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On August 18, 2016, the Internal Revenue Service (IRS) published in the Federal Register final regulations [TD 9782] under section 5000C of the Internal Revenue Code (IRC) relating to the 2 percent tax on payments made by the U.S. government to foreign persons pursuant to certain contracts. The regulations affect U.S. government acquiring agencies and foreign persons providing certain goods or services to the U.S. government pursuant to a contract. The Federal Register document also contains final regulations under section 6114, with respect to foreign persons claiming an exemption from the 2 percent tax under an income tax treaty.
Section 5000C of the IRC was added by Public Law 111–347 (the Act), 124 Stat. 3623. Section 5000C(a) imposes on any foreign person that receives a specified Federal procurement payment a tax equal to 2 percent of the amount such payment. Section 5000C(b) defines the term specified Federal procurement payment as any payment made pursuant to a contract with the Government of the United States (U.S. government) for goods or services if the goods are manufactured or produced or the services are provided in any country that is not a party to an international procurement agreement with the United States. Section 301(a)(3) of the Act provides that section 5000C applies to payments received pursuant to contracts entered into on and after January 2, 2011. Additionally, section 301(b)(1)(c) of the Act states that this section must be applied in a manner consistent with U.S. obligations under international agreements. Section 5000C(d)(1) provides that the amount deducted and withheld under chapter 3 shall be increased by the amount of tax imposed under section 5000C.
The “international procurement agreements” that are referred to above are the WTO Agreement on Government Procurement and the various free trade agreements that include procurement provisions. “U.S. obligations under international agreements” include income tax treaties in effect that prevent the imposition of the tax. There are certain other exemptions from the tax set forth in the regulations. However, payments to foreign persons providing certain goods or services from an eligible least developed country to the U.S. government (listed in the Federal Acquisition Regulation) are not exempt, since they are not the result of an international procurement agreement or international obligation.
The regulations are effective on August 18, 2016.