Tax on Certain Foreign Procurement, 22449-22465 [2015-09383]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)]
[Proposed Rules]
[Pages 22449-22465]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09383]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[REG-103281-11]
RIN 1545-BK06


Tax on Certain Foreign Procurement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 
5000C of the Internal Revenue Code relating to the 2 percent tax on 
payments made by the U.S. government to foreign persons pursuant to 
certain contracts. The proposed regulations affect U.S. government 
acquiring agencies and foreign persons providing certain goods or 
services to the U.S. government pursuant to a contract. This document 
also contains proposed regulations under section 6114, with respect to 
foreign persons claiming an exemption from the tax under an income tax 
treaty.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 21, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-103281-11), Internal 
Revenue Service, Room 5203, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
103281-11), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224; or sent electronically via the 
Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
103281-11).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Kate Hwa at (202) 317-6934, or for questions related to tax treaties, 
Rosy Lor at (202) 317-6933; concerning submissions of comments, 
Oluwafunmilayo Taylor, (202) 317-5179, (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
(OMB) for review in accordance with the Paperwork Reduction Act of 1995 
(44 U.S.C. 3507(d)). Comments on the collection of information should 
be sent to the Office of Management and Budget, Attn: Desk Officer for 
the Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by June 22, 2015. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in the proposed regulations is 
contained in a number of provisions including Sec. Sec.  1.5000C-2, 
1.5000C-3, and 1.5000C-4. Responses to these collections of information 
are required to verify the status of foreign persons to whom specified 
Federal procurement payments subject to the section 5000C tax are made; 
to obtain a benefit (to claim an exemption to, or a reduction in, 
withholding); and to facilitate tax compliance (to verify entitlement 
to an

[[Page 22450]]

exemption). The IRS intends that these information collection 
requirements will be satisfied primarily on existing chapter 3 
withholding forms by U.S. government acquiring agencies, along with 
Form 1120-F, ``U.S. Income Tax Return of a Foreign Corporation,'' and 
Form 1040NR, ``U.S. Nonresident Alien Income Tax Return.'' However, in 
certain circumstances, foreign persons must collect certain information 
in order to demonstrate to an acquiring agency the appropriate amount 
to withhold, if any, on a Section 5000C Certificate. This reporting 
burden will be reflected in a new Form W-14, ``Certificate of Party 
Receiving Federal Procurement Payment,'' or the Section 5000C 
Certificate.
    The likely respondents are the U.S. government and foreign persons 
that enter into contracts with the U.S. government.
    Estimated total annual reporting or recordkeeping burden: 11,840 
hours.
    Estimated average annual burden hours per respondent or 
recordkeeper varies from .5 hours to 40 hours, depending on individual 
circumstances, with an estimated average of 5 hours, 55 minutes.
    Estimated number of respondents or recordkeepers: 2,000.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the OMB.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 5000C of the Internal Revenue Code (Code). On January 2, 2011, 
section 301 of the James Zadroga 9/11 Health and Compensation Act of 
2010, Public Law 111-347 (the Act), 124 Stat. 3623, added section 5000C 
to the Code. Section 5000C imposes on any foreign person a 2 percent 
tax on certain payments received from the Government of the United 
States (U.S. government) for goods and services. Section 301(a)(3) of 
the Act provides that section 5000C applies to payments received 
pursuant to contracts entered into on and after January 2, 2011. 
Additionally, section 301(b)(1) of the Act stipulates that no funds are 
to be disbursed to any foreign contractor in order to reimburse the tax 
imposed under section 5000C. The Federal Acquisition Regulation (FAR) 
is the body of rules that generally governs acquisitions and 
contracting procedures for federal agencies. See 48 CFR Chapter 1. To 
comply with section 301(b)(1) of the Act, the Federal Acquisition 
Regulation Council has amended the FAR to reflect that the 2 percent 
tax imposed under section 5000C is disallowed as a contract cost, 
excluded from the contract price, and not reimbursed under the 
contract. See 48 CFR 31.205-41(b), 52.229-3(b)(2), 52.229-4(b)(2), 
52.229-6(c)(2), and 52.229-7(b)(2).
    Section 301(c) of the Act provides that section 5000C shall be 
applied in a manner consistent with United States obligations under 
international agreements.
    This document also contains amendments to 26 CFR part 301 under 
section 6114 of the Code. Section 6114(a) generally requires reporting 
when a taxpayer takes the position that a treaty of the United States 
overrules (or otherwise modifies) an internal revenue law. Section 
6114(b) provides that the Secretary may waive the reporting requirement 
under section 6114(a) with respect to classes of cases for which the 
Secretary determines that the waiver will not impede the assessment and 
collection of tax.

Explanation of Provisions

    The proposed regulations provide rules relating to the imposition 
of, and exemption from, the tax under section 5000C. They also contain 
rules relating to the obligation of the U.S. government to withhold, 
deposit, and report amounts to the IRS under section 5000C. Further, 
they provide guidance to foreign persons who must report and pay the 
tax under section 5000C in certain circumstances. If the U.S. 
government fails to withhold an amount equal to the tax due under 
section 5000C, the foreign person must file a U.S. return and pay the 
tax due. In addition, the proposed regulations provide guidance as to 
when the imposition of tax would be inconsistent with U.S. treaty 
obligations. Proposed regulations under section 6114(b) generally waive 
the reporting requirements under section 6114(a) when a taxpayer takes 
the position that a nondiscrimination provision of an income tax treaty 
exempts a payment from tax under section 5000C, provided that certain 
other requirements are satisfied.

I. Payments Subject to Section 5000C Tax

    Section 5000C(a) applies to foreign persons that are party to 
certain contracts with the U.S. government entered into on and after 
January 2, 2011. In particular, section 5000C imposes on the foreign 
person a tax equal to 2 percent of the amount of a specified Federal 
procurement payment in certain circumstances. Section 5000C(b) defines 
the term specified Federal procurement payment as any payment made 
pursuant to a contract with the U.S. government for goods or services 
if the goods are manufactured or produced in or the services are 
provided in any country that is not a party to an international 
procurement agreement with the United States.

