A SUMMARY OF U.S. ANTIBOYCOTT LAW
deKieffer & Horgan, Washington, D.C.
Background
In 1954, the council of the League of Arab States approved a
resolution calling for an economic boycott of Israel. Since
that time, members of the League have conducted a boycott of
varying effectiveness. To implement the boycott, the League
formed a Central Boycott Office, headquartered in Damascus, Syria,
for the purpose of facilitating communications among the boycott
offices of the League members and to make recommendations regarding
boycott enforcement.
The boycott is not confined to actual trade with Israel. It
also applies to dealings with companies that have been blacklisted
for activities deemed to be inconsistent with the "General Principles
for the Boycott of Israel" (June 1972), published by the Central
Boycott Office and the League of Arab States. Generally,
a firm may be blacklisted if it trades with Israel or if it has
a relationship with a firm that trades with Israel.
The Arab boycott of Israel occurs on three levels. The "primary
boycott" involves a refusal by the government of the participating
countries to deal, and a prohibition on their residents from
dealing, directly with, or in the goods of, Israel or Israeli
firms. The primary boycott is enforced by 16 Arab states. The "secondary
boycott" involves a refusal by the governments of participating
Arab states to deal, and a prohibition on their residents from
dealing with persons or firms, or in the goods or services of
persons or firms, which, although not Israeli, have been blacklisted
by boycott officials of these Arab states. The "tertiary
boycott" involves a requirement by participating governments
that persons or firms not deal with blacklisted firms in certain
circumstances. The secondary and tertiary aspects of the
boycott are enforced in varying degrees in 11 Arab states.
Generally, decisions to blacklist a firm or person originate
with local boycott authorities in one of the 11 Arab states participating
in the secondary or tertiary aspects of the boycott, although
they may originate with the Central Boycott Office. As
a means of gathering boycott-related information, the local boycott
office in an Arab state may send a questionnaire to a target
seeking formal written responses as to the target's business
affiliations, relationships with Israel, relationships with blacklisted
persons or firms, and other matters. Failure by a target
to respond to such a questionnaire within the prescribed time
period makes it more likely than not that the target will be
blacklisted by the country sending the questionnaire and that
the target will be recommended for blacklisting to the Central
Boycott Office. In the event a person or firm is blacklisted,
the "General Principles" provide that its products and services
will be denied entry into the boycotting states.
In the mid-1970's, Congress became concerned about Arab efforts
to pressure U.S. companies into participating in the boycott
against Israel and eventually enacted antiboycott legislation
as amendments to the Export Administration Act and to the U.S.
Internal Revenue Code. The essence of these provisions
is to prohibit any U.S. person, firm, or related entity from
participating in or furthering a boycott not sanctioned under
U.S. law. Thus, the primary implementation of these provisions
is with respect to the boycott of Israel, but they would apply
to any other "unlawful" boycott.
Antiboycott Provisions
Under the Export Administration Regulations
The U.S. Export Administration Act makes it a criminal or civil
violation for a U.S. company or its employees to take any one
of a number of actions to participate in or cooperate with any
foreign boycott not sanctioned by the United States Government
(50 U.S.C. app. §2407). The provisions of the Export
Administration Act are elaborated in substantial detail by regulations
issued by the Commerce Department (15 C.F.R. §760).
A United States person under these provisions is defined as "any
person who is a United States resident or national, including
individuals, domestic concerns, and 'controlled in fact' foreign
subsidiaries, affiliates, or other permanent foreign establishments
of domestic concerns." A foreign subsidiary or affiliate
is "controlled in fact" by a domestic concern when it has the
ability to control general policies or daily operations. Several
rebuttable presumptions of control are established in the regulations:
Where the domestic concern owns or controls more than 50% of
the voting securities of the foreign subsidiary or affiliate;
Where the domestic concern owns or controls more than 25% of
the voting securities of the foreign subsidiary or affiliate
and no other person owns or controls an equal or larger percentage;
If the foreign subsidiary or affiliate is operated by the domestic
concern pursuant to an exclusive management contract, or if a
majority of the members of its board of directors are also members
of the comparable governing body of the domestic concern;
If the domestic concern has the authority to appoint either
a majority of the board of directors or the chief operating officer
of the foreign subsidiary or affiliate.
