Foreign federal contractors must act quickly to avoid 2% excise tax and penalties
TAX BLOG |
Newly issued final regulations offer certain foreign federal contractors a 90-day window to satisfy past tax and filing obligations with respect to the 2 percent federal excise tax (the procurement tax) on certain payments made to foreign persons under a federal procurement contract. Although the procurement tax was enacted in 2010 (and taxpayers should have been paying it since 2011), the IRS didn’t propose regulations until April 22, 2015. On Aug. 18, 2016, the IRS issued final regulations that clarified a number of issues and that allows taxpayer who haven’t complied with their obligations to pay the tax without penalty (interest will still apply).
Generally, the procurement tax applies to foreign persons that are party to contracts with the U.S. government for the purchase of goods or services, if the goods are produced or services are provided in a country that is not a party to an international procurement agreement with the United States. There are a number of exemptions from the procurement tax, however, we expect many taxpayers to claim exemption under a tax treaty that has a nondiscrimination article. Rev. Proc. 2015-35 provides a list of countries with which the U.S. has an income tax treaty that may provide the basis for an exemption claim. In order to claim any exemption from the procurement tax, a taxpayer must file
Form W-14, Certificate of Foreign Contracting Party Receiving Federal Procurement Payments. The instructions to Form W-14 also contain a list of current U.S. income tax treaties that may exempt certain persons from the tax.
Federal agencies must withhold and deposit the procurement tax with the IRS on behalf of taxpayers. However, taxpayers subject to the tax and for whom an agency failed to withhold can avoid penalties by satisfying their tax and filing obligations before Nov. 16, 2016, the effective date of the final regulations. Taxpayers should promptly assess whether they should take advantage of this penalty waiver contained in the final regulations.
For a further discussion on the section 5000C excise tax and the specific exemption please see our tax alert: Final rules issued for tax on payments to foreign federal contractors.