• Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 2/25/2013

United States - The Iran Threat Reduction and Syria Human Rights Act of 2012 

United States
The US government recently expanded sanctions against Iran to thwart Iran’s development of nuclear weapons and other threatening activities. On 9 October 2012, Executive Order 13628 authorized the implementation of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the Act).

The Act includes amendments to the Iran Sanctions Act of 1996, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, and other measures related to Iran’s energy and financial sectors, proliferation of weapons of mass destruction, support for terrorism, and human rights abuses.

Liability of US companies for violations of the Iran sanctions by foreign affiliates

Effective 6 February 2013, Section 218 of the Act prohibits an entity (i.e. foreign affiliate) owned or controlled by a US person ( i.e. US company) and established or maintained outside of the US, from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or persons subject to the jurisdiction of Iran, if that transaction would be prohibited by Executive Order, law or regulation, if the transaction were engaged in by a US person or in the US. In other words, if a US company is prohibited from engaging in the activity, then so is the foreign affiliate.

The Act imposes new prohibitions on affiliates’ business activities in Iran. For example, goods held in inventory by a foreign affiliate that are subject to the Export Administration Regulations (EAR) but not on the EAR’s Commerce Control List, may no longer be re-exported to Iran if the transaction is not permitted by the US company. It is therefore imperative that US companies and their foreign affiliates review their business practices (e.g. exports of goods and services, mergers and acquisitions, joint ventures, etc.) to help to ensure compliance.

Requirement for issuers to disclose Iran activity

Section 219 of the Act amends the Securities and Exchange Act of 1934 and adds Section 13(r). This requires all companies whose stock is traded on US stock exchanges to disclose whether they or their foreign affiliates have knowingly engaged in certain prohibited activities involving Iran. Activity authorized by the US government is exempt from this requirement.

Activities subject to disclosure include the following:

  • development, production or export of Iranian petroleum products
  • development of weapons of mass destruction or other military capabilities
  • financial institutions engaged in prohibited activity
  • transactions with designated parties involved in the proliferation of weapons of mass destruction, terrorism, or human rights abuses
  • transactions with the Government of Iran.

Issuers required to file annual or quarterly reports with the Securities and Exchange Commission (SEC) must disclose any such activities and include in the disclosure the nature and extent of the activity, gross revenues attributable to the activity, and whether the issuer or affiliate intends to continue the activity. These disclosures will be required in Form 10-Ks (or Form 20-Fs for foreign private issuers) and Form 10-Qs that are due after 6 February 2013.

Further, in a separate report (new form type called ‘IRANNOTICE’) through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, the SEC must be notified that the disclosure of the activity has been included in the annual or quarterly report.

In summary, US companies may soon be penalized for the unlawful acts of their foreign affiliates. Issuers will soon be required to disclose their violations and those of their foreign affiliates. US companies and their foreign affiliates should review their current business activities to identify potential risks and to develop controls or enhance existing controls to minimize the risk of noncompliance.

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Robert Kearsley

+1 408 367 2839

Global Indirect Tax Brief: February 2013

GITB: February 2013
Updates on key tax issues and challenges in indirect tax being faced by taxpayers in countries around the world.

More Global Indirect Tax Briefs