It should be noted that, although the Act applies to a U.S.
person who takes prohibited action with the intent to comply
with, further, or support an unsanctioned boycott, intent in
this context merely means the reason or purpose for behavior. Agreements
with the boycott in question or desire to have the boycott succeed
or that it be furthered or supported is not required in order
to establish intent. Such reason or purpose can be established
by circumstantial evidence.
The Export Administration Act requires U.S. companies to report
any boycott requests they receive even though they refuse to
participate in or cooperate with these requests. The term "request" under
the Export Administration Act is broadly defined to include any
request, whether written or oral and from either a boycotting
or non-boycotting country entity, to take any action having the
effect of furthering or supporting a restrictive trade practice
or boycott against a country friendly to the U.S. A "request" may
include a solicitation, directive, legend, or instruction that
asks for information or asks that a U.S. person take or refrain
from taking a particular action. A "request" also includes
a situation in which a U.S. person is negotiating a transaction
with a boycotting country, knows that he will be asked to supply
certain reportable boycott information at the conclusion of negotiations,
and, in an effort to forestall receipt of the request an thereby
avoid having to file a report, supplies the information in advance.
Special attention should be paid to all transactions in or relating
to the countries listed by the U.S. Treasury Department as boycotting
countries. See Attachment I. The Treasury Department also
defines as a boycotting country any country not on its list which
a U.S. person knows or has reason to know requires any person
to participate in or cooperate with an international boycott.
It is not unusual for letters of credit to contain conditions
or terms that are boycott related. U.S. persons are prohibited
from paying or otherwise implementing letters of credit that
contain conditions or requirements, compliance with which is
prohibited by the antiboycott provisions. Actions considered
to be "implementing" such a letter of credit include paying,
honoring, or confirming it, although a bank may take ministerial
actions to dispose of such a letter of credit without implementing
it and may also assist the beneficiary in seeking an amendment
to the letter of credit to eliminate or nullify language which
prevents the bank from implementing it.
The regulations provide certain exceptions to these prohibitions
but, because the penalties for violation are substantial, as
described below, it would be wise to obtain expert advice in
connection with any activities in connection with a boycotting
country prior to any contact with such a country.
Enforcement and Penalties
The regulations provide for both criminal and civil penalties. The
criminal penalties are a maximum of a $25,000 fine and/or one
year's imprisonment for a first violation, and up to a $50,000
fine and/or five years imprisonment for subsequent offenses. The
civil penalties are a maximum of $10,000 per violation and/or
denial of export privileges.
Of particular significance is how "violation" is interpreted. The
Office of Antiboycott Compliance in the Department of Commerce
has increased its enforcement activities within the past two
years and a significant factor in the impact of these activities
is its charging a violation of the antiboycott regulations for
each and every separate answer or response to a prohibited question. For
example, answering a single questionnaire relating to a single
transaction could amount to hundreds of individual violations.
Guidelines For Compliance
The following is a list of guidelines for compliance with the
antiboycott provisions. No officer, employee, representative,
agent, or consultant, should take any action or make any agreement
to:
- refuse, or require any person to refuse, to do business with
anyone, including an entity of a boycotted country or a blacklisted
person, pursuant to an agreement with, a requirement of, or
a request from or on behalf of an entity of a boycotting country;
- discriminate against any individual or entity in employment
or in commercial relationships on the basis of the race, religion,
sex, national origin or nationality of such person or, where
an entity, of its employees, officers, directors or owners;
- furnish information with respect to the race, religion, sex,
or national origin of any U.S. individual or entity or, where
an entity, of any owner, officer, director, or employee of
such entity;
- furnish information about past, current, or prospective business
relationships of anyone with a boycotted country, an entity
of a boycotted country, or firms known or believed to be on
a boycott list; and
- furnish information about the affiliation or other relationship
of any person with an organization which supports a boycotted
country.
