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IRS Finalizes Foreign Contractor Fee Regulations

by Mike Godfrey,, Washington

19 August 2016

The Internal Revenue Service (IRS) has issued final regulations on the two percent tax on payments made to foreign companies that receive US government contracts.

The tax funds the cost of the James Zadroga 9/11 Health and Compensation Act, which was passed at the end of 2010 to provide health care for the first responders who rushed to Ground Zero after the World Trade Center attack.

Under section 5000C of the US Internal Revenue Code, the two percent tax is imposed on foreign companies, which are located in countries that are not parties to an international procurement agreement with the United States, and which receive federal government disbursements pursuant to goods and/or services procurement agreements.

The final regulations confirm that section 5000C applies to payments received pursuant to contracts entered into on and after January 2, 2011.

In addition, the James Zadroga Act requires that section 5000C be applied in a manner consistent with the US's obligations under international agreements, including an income tax treaty's nondiscrimination provision. IRS Notice 2015-35 has already provided a list of countries where the tax will not be applied, including the United Kingdom, Canada, Germany, Italy, Japan, South Africa, and Switzerland.

In April of last year, the IRS published a notice of proposed rulemaking with respect to section 5000C. In comparison with its proposed regulations, the IRS's final regulations extend exemptions for some foreign humanitarian assistance contracts and smaller personal service contracts.

TAGS: tax | double tax agreement (DTA) | law | excise duty | Internal Revenue Service (IRS) | tax authority | agreements | legislation | United States | regulation

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