal of the UAE from the Treasury Department List.
