Press Room: Tax Release
November Filing and Tax Payment Deadline for Foreign Persons With Procurement Contracts With U.S. Government Between 2011-2015
On August 18, 2016, the U.S. Treasury Department released final regulations under Sec. 5000C relating to the 2% gross U.S. tax on payments made by the U.S. government to foreign persons pursuant to certain government contracts (2% tax). The final regulations adopt, with some changes, proposed regulations that were issued in April 2015 that affect foreign persons providing certain goods or services to the U.S. government.
This provision was added in 2011 and imposes a 2% tax on any foreign person that receives a specified federal procurement payment from the U.S. government. A specified federal procurement payment includes any payment made pursuant to a contract with the 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. For purposes of the 2% tax, foreign persons include individuals as well as legal persons such as foreign corporations.
Exemptions from Tax
The 2% tax does not apply to payments:
- Made to a U.S. person;
- Made to a foreign person resident in the U.S.;
- Made to a foreign person entitled to relief pursuant to a nondiscrimination provision of a qualified income tax treaty between the foreign person's country of citizenship and the U.S. (Notice 2015-35 provides detail of the tax treaties that are fully and partially exempt from tax under this provision);
- Made, generally, to a subcontractor that is not the prime party to a contract with the U.S. government;
- Made, generally, to a person for the purpose of providing humanitarian assistance; or,
- Made to an individual performing personal service contracts of less than $150,000 on an annual basis.
In order to claim an exemption from tax under this provision, the foreign contracting party may submit a new Form W-14, Certificate of Foreign Contracting Party Receiving Federal Procurement Payments, to disclose all required information in order to claim an exemption.
If a foreign contracting party has received a payment exempt from tax under a qualified income tax treaty before the effective date of the final regulations under this provision, reporting is waived if the foreign contracting party has properly relied on Notice 2015-35 regarding exempt tax treaty nations.
Although payments to a subcontractor are generally exempt from this tax, the final regulations contain an anti-abuse rule that in certain circumstances may treat a subcontractor that is a foreign person as being liable for tax under this provision.
Procedures for Collecting Tax
The U.S. government is required to withhold the tax due under this provision; however, if the U.S. government did not withhold, then the impacted foreign parties must remit the tax due using new Form W-14, Certificate of Foreign Contracting Party Receiving Federal Procurement Payments. This new form is in addition to any federal income tax return filing obligations of the foreign person (e.g., Form 1120-F).
The final regulations were issued on August 18, 2016, and are applicable 90 days after publication as final regulations in the Federal Register, which is November 16, 2016. The withholding rules are to be applied on a retroactive basis so they apply to procurement contracts entered into beginning in 2011. The final regulations did not contain any relief or leniency for payments related to earlier contract years and as a result tax liability from any contracts from 2011-2015 will be due on November 16, 2016.
If a foreign contracting party fully satisfies its tax and filing obligations under Sec. 5000C on or before November 16, 2016, penalties will not be asserted. However, late payment interest will still apply.
Any foreign person that has contracted with the U.S. government between 2011 and 2015 should consult with their tax advisor to determine if they are subject to the 2% tax under Sec. 5000C as there may be a required filing obligation even if the U.S. government has already withheld the tax or if the foreign person is exempt from tax under one of the various exemptions. Foreign persons may have not had tax withheld on contract payments in prior years and could have a tax payment due on November 16, 2016. There is a short window to complete these filings and pay tax before being subject to penalties.