Watch Those Customer Purchase Orders – They Could Get You into Trouble!

September 13, 2023 by Leave a comment

If someone asks you to boycott Israel, did you know that you have an affirmative obligation under the U.S. regulations to report it? And did you know that this standard can also apply to the template language on a customer’s purchase order?

Recently, Pratt & Whitney Component Solutions (“PWCS”) found this out the hard way, with a BIS enforcement action that resulted in PWCS paying a settlement of $48,750. The offensive remark? Standard language on an airline purchase order! This illustrates how important it is to look carefully at each purchase order you receive.

Most Americans know that the U.S. anti-boycott rules forbid a U.S. person from participating in a foreign boycott that is inconsistent with U.S. policy. The rule most often arises in the context of boycotts against Israel.

The reporting requirement of the anti-boycott rule requires U.S. persons to report to the government when they get a request to take any “action which has the effect of furthering or supporting a restrictive trade practice or boycott fostered or imposed by a foreign country against a country friendly to the United States or against any United States person.” The Unites States has explicitly stated that failure to report such boycott-related requests in the manner prescribed may constitute a violation of the export regulations.

In the recent PWCS case, the United States claimed that Qatar Airways had stated:

“Please note that parts made in Israel is prohibited to to be imported into State of Qatar and such shipments will be held up in customs.”

This language appeared on purchase orders from Qatar Airways. This was described as a boycott request that must be reported under the anti-boycott reporting requirements. The charging document described it as a “request … to take an action which would have the effect of furthering or supporting a restrictive trade practice or unsanctioned foreign boycott.”

A United States person may comply or agree to comply with the customer’s national import requirements, but the reporting obligation still remains.

Example

Distributor X, receives an order from ZZ airlines which is located in country Z. Country Z has a boycott against Country B. The import laws of Z prohibit the import of goods produced or manufactured in Country B. Country B is protected by the U.S. anti-boycott rule. In filling this type of order, Distributor X would usually include some component parts produced in Country B.

For the purpose of filling this order, Distributor X may substitute comparable component parts in place of parts produced in Country B, because the import laws of Country Z prohibit the import of goods manufactured in Country B. For example, there may be alternatives replacement parts available that are made in a different country than the OEM parts.

However, Distributor X may not furnish negative certifications regarding the origin of components in response to import and shipping document requirements (e.g. Distributor X cannot certify that the parts did not come from Country B).

Reporting

Your duty to report arises even if you refuse the language (e.g. if you strike it out of a contract. Even when you refuse to participate, you still have a reporting duty. If you receive a communication that must be reported, then you should submit your report by mail or electronically through the BIS website.

Mailed paper reports must be submitted in duplicate to: Report Processing Staff, Office of Antiboycott Compliance, U.S. Department of Commerce, Room 6098, Washington, DC 20230. You should use Form BIS–621P (for single transactions) Form BIS–6051P (to report multiple transactions).

Electronic reports may be submitted through the Office of Antiboycott Compliance Web page.

Reports must be made by the last day of the month following the calendar quarter in which the request was received (e.g., April 30 for the quarter consisting of January, February, and March). There is a one month extension granted to US persons who are located outside the United States (e.g., May 31 for the quarter consisting of January, February, and March).

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US Updates the List of Anti-Boycott Countries – Are You Doing Business There?

February 14, 2013 by 1 Comment

Under the U.S. Anti-Boycott rules, U.S. persons are probited from complying with certain aspects of unsanctioned foreign boycotts.  The anti-boycott rules include elements in both the Export Administration Regulations (EARs) and the Internal Revenue Service (IRS) regulations.

EAR Rules

The antiboycott laws were adopted to forbid U.S. companies from participating in foreign boycotts that the United States does not sanction. They preventing U.S. businesses from being used to implement foreign policies of other nations which are contrary to U.S. foreign policy.  Currently, the most prevalent boycotts that are contrary to foreign policy are the boycotts of Israel.  Under the EARs, prohibited conduct includes:

  • Agreements to refuse or actual refusal to do business with or in Israel.
  • Agreements to discriminate or actual discrimination against other persons based on race, religion, sex, national origin or nationality.
  • Agreements to furnish or actual furnishing of information about business relationships with or in Israel or with blacklisted companies.
  • Agreements to furnish or actual furnishing of information about the race, religion, sex, or national origin of another person.

The EAR requires U.S. persons to file quarterly reports to disclose any requests to advance an unsanctioned foreign boycott.  If you have been asked to participate in, or take an action in support of, an unsanctioned foreign boycott then you should file a quarterly report on BIS form 621-P for a single transactions or BIS form 6051P for multiple transactions experienced in the same calendar quarter.  The forms are available on-line in a fillable pdf format, or you can also obtain paper copies of the reporting forms by calling the Office of Antiboycott Compliance in Washington, DC at (202) 482-2448.

Tax Reporting Rules

A lesser known aspect of the U.S. antiboycott rules is that any person or business that has operations in, or related to, a country that is known for violating the U.S. anti-boycott rules must report those operations to the Treasury Department.  Such reports are filed with tax returns on IRS form 5713.  This form is also available online.

How do you know whether you are doing business (“operations in or related to”) in such a country?  First of all, the Department of the Treasury publishes a current list of countries which require or may require participation in, or cooperation with, an international boycott.  The current list is:

  • Iraq
  • Kuwait
  • Lebanon
  • Libya
  • Qatar
  • Saudi Arabia
  • Syria
  • United Arab Emirates
  • Yemen

In addition, the anti-boycott provisions also require reporting if you are asked to participate in an unsanctioned boycott, even if the source of the request was from a country other than the above-listed countries.

Second, you must assess whether you have operations in or related to one of these affected countries.  The IRS guidance on the subject explains it like this:

The term “operations” means all forms of business or commercial activities and transactions (or parts of transactions), whether or not productive of income, including, but not limited to: selling; purchasing; leasing; licensing; banking, financing, and similar activities; extracting; processing; manufacturing; producing; constructing; transporting; performing activities related to the activities above (for example, contract negotiating, advertising, site selecting, etc.); and performing services, whether or not related to the activities above.

Operations in a boycotting country. You are considered to have operations “in a boycotting country” if you have 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.Operations with the government, a company, or a national of a boycotting country. You are considered to have operations “with the government, a company, or a national of a boycotting country” if you have an operation that is carried on outside a boycotting country either for or with the government, a company, or a national of a boycotting country.

Operations related to a boycotting country. You are considered to have operations “related to a boycotting country” if you have an operation that is carried on outside a boycotting country for the government, a company, or a national of a nonboycotting country if you know or have reason to know that specific goods or services produced by the operation are intended for use in a boycotting country, or for use by or for the benefit of the government, a company, or a national of a boycotting country, or for use in forwarding or transporting to a boycotting country.

If you cooperate with or participate in an international boycott, you may lose a portion of the following:

  • The foreign tax credit (section 908(a)),
  • Deferral of taxation of earnings of a CFC (section 952(a)(3)),
  • Deferral of taxation of IC-DISC income (section 995(b)(1)(F)(ii)),
  • Exemption of foreign trade income of a FSC (section 927(e)(2), as in effect before its repeal), and
  • Exclusion of extraterritorial income from gross income (section 941(a)(5), as in effect before its repeal).

If you suspect that your business relationships may affect your tax liability, then you should consult with a qualified tax advisor for more details.

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