II. Definitions

    Proposed Sec.  1.5000C-1(c) sets forth definitions that apply 
solely for purposes of section 5000C and the proposed regulations, 
several of which are described as follows.
A. Contracting Party, Foreign Contracting Party
    Under the proposed regulations, the term contracting party means 
any person that is a party to a contract with the U.S. government 
entered into on and after January 2, 2011. The term foreign contracting 
party means a contracting party that is not a U.S. person.
B. U.S. Government
    For purposes of section 5000C, the proposed regulations define the 
term Government of the United States or U.S. government as the 
executive departments specified in 5 U.S.C. 101 (such as the Department 
of Agriculture and the Department of Transportation), the military 
departments specified in 5 U.S.C. 102 (which includes the Department of 
the Army, the Department of the Navy, and the Department of the Air 
Force), the independent establishments specified in 5 U.S.C. 104(1), 
and wholly owned Government corporations specified in 31 U.S.C. 9101(3) 
(such as the Export-Import Bank of the United States and the Pension 
Benefit Guaranty Corporation). Unless otherwise specified in 5 U.S.C. 
101, 102, or 104(1), or 31 U.S.C. 9101(3), the term U.S. government 
does not include any quasi-governmental entities or instrumentalities 
of the U.S. government. The proposed regulations refer to U.S. 
government departments or agencies that are party to a contract as 
acquiring agencies. Moreover, to the extent that a U.S. government 
department or agency other than the

[[Page 22451]]

acquiring agency is making the payments pursuant to the contract, that 
department or agency is also treated as the acquiring agency for 
purposes of the proposed regulations.
C. International Procurement Agreement
    The proposed regulations define the term international procurement 
agreement as the World Trade Organization Government Procurement 
Agreement within the meaning of 48 CFR 25.400(a)(1) and any Free Trade 
Agreement to which the United States is a party that includes 
government procurement obligations that provide appropriate competitive 
government procurement opportunities to U.S. goods, services, and 
suppliers. For purposes of this definition, a party to an agreement is 
a signatory to the agreement and does not include a country that is 
merely an observer with respect to the agreement.
D. Contract
    The proposed regulations provide that the term contract has the 
same meaning as provided in Sec.  2.101 of the FAR. Under the FAR, a 
contract does not include a grant agreement or cooperative agreement 
within the meaning of 31 U.S.C. 6304 and 6305, respectively. A grant 
agreement is an agreement between the U.S. government and a recipient 
when: (1) The principal purpose of the relationship is to transfer a 
thing of value to the recipient to carry out a public purpose of 
support or stimulation authorized by a law of the United States instead 
of acquiring (by purchase, lease, or barter) property or services for 
the direct benefit or use of the U.S. government; and (2) substantial 
involvement is not expected between the executive agency and the 
recipient when carrying out the activity contemplated in the agreement. 
See 31 U.S.C. 6304. A cooperative agreement is similar to a grant 
agreement except that substantial involvement is expected between the 
U.S. government and the recipient when carrying out the activity 
contemplated in the agreement. See 31 U.S.C. 6305. Thus, consistent 
with the FAR, the proposed regulations provide that the tax imposed 
under section 5000C does not apply to grant or cooperative agreements 
with the U.S. government.

III. Exemptions From Section 5000C Tax

    The proposed regulations provide five exemptions from the tax 
imposed under section 5000C. The first exemption excludes payments for 
purchases under the simplified acquisitions procedures that do not 
exceed the simplified acquisitions threshold (as described in the FAR). 
The second exemption excludes payments pursuant to contracts for 
certain emergency acquisitions (as defined in the FAR). The third 
exemption excludes payments if the imposition of the tax would be 
inconsistent with any international agreement with the United States, 
including for example, when a foreign contracting party is entitled to 
the benefit of a nondiscrimination provision of an international 
agreement with the United States, such as a qualified income tax 
treaty. The fourth exemption applies if the goods are manufactured or 
produced, or services are provided, in the United States. The final 
exemption is for goods manufactured or produced or services provided in 
a country that is a party to an international procurement agreement 
with the United States. Sections III.A-C of this preamble discuss 
several of the exemptions.
A. Payments for Simplified Acquisitions
    The IRS and the Department of the Treasury (Treasury Department) 
recognize that withholding under section 5000C on contracts in certain 
circumstances may be administratively burdensome and, in some cases, 
more costly than the tax actually collected. Accordingly, the proposed 
regulations provide that the tax imposed under section 5000C will not 
apply to payments for purchases under the simplified acquisition 
procedures described in the FAR that do not exceed the simplified 
acquisition threshold. See 48 CFR 2.101. In general, simplified 
acquisition procedures apply when the U.S. government makes purchases 
of supplies or services of $150,000 or less.
B. Emergency Acquisitions
    From time to time, the U.S. government makes purchases in emergency 
situations. The IRS and Treasury Department recognize that in those 
emergency situations it may not be practicable to impose tax on 
payments otherwise subject to section 5000C because it may impede the 
ability of the U.S. government to make certain acquisitions that are 
necessary to prevent serious injury, financial or other, to the U.S. 
government. Therefore, Sec.  1.5000C-1(d)(2) exempts payments pursuant 
to contracts (1) awarded under the ``unusual and compelling urgency'' 
authority of 48 CFR 6.302-2, and (2) entered into under the emergency 
acquisition flexibilities as defined in 48 CFR part 18. Acquisitions 
pursuant to the unusual and compelling urgency authority of 48 CFR 
6.302-2 are subject to special rules and procedures when the need for 
supplies or services is of such an urgency that serious injury, 
financial or other, could result for the U.S. government if the special 
procedures did not apply. Certain written justifications and approvals 
described in 48 CFR 6.303 and 6.304 are required for acquisitions in 
these circumstances. Acquisitions entered into under the emergency 
acquisition flexibilities of 48 CFR part 18 refer to acquisitions of 
supplies or services by the U.S. government that, as determined by the 
head of an executive agency, may be used (1) in support of a 
contingency operation (as defined in 48 CFR 2.101), (2) to facilitate 
the defense against or recovery from nuclear, biological, chemical, or 
radiological attack against the United States, or (3) when the 
President issues an emergency declaration, or a major disaster 
declaration.
C. Certain International Agreements
    Section 301(c) of the Act requires that section 5000C be applied in 
a manner consistent with United States obligations under international 
agreements. The reference to ``international agreements'' includes 
income tax treaties to which the United States is a party. The General 
Explanation of Tax Legislation prepared by the Joint Committee on 
Taxation accompanying section 5000C explains that treaties generally 
provide that neither country may subject nationals of the other country 
to taxation more burdensome than the tax it imposes on its own 
nationals. This explanation by the Joint Committee on Taxation refers 
to the nondiscrimination provisions of tax treaties. See Staff of the 
Joint Committee on Taxation, General Explanation of Tax Legislation 
Enacted in the 111th Congress, at 693-4.
    The United States currently has 58 comprehensive income tax 
treaties in force that cover 66 countries. Virtually all 
nondiscrimination articles in these treaties contain provisions that 
prohibit the imposition of tax on a foreign national that is more 
burdensome than the taxation to which a U.S. national under similar 
circumstances may be subjected. A national is generally defined in tax 
treaties to include both individuals possessing citizenship and legal 
persons whose status is derived from the laws of that country. Some of 
these income tax treaties only prohibit discrimination against foreign 
nationals who are individuals, and a few provide protection only for 
foreign nationals who are also U.S. residents. The majority of 
nondiscrimination articles contain provisions that prohibit 
discrimination against all foreign nationals of the treaty country,

