Failure To Report Sales In Some Countries Can Have Significant Tax Penalties

The United States discourages any U.S. persons* from participating in, or cooperating with, international boycotts not approved by the U.S. government. If a U.S. person does participate in such a boycott, they may lose certain tax benefits, such as tax deferral of IC-DISCs or foreign tax credits. Taxpayers doing business with companies located in boycott countries must file Form 5713, International Boycott Report, or risk being subject to substantial penalties.

Currently, nine countries are boycotting Israel. This prohibited economic boycott is the one most likely to affect U.S. taxpayers.

WHICH COUNTRIES ARE BOYCOTTING ISRAEL?

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


HOW DOES THIS AFFECT MY BUSINESS?
If your business has operations in, or in relation to these nine countries, you may be subject to additional reporting related to those operations. Operations refer to all forms of business and commercial activities done in a boycotting country. Examples include: sales, purchases, leases, transportation, construction, manufacturing and more.

Sales of any goods or services intended for use in a boycotting country are also considered operations and are subject to reporting. If you know, or have reason to know, that specific goods or services are for use in a boycotting country, those sales may also be required to be reported – even if they occur outside of a boycotting country.  

Additionally, you may be subject to Form 5713 reporting requirements:

  • If your company has foreign affiliates doing business in boycott countries, or
  • If you are a partner in a partnership that is required to file Form 5713, but it does not.  


PENALTIES
Failure to file Form 5713 could result in penalties of $25,000 per failure, one year of imprisonment or both. If you have international operations in any boycott country, be diligent about meeting the reporting requirements. The IRS takes reporting of transactions with boycotting countries very seriously and has shown limited flexibility for waiving monetary penalties.

When preparing your tax returns, provide your tax return preparer with a sales by country report. Even if sales in a boycott country are minimal, Form 5713 should be prepared.

To learn more, contact your Beene Garter Professional via the form available here or via phone at 616.235.5200.

 
*A U.S. person is defined as a citizen/resident, domestic corporation, domestic partnership, or domestic estate/trust.