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Aug. 17 — Most foreign subcontractors won't have to pay the 2 percent tax on U.S. government payments faced by direct foreign contractors, the IRS said in final rules.
Tax code Section 5000C calls for a tax on payments made to contractors who provide goods and services for some U.S. agencies, but in regulations (T.D. 9782, RIN:1545-BK06) issued Aug. 17, the Internal Revenue Service said it won't impose the tax on payments made to a subcontractor that doesn't have a direct contract with the U.S.
The change is one of several in the guidance, including exemptions for contracts made with individuals and for contracts involving foreign humanitarian assistance.
Despite the new tax relief for subcontractors, the IRS said it will still closely monitor their activity when it is determining where goods are manufactured or produced and where services are provided.
In another big change from the proposed rules (REG-103281-11), the agency said it would provide relief in some cases where a contract calls for an individual to provide a service—an arrangement called a “personal service contract.”
The main exemption under Section 5000C doesn't apply to all of these contracts, the IRS said, but it decided to let the contracts qualify for a “simplified acquisition” exemption. In general, simplified acquisition procedures apply when the U.S. government buys goods or services for $150,000 or less.
In a third change, the IRS said it won't impose the 2 percent tax on foreign contractors doing work for the U.S. Agency for International Development. The relief also applies to contracts where the U.S. is working with other countries to provide foreign humanitarian assistance, it said.
The agency said that in some cases, it isn't going to make changes sought by taxpayers commenting on the proposed rules (76 DTR G-4, 4/21/15).
According to the rules, taxpayers won't get an exemption for credit card payments. The IRS said that in general, most payments would qualify for relief under the simplified acquisition rules. Another reason to reject the idea is that foreign contractors might be able to avoid the tax via big credit card payments, the agency said.
In addition, the IRS is sticking to its guns in saying the only international agreements that would prevent the tax from being imposed are tax treaties.
The agency also said it won't expand the definition of “emergency acquisitions” qualifying for tax relief, or expand the definition of a tax-favored “international procurement agreement” to include goods manufactured or produced, or services provided, in a “least developed country.”
The IRS did provide a break for taxpayers hoping to get immediate relief under the final rules.
Although the guidance technically isn't final until Nov. 16—90 days after its Aug. 18 publication in the Federal Register—the IRS said agencies and contractors can rely on the rules before that date.
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Text of T.D. 9782 is in TaxCore.
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