[[Page 22452]]

regardless of whether the national is a resident of the treaty country.
    Many of these income tax treaties have a nondiscrimination article 
that applies to ``taxes of every kind and description,'' whether or not 
an income tax, and are broad enough to apply to the tax imposed under 
section 5000C. Consistent with section 301(c) of the Act, any foreign 
contracting party that is entitled to the benefits of such a 
nondiscrimination article is not subject to tax under section 5000C. 
The proposed regulations refer to a treaty with such an article as a 
qualified income tax treaty. The term is defined as a U.S. income tax 
treaty in force that contains a nondiscrimination provision that 
applies to the tax imposed under section 5000C and prohibits taxation 
that is more burdensome on a foreign national than a U.S. national (or 
in the case of some income tax treaties, taxation that is more 
burdensome on a foreign citizen than a U.S. citizen), regardless of 
residence. Notice 2015-35, 2015-18 IRB, identifies income tax treaties 
in force, as of the date the proposed regulations are issued, that are 
qualified income tax treaties (available on www.irs.gov). This Notice 
may be updated or amended in subsequent IRS Forms, Instructions, 
Publications, or other media (including electronic media).

IV. Rules for Determining Where Goods Are Manufactured or Produced, and 
Where Services Are Performed

    Section 5000C(b) applies when payments are made pursuant to a 
contract for goods or services if the goods are manufactured or 
produced in or the services are provided in a country that is not a 
party to an international procurement agreement with the United States. 
Solely for purposes of section 5000C, the proposed regulations provide 
rules for determining where goods are manufactured or produced, and 
where services are performed. In particular, the proposed regulations 
provide that goods are manufactured or produced in the country (or 
countries) where property has been substantially transformed into the 
goods that are procured, or alternatively, where there has been 
assembly or conversion of component parts into the final product. 
Further, the proposed regulations provide that services will be 
considered to be provided in the country where the individuals 
performing the services are physically located when they perform their 
duties pursuant to the contract.
    If, pursuant to a single contract, goods are manufactured or 
produced or services are provided in multiple countries, the proposed 
regulations provide that a foreign contracting party may use a 
reasonable allocation method to determine how the goods or services 
must be allocated to each country for purposes of applying the relevant 
exemptions for payments pursuant to that contract. A reasonable 
allocation method would include taking into account the proportionate 
costs (including the cost of labor and raw materials) incurred to 
manufacture or produce the goods in each country, or taking into 
account the proportionate costs incurred to provide the services in 
each country.

V. Withholding by the U.S. Government on Specified Federal Procurement 
Payments

A. Increase Amount Deducted and Withheld Under Chapter 3
    Section 5000C(d)(1) provides that the amount deducted and withheld 
under chapter 3 shall be increased by the amount of tax imposed under 
section 5000C. Accordingly, the proposed regulations generally follow 
the procedural requirements in the Code and Treasury regulations for 
situations in which withholding is required under chapter 3 on fixed or 
determinable annual or periodical income (FDAP). For example, similar 
to withholding agents under chapter 3, acquiring agencies with an 
obligation to withhold under section 5000C must file Form 1042, 
``Annual Withholding Tax Return for U.S. Source Income of Foreign 
Persons,'' and Form 1042-S, ``Foreign Person's U.S. Source Income 
Subject to Withholding,'' to report amounts withheld. However, the 
proposed regulations differ from the withholding and reporting rules 
under chapter 3 to take into account the differences between the tax 
imposed under section 5000C and the tax imposed under subtitle A to 
which chapter 3 applies. Thus, a foreign contracting party is not 
required to submit a Form W-8BEN, ``Certificate of Foreign Status of 
Beneficial Owner for United States Tax Withholding,'' or Form W-8BEN-E, 
``Certificate of Status of Beneficial Owner for United States Tax 
Withholding and Reporting (Entities),'' to an acquiring agency under 
the proposed regulations to certify its foreign status or claim a 
reduction in withholding under an applicable income tax treaty.
    The proposed regulations require instead that a foreign contracting 
party must submit a ``Section 5000C Certificate,'' signed under 
penalties of perjury, that provides all of the information required by 
the proposed regulations to claim an exemption from section 5000C. The 
term ``Section 5000C Certificate'' also includes any form that the IRS 
may prescribe as a substitute for the certificate. Under the proposed 
regulations, an acquiring agency may generally rely on a claim made in 
a Section 5000C Certificate if the foreign contracting party provides 
complete information in the time and manner required by the 
regulations. However, an acquiring agency may not rely on the 
information provided by the foreign contracting party if it has reason 
to know that the information is incorrect or unreliable. An acquiring 
agency has reason to know that the information is incorrect or 
unreliable if it has knowledge of relevant facts or statements 
contained in the submitted information such that a reasonably prudent 
person in the position of the acquiring agency would know that the 
information provided is incorrect or unreliable.
    For the convenience of both acquiring agencies and foreign 
contracting parties, a model Section 5000C Certificate is included as 
part of the proposed regulations. A foreign contracting party may 
choose not to use the format of the model certificate, but in all cases 
it must submit all the necessary information required by the proposed 
regulations accompanied by a signed penalties of perjury statement. 
Each Section 5000C Certificate applies to a single contract, and thus a 
foreign contracting party with multiple contracts with the U.S. 
government must complete a new certificate for each contract, if 
necessary.
B. Steps for Acquiring Agencies
    The proposed regulations provide steps that an acquiring agency 
must follow to comply with its withholding obligations under section 
5000C. Applying these steps will identify the payments that are subject 
to withholding under section 5000C and eliminate those that are not. 
The steps are organized so that if an acquiring agency already 
possesses information that establishes that the payment is not subject 
to the tax imposed under section 5000C (because, for example, the 
payment is made to a U.S. person), the acquiring agency may conclude 
based on that particular information that the payment is not subject to 
withholding and will not have to continue to evaluate the other steps.
    The first of these steps instructs an acquiring agency to determine 
whether the payment is made pursuant to a contract for goods or 
services. If the U.S. government is making a payment for any other 
purpose, there will not be an obligation to withhold under section

