The U.S. Treasury Department has published a current list of countries that may require participation in, or cooperation with, an international boycott for purposes of Code Sec. 999, which denies certain tax benefits to a person that participates in or cooperates with an unsanctioned international boycott.
Background
A taxpayer who participates in or cooperates with an international boycott may suffer reduced foreign tax credits and have subpart F income in relation to taxes and income attributable to the country the government of which sponsors or supports an international boycott.
Under Code Sec. 999(b)(3), a person participates in or cooperates with an international boycott when that person agrees, as a condition of doing business within a country, with its government, or with one of its nationals or companies, to do any of the following:
- Refrain from doing business with or in the country that is the target of the boycott, or with its nationals or companies;
- Refrain from doing business with a U.S. person engaged in trading with the country that is the target of the boycott;
- Refrain from doing business with any company owned or managed by individuals of a particular nationality, race or religion;
- Remove or refrain from choosing corporate directors who are of a particular nationality, race or religion; or
- Refrain from employing individuals of a particular nationality, race or religion.
A person may also participate or cooperate in an international boycott when, as a condition of the sale of a product to a country’s government, national or company, the person agrees to refrain from shipping or insuring a product on a carrier owned, leased, or operated by a person that does not participate in or cooperate with an international boycott. (Code Sec. 999(b)(3))
There is a presumption that if a person or a member of a person’s controlled group participates or cooperates with an international boycott during a tax year, all of the person’s or group’s operations in connection with the boycotting country are connected with the boycott. This presumption may be rebutted, and an operation may be shown to be separate and not connected with the boycott. If a taxpayer controls a corporation, there is a presumption that participation or cooperation by the corporation is participation or cooperation by the taxpayer, and vice versa. (Code Sec. 999(e)) If any member of a controlled group participates in or cooperates with an international boycott, each member of the group is subject to the foreign tax credit denial rules. (Code Sec. 908(a))
If the anti-boycott rules apply to a person, the allowable foreign tax credit is reduced by an amount equal to the amount of the credit otherwise allowed to the person multiplied by the “international boycott factor,” which is a fraction that generally reflects the percentage of taxpayer’s operations in the boycotting countries to worldwide operations. (Code Sec. 908(a), Code Sec. 999(c)) A taxpayer may deduct taxes for which a credit is disallowed, and those taxes are not included in income under Code Sec. 78. (Code Sec. 908(b))
Income deemed connected with an international boycott is included in subpart F income. ( Code Sec. 952(a)(3)) The amount included under this rule is equal to all of the income of the controlled foreign corporation (CFC), less
- The income attributable to earnings and profits of the CFC otherwise included in the gross income of a U.S. person under another category of subpart F income and
- Certain income taxed by the U.S. at regular rates because it is effectively connected to the conduct of a U.S. trade or business, multiplied by the international boycott factor.
Countries Requiring Cooperation with an International Boycott
Treasury publishes a current list of countries which require or may require participation in, or cooperation with, an international boycott, within the meaning of Code Sec. 999(b)(3).
On the basis of the best information currently available to Treasury, the following is the current list of countries:
- Iraq,
- Kuwait,
- Lebanon,
- Libya,
- Qatar,
- Saudi Arabia,
- Syria,
- United Arab Emirates, and
- Yemen.
To continue your research on rules denying tax benefits to persons who participate in or cooperate with a boycott, see FTC 2d/FIN ¶ O-3500; United States Tax Reporter ¶ 9994.
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