Any officer, employee, agent or consultant of a U.S. company
or its subsidiary who receives a request, whether in relation
to a sanctioned or unsanctioned boycott, either in writing or
orally, which is, or might be construed as, a request to take
or agree to take any of the prohibited actions set forth above
should not respond to the request without specific guidance.
Warning Signals
The following is lists of some warning signals which may suggest
the presence of boycott concerns in international business dealings:
- requests not to do business with a boycotted country, with
companies, nationals or residents of such country, with other
entities doing business with such country, with so-called "blacklisted" firms
or persons, or with any person or company if you suspect the
request is related to the boycott of such country (for example,
Arab boycott of Israel);
- requests to do business only with approved firms or persons
(for example, those on a so-called "whitelist");
- requests to do business with specified firms or persons,
such as potential contractors or subcontractors, which you
have reason to believe have been selected by boycotting countries
or entities in such countries for boycotting reasons;
- requests to discriminate against U.S. persons on the basis
of race, religion, sex, or national origin;
- requests in which the words "Israel", "Hebrew", "Jewish",
or other words indicative of ancestry, nationality, or national
origin are used, as well as questions about parentage;
- requests to furnish information regarding race, religion,
sex, or national origin;
- requests to furnish information about anyone's past, present
or future business relationships with a boycotted country,
with companies, nationals, or residents of such country, or
with blacklisted persons, as well as requests to furnish information
about anyone's association with charitable or fraternal organizations
supporting a boycotted country;
- insistence upon contract clauses making applicable, or requiring
compliance with, local laws or regulations; and
- requests to supply a negative certificate or origin of goods
(for example, "not produced in Israel").
While some of the examples described above may not constitute
a violation of federal law or regulation, the examples, which
are not exhaustive, do reflect warning signals that should trigger
concern. All personnel should be alert for any statements
or requests (written or oral) that could indicate the presence
of boycott issues. If any such warning signal is encountered,
the company personnel involved should refrain from responding
to or discussing the matter either with the source of the signal
or others and should promptly seek advice and guidance from the
appropriate supervisory personnel or company counsel.
As noted above, the regulations require companies to report
requests to comply with an unsanctioned boycott, whether such
requests are acted upon or not. Furthermore, companies
doing business in and with boycotting countries are subject to
income tax reporting requirements as well. It is recommended
that the company maintain all records relating to reportable
boycott requests, including copies of any document in which the
request appeared, for three years after receipt of the request.
Tax Aspects of U.S. Antiboycott Law
This is a brief analysis of the provisions of section 999 of
the Internal Revenue Code of 1954, as amended ("Code", 26 USC § 1
ET SEQ.) and the Treasury Department's Boycott Guidelines ("Guidelines",
43 Fed. Reg. 3454, Jan. 25, 1978, 44 Fed. Reg. 66272, Nov. 19,
1979) which interpret this provision. This is to provide
an overview of what section 999 penalizes and the scope and manner
of its application. It also analyzes the key differences
between code section 999 and its Guidelines and the antiboycott
provisions of the Export Administration Act.
Overview of Code Section 999
Code section 999 imposes certain tax penalties, namely loss
of deferral, foreign tax credits and foreign sales corporation
("FSC") benefits with respect to, agreements made as a condition
of doing business with or in a boycotting country:
- to refrain from doing business with a boycotted country,
or with its government, companies or nationals;
- to refrain from doing business with a blacklisted United
States person;
- to refrain from doing business with companies whose owners
or managers are of a particular nationality, race, or religion;
or
- to refrain from employing individuals on the basis of their
race, nationality or religion.
The Code also penalizes agreements, made as a condition of the
sale of goods to a boycotting country, its companies, or nationals,
to refrain from shipping or insuring with blacklisted carriers.
The Code's tax sanctions for a penalized agreement apply to
a "person or a member of his controlled group (within the meaning
of section 993(a)(3) which includes the person) ..." See Code
section 999(b)(1). A "controlled group", in general, is
a group of companies connected through stock ownership with a
common parent in which more than 50% of the voting stock or of
the total value of the shares in each of the corporations in
the group, except the common parent, is owned directly or indirectly
by one or more of the other corporations. Section 999(b)(1)
also provides that if any member of a controlled group engages
in acts of boycott compliance, all members of the controlled
group with operations in boycotting countries are presumed to
have complied with the boycott.