[[Page 22453]]

5000C on the payment. Thus, this step will eliminate from withholding 
payments made pursuant to grant or cooperative agreements, and payments 
made pursuant to contracts that are not for goods or services, such as 
a contract for the purchase or lease of land or an interest in land.
    Under the second step, an acquiring agency must determine whether 
the payment is made to a U.S. person. This step takes into account that 
only foreign persons are subject to tax under section 5000C and Sec.  
1.5000C-1(b). Under this step, if the acquiring agency determines that 
the contracting party is a U.S. person based on its TIN as reflected in 
a U.S. government information system, such as the System for Award 
Management (or because there is a completed Form W-9, ``Request for 
Taxpayer Identification Number (TIN) and Certification,'' on file), 
payments made pursuant to this contract are not subject to withholding 
under section 5000C.
    Under the third step, an acquiring agency determines whether the 
payment is for purchases under the simplified acquisition procedures as 
described in the FAR. If it is, the acquiring agency does not have an 
obligation to withhold under section 5000C on the payment. This step 
takes into account the exemption from tax for simplified acquisitions 
in Sec.  1.5000C-1(d)(1).
    Under the fourth step, the acquiring agency determines whether the 
payment is made for certain emergency acquisitions. If it is, the 
acquiring agency does not have an obligation to withhold under section 
5000C on the payment. This step takes into account the exemption from 
tax for emergency acquisitions as described in Sec.  1.5000C-1(d)(2).
    Under the fifth and sixth steps, the acquiring agency determines 
whether the payment is subject to withholding (in whole or in part) 
based on the information contained in a Section 5000C Certificate, if 
one has been provided by the foreign contracting party. Under the fifth 
step, if the acquiring agency determines that the foreign contracting 
party is exempt from the tax under section 5000C by reason of an 
international agreement with the United States, as represented on a 
completed Section 5000C Certificate, the acquiring agency does not have 
an obligation to withhold. For example, under this step, the acquiring 
agency does not have an obligation to withhold if a foreign contracting 
party provides a completed Section 5000C Certificate that accurately 
identifies the nondiscrimination article of a qualified income tax 
treaty on which it is relying to claim an exemption and the basis for 
that reliance.
    Under the sixth step, the acquiring agency must determine from the 
Section 5000C Certificate if the payments are (in whole or part) made 
pursuant to a contract for goods manufactured or produced or services 
provided in the United States, or in a foreign country that is a party 
to an international procurement agreement and therefore exempt (to that 
extent) from withholding under Section 5000C.
    Under the seventh step, if the acquiring agency determines that it 
has an obligation to withhold, the acquiring agency computes the amount 
of withholding based on the information contained in the Section 5000C 
Certificate, including a claim for a partial exemption from 
withholding, and withholds that amount from the payment.
    Under the final step, the acquiring agency must deposit and report 
any amounts withheld.

VI. Procedure for the Foreign Contracting Party To Request Offset for 
Underwithholding or Overwithholding

    Under certain circumstances, the proposed regulations provide that 
the foreign contracting party may request that the acquiring agency 
increase or decrease the amount of withholding on future payments for 
which withholding is required under section 5000C. The IRS and Treasury 
Department intend for this procedure to provide flexibility for foreign 
contracting parties that discover that the previous amounts withheld 
did not satisfy, or exceeded, their tax liability under section 5000C 
and the proposed regulations. These requests must be in writing, and 
provide an explanation, signed under penalties of perjury. Any increase 
or decrease in amounts withheld under this procedure may occur only if 
the payments to which it applies are made on or before the date on 
which the acquiring agency must file Form 1042 for the year with 
respect to the payment for which the overwithholding or 
underwithholding occurred.

VII. Administrative Provisions Relating to Withholding by U.S. 
Government

    Under Sec.  1.6302-2 of the Income Tax Regulations, the amount of 
tax under chapter 3 that U.S. withholding agents are required to 
withhold determines the frequency of their deposits: Monthly, quarter-
monthly, or annual. Section 5000C(d)(1) instructs acquiring agencies to 
increase amounts deducted and withheld under chapter 3 by amounts 
withheld under section 5000C. Therefore, for purposes of determining 
the frequency of their deposits, the proposed regulations require 
acquiring agencies that have chapter 3 deposit obligations for a period 
to add amounts withheld under section 5000C to the amounts withheld 
under chapter 3. This rule applies regardless of whether the chapter 3 
deposit obligation is with respect to the contracting party or any 
other person. However, to reduce the burden on acquiring agencies that 
have no chapter 3 withholding obligations, the proposed regulations 
require these acquiring agencies to make deposits monthly, regardless 
of the amount of tax withheld. Acquiring agencies must deposit all 
withheld amounts by electronic funds transfer, as that term is defined 
in Sec.  31.6302-1(h)(4)(i).

VIII. Special Arrangement for Certain Contracts and Classified 
Contracts

    The IRS and Treasury Department have determined that, in limited 
circumstances, it may be in the interest of sound tax administration to 
allow flexibility in some of the rules provided in the proposed 
regulations. Thus, the proposed regulations authorize the IRS to 
consent to alternative means for depositing the tax due under section 
5000C when agreed to by the acquiring agency and the foreign 
contracting party subject to tax under section 5000C. In these 
situations, the IRS may also modify any reporting or return 
requirements of the acquiring agency or the foreign contracting party. 
Similarly, Sec.  1.5000C-3 provides that an acquiring agency is not 
required to report information on Form 1042-S for payments made 
pursuant to classified contracts, as described in section 6050M(e)(3), 
unless the acquiring agency determines that the information reported on 
the Form 1042-S does not compromise the safeguarding of classified 
information or national security.

