Lazaro Vazquez, left, and Francis Rodriguez, right.

The Israel Anti-Boycott Act (S.720 and H.R.1697), a bill in Congress attracting debate, is considered by some to protect the interests of the United States and by others to violate the First Amendment right to free speech. Regardless of how the proposed legislation pans out, it is casting a spotlight on existing U.S. anti-boycott laws and regulations that are often overlooked when structuring cross-border transactions. These laws require serious consideration.

International deals are complex and can be expensive, and they expose the parties involved to regulations both in the United States and in foreign countries. In some circumstances, merely entering into a contract with a foreign party can result in a violation of the U.S. anti-boycott laws.

Prevailing U.S. anti-boycott laws include the 1977 amendments to the Export Administration Act (EAA) and the Ribicoff Amendment to the Tax Reform Act (TRA) of 1976. Their main goal is to discourage participation in economic boycotts of countries friendly to the United States. The EAA amendments are enforced by the U.S. Department of Commerce, and the TRA amendment is enforced by the U.S. Department of Treasury.

Generally, the consequences imposed by the U.S. Treasury for participating in a forbidden boycott include a partial loss of foreign tax credits and treatment of certain boycott-related income as Subpart F income. The EAA prohibits U.S. persons from refusing to do business with a boycotted firm or in a boycotted country. A violation of the EAA can result in administrative penalties of up to $250,000 per violation or twice the value of the transaction, whichever is greater. Criminal violations of the EAA can result in penalties of up to $1 million or 20 years in prison for each violation.

Practitioners negotiating cross-border deals should pay special attention to local law clauses and their application. Some jurisdictions, such as the Middle East, have laws “boycotting” Israel. The U.S. Treasury imposes harsh penalties on a U.S. taxpayer who enters into a contract in which it agrees to comply with the laws, regulations, requirements or administrative practices of a boycotting country. However, drafters can avoid penalties if they “except out” of compliance penalized by U.S. law. Phrases such as “except to the extent such compliance is penalized under the laws of the United States” or “except to the extent inconsistent with U.S. law” will do the trick. Unlike under the TRA, the EAA allows U.S. persons to agree to comply with the laws of a boycotting country in a contract so long as they are bona fide residents of such boycotting country.

On a brighter note, clauses dictating that the laws of a boycotting country will apply to the performance of a contract are acceptable under both the TRA and EAA.

The bill before Congress would extend existing anti-boycott laws to boycotts fostered by international organizations, such as the United Nations or the European Union.

Counsel to U.S. taxpayers and U.S. persons contemplating cross-border transactions should carefully review and be prepared to negotiate the terms of any local law clauses present in related contracts. If such terms are non-negotiable, it is advisable to consider restructuring the contemplated deal so that the parties involved are neither U.S. taxpayers nor U.S. persons. They should also advise their clients to steer clear from conduct that may constitute participation in a forbidden boycott. Something as simple as the termination of a business relationship with a company doing business in a boycotted country, coupled with the signing of a contract, may lead to a determination that participation has taken place.

These upfront considerations can help avoid costly penalties and adverse tax consequences resulting from a violation of the U.S. anti-boycott laws.

Lazaro I. Vazquez is an attorney in the Miami office of Shutts & Bowen, where he is a member of the ​corporate ​practice ​group.

Francis E. Rodríguez is the ​Miami ​office managing partner of Shutts & Bowen, where he is co-chair of the ​tax and ​international ​law ​practice ​group.