Under Code section 999(b)(1), if a person engages in an act
of boycott compliance, all of that person's operations in any
boycotting country (including specifically all of the countries
set forth in a list of boycotting countries published quarterly
by the Treasury Department) are presumed to be boycott-tainted. The
presumption of boycott participation does not arise automatically
because a person does business in a boycotting country; it is
triggered by an initial act of actual boycott participation.
If a taxpayer or other members of the taxpayer's controlled
group are engaged in "separate and identifiable" operations in
boycotting countries, the taxpayer (or group) may avoid loss
of tax benefits as to those operations in which there is no boycott
compliance. In order to benefit from this rule, it must
be demonstrated that the operations in boycotting countries were
separate and identifiable, and that there was no boycott compliance
in such operations. The income and taxes attributable must
also be identified.
Among the tests applied under the Guidelines in determining
whether operations are clearly separate and identifiable are
whether the operations were conducted by different corporations
or other entities, were supervised by different management personnel,
whether they involved different products or services, or were
undertaken pursuant to separate contracts. A taxpayer must
demonstrate that different operations within the same country
are separate and identifiable in order to avoid having a penalized
agreement in one operation taint other operations.
"Boycotting countries" for purposes of the above rules are both
the countries periodically listed by Treasury and other, unlisted
countries, if the taxpayer "knows or has reason to know" that
country requires boycott participation as a condition of doing
business. Countries appearing on the most recent Treasury
list are listed in Attachment I.
Key Differences Between the EAA and Code
Section 999
There are many areas in which the EAA and Code section 999 overlap. Both
laws penalize agreements to refrain from doing business with
boycotted countries and with blacklisted U.S. persons (the EAA
is broader in that it prohibits refusals to do business with ANY blacklisted
persons, rather than solely U.S. persons). Both penalize
certain types of discrimination although there are important
differences in scope. The most important differences between
the two sets of laws (and their interpretative regulations and
guidelines) are the following:
- Code section 999 penalizes only agreements do certain things,
for example, refraining from doing business with a boycotted
country or blacklisted U.S. persons. Such agreements
must be made as a condition of doing business with a boycotting
country. Unlike the EAA, the Code does not, by its terms,
penalize:
- the taking of actions not pursuant to a proscribed
agreement;
- the furnishing of information per se. See Guideline
H-17 (but beware of agreements to furnish information
or certifications at a future date because such agreements
may be penalized; See Guidelines H-17
and H-35).
- The EAA applies only to transactions in the interstate or
foreign commerce of the United States, whereas Code section
999 is not limited in this way.
- The EAA applies only to "U.S. persons" (defined to include
controlled-in-fact foreign affiliates) and prohibited certain
actions only if they are taken with "intent to comply with,
further or support" a foreign boycott against a country friendly
to the United States which is not the object of any form of
boycott under U.S. law. In contrast, Code section 999
applies to all U.S. taxpayers and members of their "controlled
group" as defined above. "Intent" is not required under
the Code.
- Code section 999 penalizes discrimination in employment on
the basis of nationality , whereas EAA prohibits it on the
basis of national origin .
- Both the EAA and Code section 999 make some provision for
compliance with primary boycott requirements:
- EAA section 2407(a)(2)(A) permits a U.S. person to
comply with boycotting country's prohibition on imports
of goods or services from the boycotted country, or produced
or provided by boycotted country companies, nationals,
or residents.
- In contrast, Code section 999(b)(4)(B) permits agreements
to comply with a prohibition on the import of goods,
but not services , produced in whole or in part in a
country which is the object of boycott.
- Not surprisingly, there are also a number of key differences
and inconsistencies between the EAA's antiboycott Regulations
and Treasury's Guidelines interpreting Code section 999:
- The most dangerous difference is the Treasury's apply/comply
distinction. Under this distinction, an agreement
that the laws of a boycotting country "shall apply" to
the performance of a contract is not penalized. In
contrast, an agreement "to comply" generally with a boycotting
country's laws is penalized, even though boycott laws
are not specifically mentioned. See Guidelines
H-3, H-4. In Guideline H-39, Treasury has further
elaborated on this distinction. An agreement that
a boycotting country's laws "shall govern" performance
of a contract or that the company would be "subject to" the
laws, regulations, requirements or administrative practices
of the boycotting country is not penalized under the
Code.