IX. Requirement for Foreign Contracting Party To File a Return and Pay 
Tax, and Procedures for Contracting Party To Seek a Refund

    Section 5000C(d)(2) provides that for purposes of subtitle F of the 
Code (relating to procedure and administration), the tax imposed under 
section 5000C on foreign contracting parties is treated as a tax 
imposed under subtitle A (rather than as an excise tax under subtitle 
D). As such, and because section 5000C(d)(1) provides only that the 
amount deducted and withheld under chapter 3 shall be increased by the 
amount of tax imposed under section 5000C, the proposed regulations 
treat the tax imposed on foreign contracting parties under section 
5000C

[[Page 22454]]

as administered in a manner similar to gross basis income taxes. Thus, 
if a payment is subject to the tax imposed under section 5000C and the 
foreign contracting party remains liable for the tax because, for 
example, it was not fully satisfied by withholding by the acquiring 
agency, the foreign contracting party must make an income tax return 
(for example, Form 1120-F, ``U.S. Income Tax Return of a Foreign 
Corporation'') and remit payment by the due date of that income tax 
return. See sections 6012 and 6072 and the regulations thereunder. 
Penalties may apply for the foreign contracting party's failure to 
comply, including those in sections 6651 and 6662.
    If the acquiring agency has overwithheld under section 5000C and 
has made a deposit of the amount withheld, the contracting party may 
claim a refund of the amount overwithheld pursuant to the procedures 
described in chapter 65. See section 6402 and the regulations 
thereunder for refund procedures. See section 6511 and the regulations 
thereunder for the statute of limitations on refund claims.

X. Anti-Abuse Rule

    The proposed regulations contain an anti-abuse rule to prevent 
circumvention of the tax under section 5000C. Under this rule, if a 
foreign person engages in a transaction (or series of transactions) 
with a principal purpose of avoiding the tax imposed under section 
5000C, the transaction (or series of transactions) may be disregarded 
or the arrangement may be recharacterized in accordance with its 
substance.

XI. Section 6114 Reporting

    Ordinarily any foreign person claiming that a nondiscrimination 
provision of an income tax or any other treaty obligation precludes the 
application of an otherwise applicable Code provision is required to 
report that position under Sec.  301.6114-1(b)(1). Proposed Sec.  
301.6114-1(c)(1)(ix) provides that this reporting obligation is waived 
when a foreign person is claiming that a qualified income tax treaty 
precludes the application of section 5000C, but only if the foreign 
person has provided a Section 5000C Certificate (or such other form as 
may be prescribed by the Commissioner pursuant to section 5000C) in 
accordance with section 5000C and the regulations thereunder. 
Accordingly, if a foreign person relying on a qualified income tax 
treaty has not provided the certificate or is relying on a treaty 
obligation other than an income tax treaty to claim an exemption from 
the tax, reporting is not waived.

 Proposed Effective/Applicability Date

    Section 5000C applies to specified Federal procurement payments 
received pursuant to contracts entered into on and after January 2, 
2011. Proposed Sec. Sec.  1.5000C-1 through 1.5000C-7 and proposed 
Sec.  301.6114-1(c)(1)(ix) will apply on and after the date that is 90 
days after the date they are published as final regulations in the 
Federal Register.
    Contracting parties and acquiring agencies may generally rely upon 
the rules in the proposed regulations until the date they become 
effective/applicable as final regulations. To the extent that a foreign 
contracting party is eligible for an exemption under the proposed 
regulations that would eliminate the tax imposed under section 5000C 
for any specified Federal procurement payments received on or before 
April 22, 2015, no further action is required, and the requirement to 
provide a Section 5000C Certificate is waived. Further, prior to the 
date these rules become effective/applicable as final regulations, the 
requirement to file a Form 8833, ``Treaty-Based Return Position 
Disclosure Under Section 6114 or 7701(b),'' under section 6114 and the 
regulations thereunder (with respect to relief pursuant to the 
nondiscrimination provision of a qualified income tax treaty) is waived 
for positions related to the tax imposed under section 5000C (and thus 
no information reporting penalties will be imposed under section 6712).
    If a foreign contracting party has a tax liability under section 
5000C for any specified Federal procurement payment received before the 
date these rules become effective/applicable as final regulations 
(taking into account any exemptions in the proposed regulations as 
finalized) that has not been satisfied by withholding, the foreign 
contracting party should file a tax return and pay the tax in 
accordance with applicable IRS forms, such as Form 1120-F. If a foreign 
contracting party fully satisfies its tax and filing obligations under 
section 5000C with respect to any payments received before the date 
these rules become effective/applicable as final regulations, penalties 
will not be asserted with respect to those payments. However, with 
respect to tax due under section 5000C, a foreign contracting party is 
subject to applicable interest on the underpayments (as described in 
Subchapter A of Chapter 67 of the Code).

Special Analyses

    It has been determined that this proposed regulation is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to the proposed regulations. The collection of information 
requirement in the proposed regulations will not have a significant 
economic impact on a substantial number of small entities because a 
limited number of foreign contracting parties that are small entities 
will be subject to the tax. Pursuant to section 7805(f) of the Code, 
the proposed regulations have been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on all aspects of 
the proposed rules, including comments on the clarity of the proposed 
rules and how they may be made easier with which to comply. All 
comments will be available for public inspection and copying at 
www.regulations.gov or upon request.

Drafting Information

    The principal authors of the proposed regulations are Kate Hwa, 
Brad McCormack, and Rosy Lor, Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

[[Page 22455]]

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 301, and 602 are proposed to be 
amended as follows:

PART I--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U. S. C. 7805 * * *

0
Par. 2. An undesignated center heading is revised immediately following 
Sec.  1.5000A-5 to read as follows:

Tax on Certain Foreign Procurement

0
Par. 3. Section 1.5000C-0 is added to read as follows:


Sec.  1.5000C-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.5000C-1 
through 1.5000C-7.

Sec.  1.5000C-1 Tax on specified Federal procurement payments.

(a) Overview.
(b) Imposition of tax.
(c) Definitions.
(d) Exemptions.
(1) Simplified acquisitions.
(2) Emergency acquisitions.
(3) Certain international agreements.
(4) Goods manufactured or produced or services provided in the 
United States.
(5) Goods manufactured or produced or services provided in a country 
that is a party to an international procurement agreement.
(e) Country in which goods are manufactured or produced or services 
provided.
(1) Goods manufactured or produced.
(2) Provision of services.
(3) Allocation of total contract price to determine the nonexempt 
amount.
(4) Reduction or elimination of withholding by an acquiring agency.

Sec.  1.5000C-2 Withholding on specified Federal procurement payments.

