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INSIGHT ARTICLE |
International airfare and section 999
U.S. law has a number of provisions designed to discourage U.S. businesses from participating in boycotts that aren’t sanctioned by the U.S. government. This includes section 999 which imposes a Form 5713, International Boycott Report, reporting requirement on any person that either (1) has ‘operations in, or related to’ a country which is on the international boycott list maintained by the Treasury, or (2) operates in a country which the person knows, or has reason to know, participates in an international boycott as a condition of doing business. As of November 2015, countries on this list include; Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates, and Yemen. If the taxpayer is deemed to be participating in an unsanctioned foreign boycott, there may be adverse consequences including, but not limited to; reduced foreign tax credits, loss of deferral of income from controlled foreign corporations, and loss of certain benefits of using a domestic international sales corporation (“DISC”). In addition, failure to file the Form 5713 could result in a $25,000 fine, imprisonment for no more than 1 year, or both.
These provisions can be deceptively complex. Suppose a company purchases an airplane ticket from an airline domiciled in one of the boycott countries. Could mere travel expenses alone, such as the purchase of the ticket, give rise to a Form 5713 filing requirement? This area of tax law can be a hidden trap for the unwary.
Understanding the applicability of section 999(a)
In order to fully comprehend the application of this provision, it is vital to understand the term “operations” as it is used in section 999(a)(1). The Treasury regulations state that the term “operations” can mean all forms of business or commercial activities and transactions (or parts thereof) 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, and performing activities related to any of those actions. The list of activities defining operations is quite broad and would certainly include the purchase of an airline ticket under the categories of purchasing and transportation.
The incidental contacts waiver
In today’s global climate, it is often difficult to avoid triggering these all-encompassing provisions due to common peripheral business activities. The Treasury has issued guidelines that provide an exception to filing Form 5713 for “incidental contacts” with nationals or business enterprises of boycotting countries under Section 999(a). The guidelines set out a four-part test under which a particular transaction could be characterized as an incidental contact that would not give rise to compliance requirements under Section 999. The four-part test is as follows:
- All aspects of the operation contemplated by the parties are carried on outside a boycotting country;
- No request for an agreement described in Section 999(b)(3) (describing the scenarios in which one is deemed to be “participating in an international boycott”) is made or received by any party to the operation;
- There is no such agreement in connection with the operation; and
- Either a) the operation does not involve the importation of property, funds or services from or produced in a boycotting country and the company does not know, or have reason to know, that the property, funds or services involved in the operation will be used, consumed or disposed of in a boycotting country, or b) the value of the property, funds or services involved in the operation does not exceed $5,000.
In a routine purchase of an airline ticket from a passenger airline, there is typically no requirement to participate in an international boycott and, thus, it is unlikely that elements (2) and (3) will be at issue. Elements (1) and (4) are both of concern in the context of commercial airline tickets.
The first element of the incidental contact waiver is met as long as the airline ticket purchased does not involve travel within the borders of a boycotting country. Even for an airline domiciled in a boycotting country, it is not uncommon for the flight departure and destinations to both occur in countries not listed on the anti-boycott list.
The fourth element is the most difficult to meet in this context. As a general rule, part (a) of the fourth element in the context of airline tickets is concerned with the purchase of an airline ticket from an airline domiciled in a boycotting country. Such purchase could be considered importation of services from that country or the funds could be considered consumed in a boycotting country. For part (b) to be satisfied, the cost of the purchase of airline tickets related to the operation must not exceed $5,000. In an operation involving significant travel utilizing one of these airlines, $5,000 is an easy threshold to exceed.
In short, unless the incidental expense exception applies, travel expenses incurred in relation to one of the countries on the international boycott list could create a reporting obligation under Section 999(a). Since many companies often do business in these countries, it is vital to be aware of these provisions, particularly if the purchase price of travel expenses or other incidentals in the boycott country exceeds $5,000.