This distinction does not exist under the EAR. Under
EAR section 15 CFR §760.2(a)(5), an agreement "to
comply" generally with the laws of a boycotting
country or an agreement that the laws of the boycotting
country "shall apply" or "govern" is not prohibited.
- Unlike the EAA and EAR, the Guidelines make no provision
for an in-country exception: compliance by U.S. firms
resident in boycotting countries with local law with
respect to their activities exclusively within that country,
for example, entering contracts providing that the parties
will comply with local laws and compliance with local
import laws in importing goods, materials, or components
into the boycotting country.
- Unlike the EAR, which basically makes all boycott-related
requests reportable (regardless of whether they are prohibited
or permissible, unless they are exempted from reporting by
15 CFR §760.5(a)(4)), the Code requires that all "operations" (1)
in or related to boycotting countries must be reported on Form
5713 (International Boycott Report) filed each year with the
taxpayer's federal income tax return (with a duplicate copy
filed with the Internal Revenue Service Center in Philadelphia).
- Form 5713 must be filed regardless of whether any boycott "requests" are
received. Any such "requests" to participate in
or cooperate with an unsanctioned international boycott
within the meaning of Code section 999(b)(3) must also
be reported.
- Unlike the EAR, a taxpayer must report the "operations" of
his or its entire "controlled group" (including foreign
affiliates in which more than 50% of the voting stock
or total value of shares in each of the corporations,
except the common parent, is owned directly or indirectly
by one or more of the other corporations), regardless
of whether their activities involve U.S. interstate or
foreign commerce.
- It should be remembered that while the Treasury Department,
unlike Commerce, lists certain "boycotting countries",
operations in other, unlisted countries are also reportable
if the taxpayer knows or has reason to know that country
requires participation in or cooperation with an unsanctioned
international boycott. Special scrutiny should
be given to the member countries of the Islamic Conference
Organization that has declared an Islamic Boycott of
Israel. These countries are listed in Attachment
II.
Attachment I
LIST OF BOYCOTTING COUNTRIES
The U.S. Treasury Department currently lists the following as
boycotting countries, that is, countries "which may require participation
in or cooperation with an international boycott":
- Bahrain
- Iraq
- Kuwait
- Lebanon
- Libya
- Oman
- Qatar
- Saudi Arabia
- Syria
- United Arab Emirates (U.A.E.)
- Yemen, Republic of
Attachment II
MEMBERSHIP IN THE ISLAMIC CONFERENCE ORGANIZATION
(ICO)
NON-ARAB MEMBERS OF THE ICO : Afghanistan
(currently suspended from the ICO), Bangladesh, Cameroon, Chad,
Comoros Is., Djibouti, Gabon, Gambia, Guinea, Guinea-Bissau,
Indonesia, Iran, Malaysia, Maldives, Mali, Niger, Pakistan, Senegal,
Turkey, Uganda, Burkina Faso
ARAB MEMBERS OF THE ICO : Algeria, Bahrain,
Egypt (currently suspended from the ICO), Iraq, Jordan, Kuwait,
Lebanon, Libya, Mauritania, Morocco, Oman, Qatar, Saudi Arabia,
Somalia, Sudan, Syria, Tunisia, United Arab Emirates, Yemen,
Arab Republic, Palestine Liberation Organization
COUNTRIES/ORGANIZATIONS HAVING OFFICIAL OBSERVER STATUS
IN THE ICO : Moslem World Congress, Nigeria,
Turkish Federated State of Kibris (the Turkish part of Cyprus),
League of Arab States, Moslem World League
Endnote:
- The term "operations" is broadly defined under Guideline
B-1 to include all forms of business or commercial activity,
regardless of whether productive of income.
Reportable "operations" include selling, leasing, purchasing, performing
services, producing, and performing ancillary activities such as contract
negotiating, advertising, site selection, etc
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