(a) In general.
(b) Steps in determining the obligation to withhold under section 
5000C.
(1) Determine whether the payment is pursuant to a contract for 
goods or services.
(2) Determine whether the payment is made pursuant to a contract 
with a U.S. person.
(3) Determine whether the payment is for purchases under the 
simplified acquisition procedures.
(4) Determine whether the payment is for emergency acquisitions.
(5) Determine whether the foreign contracting party is entitled to 
relief pursuant to an international agreement.
(6) Determine whether the contract is for goods manufactured or 
produced or services provided in the United States or in a foreign 
country that is a party to an international procurement agreement.
(7) Compute amounts to withhold.
(8) Deposit and report amounts withheld.
(c) Determining whether the contracting party is a U.S. person.
(1) In general.
(2) Determination based on Taxpayer Identification Number (TIN).
(3) Determination based on the Form W-9.
(4) Contracting party treated as a foreign contracting party.
(d) Withholding when a foreign contracting party submits a Section 
5000C Certificate.
(1) In general.
(2) Exemption for a foreign contracting party entitled to the 
benefit of relief pursuant to certain international agreements.
(3) Exemption when goods are manufactured or produced or services 
provided in the United States, or in a foreign country that is a 
party to an international procurement agreement.
(4) Information required for Section 5000C Certificate.
(5) Validity period of Section 5000C Certificate.
(6) Change in circumstances.
(7) Model Section 5000C Certificate.
(8) Time for submitting Section 5000C Certificate or Form W-9, 
``Request for Taxpayer Identification Number and Certification''.
(e) Offset for underwithholding or overwithholding.
(1) In general.
(2) Underwithholding.
(3) Overwithholding.

Sec.  1.5000C-3 Payment and returns of tax withheld by the acquiring 
agency.

(a) In general.
(b) Deposit rules.
(1) Acquiring agency with a chapter 3 deposit requirement treats 
amounts withheld as under chapter 3.
(2) Acquiring agency with no chapter 3 filing obligation deposits 
withheld amounts monthly.
(c) Return requirements.
(1) In general.
(2) Classified contracts.
(d) Special arrangement for certain contracts.

Sec.  1.5000C-4 Requirement for the foreign contracting party to file a 
return and pay tax, and procedures for the contracting party to seek a 
refund.

(a) In general.
(b) Tax obligation of foreign contracting party independent of 
withholding.
(c) Return of tax by the foreign contracting party.
(d) Time and manner of paying tax.
(e) Refund requests when amount withheld exceeds tax liability.

Sec.  1.5000C-5 Anti-abuse rule.

Sec.  1.5000C-6 Examples.

Sec.  1.5000C-7 Effective/applicability date.

(a) In general.
(b) Reliance on proposed regulations.
(c) Obligation to file a return and pay tax.
(d) Waiver of penalties under certain circumstances.

0
Par. 4. Sections 1.5000C-1 through 1.5000C-7 are added to read as 
follows:


Sec.  1.5000C-1  Tax on specified Federal procurement payments.

    (a) Overview. This section provides definitions and general rules 
relating to the imposition of, and exemption from, the tax on specified 
Federal procurement payments under section 5000C. Section 1.5000C-2 
provides rules concerning withholding under section 5000C(d)(1), 
including the steps that must be taken to determine the obligation to 
withhold and whether an exemption from withholding applies. Section 
1.5000C-3 provides the time and manner for depositing the amounts 
withheld under section 5000C and the related reporting requirements. 
Section 1.5000C-4 contains the rules for a foreign contracting party 
that must pay and report the tax under section 5000C when the tax 
obligation under section 5000C is not fully satisfied by withholding, 
as well as procedures by which a contracting party may seek a refund 
when the amount withheld exceeds its tax liability under section 5000C. 
Section 1.5000C-5 contains an anti-abuse rule. Section 1.5000C-6 
contains examples illustrating the principles of Sec. Sec.  1.5000C-1 
through 1.5000C-7. Finally, Sec.  1.5000C-7 contains the effective/
applicability date for Sec. Sec.  1.5000C-1 through 1.5000C-7.
    (b) Imposition of tax. Except as otherwise provided, section 5000C 
imposes on any foreign contracting party a tax equal to 2 percent of 
the amount of a specified Federal procurement payment. In general, the 
tax imposed under section 5000C applies to specified Federal 
procurement payments received pursuant to contracts entered into on and 
after January 2, 2011. Specified Federal procurement payments received 
by a nominee or agent on behalf of a contracting party are considered 
to be received by that contracting party. The tax imposed under section 
5000C is to be applied in a manner consistent with U.S. obligations 
under international agreements. Payments for the purchase or lease of 
land or an interest in land are not subject to the tax imposed under 
section 5000C.
    (c) Definitions. Solely for purposes of section 5000C and 
Sec. Sec.  1.5000C-1 through 1.5000C-7, the following definitions 
apply:
    (1) The term acquiring agency means the U.S. government department, 
agency, independent establishment, or corporation described in 
paragraph (c)(7) of this section that is a party to the contract. To 
the extent that a U.S. government department or agency, other

[[Page 22456]]

