By: Matthew M. Van Nuland, Attorney at Hager, Dewick & Zuengler, S.C.
Living in the United States means we are governed by countless laws; some that are well known, like driving at specific speeds, and others that are more obscure, like prohibiting Wisconsin businesses from listing operating hours other than in standard time (Wis. Stat. 175.09(3)). Fortunately, many obscure laws have little impact on our day-to-day lives. That is not true, however, for U.S. antiboycott laws; laws, that although not very well known, have been regulating U.S. trade for nearly 50 years. Despite the lack of attention these laws receive, they impact U.S. business, especially manufacturers, every day.
U.S. antiboycottt laws prohibit or penalize cooperation with international economic boycotts not sanctioned by the U.S. There are two sets of antiboycott laws; one administered by the U.S. Department of Commerce and the other administered by the U.S. Treasury Department. These highly complex laws govern cooperation with any international economic boycotts that the U.S. does not support, with the primary target being the Arab League’s boycott of Israel.
The antiboycott regulations administered by the U.S. Department of Commerce are found in the Export Administration Regulations, 15 C.F.R Part 760. These regulations prohibit participation or cooperation with “boycott requests”. A boycott request is defined broadly to include nearly any request to participate in or cooperate with a boycott not sanctioned by the U.S. These include, but are not limited to, a request to prohibit the use of parts manufactured in a specific country, agreeing not to do business with a specific country or agreeing to discriminate against a U.S. person on the basis of race or nationality.
The U.S. Treasury Department’s antiboycott regulations are found in the Internal Revenue Code. These regulations do not prohibit boycott activity, but instead penalize U.S. taxpayers for agreeing to participate in or cooperate with a boycott not sanctioned by the U.S. Conduct regulated by the U.S. Treasury Department’s antiboycott regulations includes many of the same activities governed by the U.S. Department of Commerce.
According to Commerce Department statistics, most prohibited boycott requests are made from countries known to commonly boycott others; with the United Arab Emirates, Iraq, Libya and Syria being the most frequent requesters. This does not mean, however, that boycott requests do not come from other countries. Businesses must pay close attention regardless of a products final destination or their customer’s location. In fact, not all boycott requests come from the end-user. In many instances, boycott requests are made by distributors or middlemen.
Although it is easy to ignore antiboycott regulations, this practice comes with risk; financially and otherwise. Under the Commerce Department’s regulations, violators can be liable for civil and criminal penalties. Civil penalties include fines of up to the greater of: $250,000 per violation or twice the value of the transaction. Criminal penalties, on the other hand, include fines of up to $1,000,000 per violation or 20 years’ imprisonment. The U.S. Treasury Department’s regulations do not carry civil or criminal penalties. Instead, violators incur adverse U.S. income tax consequences. The income tax consequences, determined by the circumstances of the particular tax payer, may include a loss of foreign tax credits and the inability to defer foreign-source income. Additionally, a willful failure to file a boycott report with the Treasury Department may result in a $25,000 fine and/or imprisonment of up to one year.
Considering the complexity of these laws and the resulting penalties, U.S. businesses cannot be complacent. Although challenging and sometimes expensive, businesses should create and implement an effective antiboycott compliance strategy. At a minimum, businesses should train their employees to carefully review all oral and written communications for prohibited boycott language. This should include, but not be limited to, reviews of e-mails, contracts, purchase orders, invoices and any other communication. Businesses should also train employees to pay special attention when transactions involve traditional boycotting countries. In the event boycott language is discovered, the transaction should be placed on hold and referred to a party with a strong understanding of the regulations.
Although not well known, U.S. antiboycott regulations impact business transactions every day. Violating the regulations can result in civil and criminal penalties, the loss of tax benefits and hours of time and aggravation trying to defend the violation. Taking an active role in understanding the regulations and maintaining compliance will reduce the potential for violations and increase your bottom line.