Government Contracts Proposed FAR Rule Authorizes Procurement Tax Withholding
Monday, October 14, 2019

Proposed FAR Rule Authorizes Procurement Tax Withholding

By Government Contracts Editorial Staff

A proposed rule would amend the Federal Acquisition Regulation to require withholding of the two-percent tax on contract payments made to foreign persons pursuant to certain contracts. The proposed rule implements a Treasury Department final rule (81 FR 55133) relating to the two-percent tax on government contract payments to foreign persons under section 5000C of the Internal Revenue Code. The James Zadroga 9/11 Health and Compensation Act of 2010 (PL 111-347) added section 5000C to impose the tax and prohibit disbursement of funds to reimburse the tax. Various FAR provisions disallow the two-percent tax as a contract cost, exclude it from the contract price, and prohibit reimbursement under the contract. The Treasury’s regulations at 26 CFR 1.5000C-0 through 1.5000C-7 address the imposition of the tax and exemptions, as well as the government’s withholding, deposit, and reporting obligations.

New Clauses. Proposed FAR 29.204, Federal excise tax on specific foreign contract payments, explains the excise tax and withholding requirements. A proposed new solicitation provision, FAR 52.229-WW, Tax on Certain Foreign Procurements—Notice and Representation, notifies offerors of the excise tax withholding requirements and requires them to represent whether they are a foreign person and whether they would claim an exemption on Treasury/IRS Form W-14, Certificate of Foreign Contracting Party Receiving Federal Procurement Payments. A proposed new clause at FAR 52.229-XX, Tax on Certain Foreign Procurements, establishes the excise tax withholding requirements in the FAR. FAR 52.229-XX would be added to the list of clauses in FAR 52.212-5 that apply to commercial items contracts. The proposed rule only addresses the collection of the section 5000C tax from contract payments by withholding up to two percent of the payment. Agencies merely withhold the tax for the Internal Revenue Service. All substantive issues regarding the underlying section 5000C tax are matters under IRS jurisdiction. A complete listing of the regulations impacted by the rule appears in the regulation table below. Comments on the proposed rule referencing FAR Case 2016-013 are due November 19, 2019. For the text of the proposed rule, see ¶70,006.342.

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