than the acquiring agency, is making the payments pursuant to the 
contract, that department or agency is also considered to be the 
acquiring agency.
    (2) The term contract has the same meaning as provided in 48 CFR 
2.101, and thus does not include a grant agreement or a cooperative 
agreement within the meaning of 31 U.S.C. 6304 and 6305, respectively.
    (3) The term contract ratio refers to the nonexempt amount over the 
total contract price.
    (4) The term contracting party means any person that is a party to 
a contract with the U.S. government that is entered into on or after 
January 2, 2011.
    (5) The term foreign contracting party means a contracting party 
that is a foreign person.
    (6) The term foreign person means any person other than a United 
States person (as defined in section 7701(a)(30)).
    (7) The term Government of the United States or U.S. government 
means the executive departments specified in 5 U.S.C. 101, the military 
departments specified in 5 U.S.C. 102, the independent establishments 
specified in 5 U.S.C. 104(1), and wholly owned government corporations 
specified in 31 U.S.C. 9101(3). Unless otherwise specified in 5 U.S.C. 
101, 102, or 104(1), or 31 U.S.C. 9101(3), the term Government of the 
United States or U.S. government does not include any quasi-
governmental entities or instrumentalities of the U.S. government.
    (8) The term international procurement agreement means the World 
Trade Organization Government Procurement Agreement within the meaning 
of 48 CFR 25.400(a)(1) and any Free Trade Agreement to which the United 
States is a party that includes government procurement obligations that 
provide appropriate competitive government procurement opportunities to 
U.S. goods, services, and suppliers. A party to an international 
procurement agreement is a signatory to the agreement and does not 
include a country that is merely an observer with respect to the 
agreement.
    (9) The term nonexempt amount means the portion of the contract 
price allocated to nonexempt goods and nonexempt services.
    (10) The term nonexempt goods means goods manufactured or produced 
in a foreign country that is not a party to an international 
procurement agreement with the United States.
    (11) The term nonexempt services means services provided in a 
foreign country that is not a party to an international procurement 
agreement with the United States.
    (12) The term outlying areas has the same meaning as set forth in 
48 CFR 2.101(b), which includes Puerto Rico, the Northern Mariana 
Islands, American Samoa, Guam, the Virgin Islands, Baker Island, 
Howland Island, Jarvis Island, Johnston Atoll, Kingman Reef, Midway 
Islands, Navassa Island, Palmyra Atoll, and Wake Atoll.
    (13) The term qualified income tax treaty means a U.S. income tax 
treaty in force that contains a nondiscrimination provision that 
applies to the tax imposed under section 5000C and prohibits taxation 
that is more burdensome on a foreign national than a U.S. national (or 
in the case of certain income tax treaties, taxation that is more 
burdensome on a foreign citizen than a U.S. citizen), regardless of its 
residence.
    (14) The term Section 5000C Certificate means a written statement 
that includes the information described in Sec.  1.5000C-2(d) that the 
foreign contracting party submits to an acquiring agency for the 
purposes of demonstrating that the foreign contracting party is 
eligible for certain exemptions from withholding (in whole or in part) 
under section 5000C with respect to a contract. The term also includes 
any form that the Internal Revenue Service may prescribe as a 
substitute for the Section 5000C Certificate.
    (15) The term specified Federal procurement payment means any 
payment made pursuant to a contract with a foreign contracting party 
that is for goods manufactured or produced or services provided in a 
foreign country that is not a party to an international procurement 
agreement with the United States. For purposes of the prior sentence, a 
foreign country does not include an outlying area.
    (16) The term Taxpayer Identification Number or TIN means the 
identifying number assigned to a person under section 6109, as defined 
in section 7701(a)(41).
    (17) The term total contract price means the total cost to the U.S. 
Government of the goods and services procured under a contract and paid 
to the contracting party.
    (d) Exemptions. The tax imposed under paragraph (b) of this section 
does not apply to the payments made in the following situations. For 
the exemptions in paragraphs (d)(3), (4) and (5) of this section, see 
Sec.  1.5000C-2(d) for the procedures to eliminate withholding by an 
acquiring agency.
    (1) Simplified acquisitions. Payments for purchases under the 
simplified acquisition procedures that do not exceed the simplified 
acquisition threshold as described in 48 CFR 2.101.
    (2) Emergency acquisitions. A payment made pursuant to a contract 
if the contract is--
    (i) Awarded under the ``unusual and compelling urgency'' authority 
of 48 CFR 6.302-2, or
    (ii) Entered into under the emergency acquisition flexibilities as 
defined in 48 CFR Part 18.
    (3) Certain international agreements. A payment made by the U.S. 
government pursuant to a contract with a foreign contracting party when 
the payment is entitled to relief from the tax imposed under section 
5000C pursuant to an international agreement with the United States, 
including relief pursuant to a nondiscrimination provision of a 
qualified income tax treaty, because the foreign contracting party is 
entitled to the benefit of that provision.
    (4) Goods manufactured or produced or services provided in the 
United States. A payment made pursuant to a contract to the extent that 
the payment is for goods manufactured or produced or services provided 
in the United States.
    (5) Goods manufactured or produced or services provided in a 
country that is a party to an international procurement agreement. A 
payment made pursuant to a contract to the extent the payment is for 
goods manufactured or produced or services provided in a country that 
is a party to an international procurement agreement, as defined in 
paragraph (c)(8) of this section.
    (e) Country in which goods are manufactured or produced or services 
provided--(1) Goods manufactured or produced. Solely for purposes of 
section 5000C, goods are manufactured or produced in the country (or 
countries)--
    (i) Where property has been substantially transformed into the 
goods that are procured pursuant to a contract; or
    (ii) Where there has been assembly or conversion of component parts 
(involving activities that are substantial in nature and generally 
considered to constitute the manufacture or production of property) 
into the final product that constitutes the goods procured pursuant to 
a contract.
    (2) Provision of services. Solely for purposes of section 5000C, 
services are considered to be provided in the country where the 
individuals performing the services are physically located when they 
perform their duties pursuant to the contract.
    (3) Allocation of total contract price to determine the nonexempt 
amount. If, pursuant to a contract, goods are manufactured or produced, 
or services

[[Page 22457]]

are provided, in multiple countries and only a portion of the goods 
manufactured or produced or the services provided pursuant to the 
contract are nonexempt goods or nonexempt services, a foreign 
contracting party may use a reasonable allocation method to determine 
the nonexempt amount. A reasonable allocation method would include 
taking into account the proportionate costs (including the cost of 
labor and raw materials) incurred to manufacture or produce the goods 
in each country, or taking into account the proportionate costs 
incurred to provide the services in each country.
    (4) Reduction or elimination of withholding by an acquiring agency. 
For procedures to reduce or eliminate withholding by an acquiring 
agency based on where goods are manufactured or produced or where 
services are provided, including as a result of an allocation under 
this paragraph (e), see Sec.  1.5000C-2(d).


Sec.  1.5000C-2  Withholding on specified Federal procurement payments.

    (a) In general. Except as otherwise provided in this section, every 
acquiring agency making a specified Federal procurement payment on 
which tax is imposed under section 5000C and Sec. Sec.  1.5000C-1 
through 1.5000C-7 must deduct and withhold an amount equal to 2 percent 
of the payment. For rules relating to the liability of a foreign 
contracting party with respect to specified Federal procurement 
payments not fully withheld upon at source, see Sec.  1.5000C-4. An 
acquiring agency may rely upon any information furnished by a 
contracting party under this section unless the acquiring agency has 
reason to know that the information is incorrect or unreliable. An 
acquiring agency has reason to know that the information is incorrect 
or unreliable if it has knowledge of relevant facts or statements 
contained in the submitted information such that a reasonably prudent 
person in the position of the acquiring agency would know that the 
information provided is incorrect or unreliable.
    (b) Steps in determining the obligation to withhold under section 
5000C. An acquiring agency generally determines its obligation to 
withhold under section 5000C according to the steps described in this 
paragraph (b). See, however, paragraph (e) of this section for 
situations in which withholding may be increased in the case of 
underwithholding, or may be decreased in the case of overwithholding.
    (1) Determine whether the payment is pursuant to a contract for 
goods or services. The acquiring agency determines whether it is making 
a payment pursuant to a contract for goods or services. If the 
acquiring agency is making a payment for any other purpose, it does not 
have an obligation to withhold under section 5000C on the payment.
    (2) Determine whether the payment is made pursuant to a contract 
with a U.S. person. The acquiring agency determines whether the payment 
is made pursuant to a contract with a person considered to be a United 
States person (U.S. person) in accordance with paragraph (c) of this 
section. If the contracting party is a U.S. person, the acquiring 
agency does not have an obligation to withhold under section 5000C on 
the payment.
    (3) Determine whether the payment is for purchases under the 
simplified acquisition procedures. The acquiring agency determines 
whether the payment is for purchases under the simplified acquisitions 
procedures that do not exceed the simplified acquisition threshold as 
described in 48 CFR 2.101. If it is, the acquiring agency does not have 
an obligation to withhold under section 5000C on the payment.
    (4) Determine whether the payment is for emergency acquisitions. 
The acquiring agency determines whether the payment is made for certain 
emergency acquisitions within the meaning of Sec.  1.5000C-1(d)(2). If 
it is, the acquiring agency does not have an obligation to withhold 
under section 5000C on the payment.
    (5) Determine whether the foreign contracting party is entitled to 
relief pursuant to an international agreement. If the foreign 
contracting party submits a Section 5000C Certificate in accordance 
with paragraph (d) of this section representing that the foreign 
contracting party is entitled to relief from the tax imposed under 
section 5000C pursuant to an international agreement with the United 
States (such as relief pursuant to the nondiscrimination provision of a 
qualified income tax treaty), the acquiring agency does not have an 
obligation to withhold under section 5000C on the payment.
    (6) Determine whether the contract is for goods manufactured or 
produced or services provided in the United States or in a foreign 
country that is a party to an international procurement agreement. If 
the foreign contracting party submits a Section 5000C Certificate in 
accordance with paragraph (d) of this section that represents that the 
contract is for goods manufactured or produced or services provided in 
the United States, or in a foreign country that is a party to an 
international procurement agreement, the acquiring agency does not have 
an obligation to withhold. If the Section 5000C Certificate provides 
that payments under the contract are only partially exempt from 
withholding under section 5000C, the acquiring agency must withhold to 
the extent described in paragraph (b)(7).
    (7) Compute amounts to withhold. If, after evaluating each step 
described in this paragraph (b), the acquiring agency determines that 
it has an obligation to withhold, the acquiring agency computes the 
amount of withholding by multiplying the amount of the payment by 2 
percent, unless the foreign contracting party has provided a Section 
5000C Certificate. In cases in which the Section 5000C Certificate 
demonstrates that the exemption in Step 6 applies, the acquiring agency 
generally computes the amount of withholding by multiplying the amount 
of the payment by the contract ratio provided on the most recent 
Section 5000C Certificate, the product of which is multiplied by 2 
percent. However, in cases in which the exemption in Step 6 applies and 
the requirements of paragraph (d)(4)(iii)(B)(2) of this section are 
met, the acquiring agency computes the amount of withholding based on 
the payment for the specifically identified items, which may be 
identified by the contract line item number, or CLIN. The acquiring 
agency withholds the computed amount from the payment.
    (8) Deposit and report amounts withheld. The acquiring agency 
deposits and reports the amounts determined in the prior step in 
accordance with Sec.  1.5000C-3.
    (c) Determining whether the contracting party is a U.S. person--(1) 
In general. An acquiring agency must rely on the provisions of this 
paragraph (c) to determine the status of the contracting party as a 
U.S. person for purposes of withholding under section 5000C.
    (2) Determination based on Taxpayer Identification Number (TIN). An 
acquiring agency must treat a contracting party as a U.S. person if the 
U.S. government information system (such as the System for Award 
Management (SAM)) indicates that the contracting party is a corporation 
(for example, because the name listed in SAM contains the term 
``Corporation,'' ``Inc,'' or ``Corp'') and that it has a TIN that 
begins with two digits other than ``98'' (a limited liability company 
or LLC is not treated as a corporation for purposes of this paragraph 
(c)(2)). Further, an acquiring agency must treat a contracting party as 
a U.S. person if the acquiring agency has access to a U.S.

[[Page 22458]]

government information system that indicates that the contracting party 
is an individual with a TIN that begins with a digit other than ``9''.
    (3) Determination based on the Form W-9. An acquiring agency must 
treat a contracting party as a U.S. person if the person has submitted 
to it a valid Form W-9, ``Request for Taxpayer Identification Number 
(TIN) and Certificate'' (or valid substitute form described in Sec.  
31.3406(h)-3(c)(2) of this chapter), signed under penalties of perjury.
    (4) Contracting party treated as a foreign contracting party. If an 
acquiring agency cannot determine that a contracting party is a U.S. 
person based on application of paragraph (c)(2) or (3) of this section, 
then the contracting party is treated as a foreign contracting party 
for purposes of this section.
    (d) Withholding when a foreign contracting party submits a Section 
5000C Certificate--(1) In general. Unless the acquiring agency has 
reason to know that the information is incorrect or unreliable, the 
acquiring agency may rely on a claim that a foreign contracting party 
is entitled to an exemption (in whole or in part) from withholding on 
payments pursuant to a contract if the foreign contracting party 
provides a Section 5000C Certificate to the acquiring agency as 
prescribed in this paragraph (d). When a Section 5000C Certificate is 
furnished, the acquiring agency is not required to withhold, or must 
reduce the amount of withholding, on payments made to a foreign person 
if the certificate establishes that the foreign person is wholly or 
partially exempt from withholding. An acquiring agency may establish a 
system for a foreign contracting party to electronically furnish a 
Section 5000C Certificate.
    (2) Exemption for a foreign contracting party entitled to the 
benefit of relief pursuant to certain international agreements. An 
acquiring agency is not required to withhold on payments pursuant to a 
contract with a foreign contracting party when the payment is entitled 
to relief from the tax imposed under section 5000C pursuant to an 
international agreement, including relief pursuant to a 
nondiscrimination provision of a qualified income tax treaty, because 
the foreign contracting party is entitled to the benefit of that 
agreement and the foreign contracting party has submitted a Section 
5000C Certificate that includes all of the information described in 
paragraphs (d)(4)(i) and (ii) of this section.
    (3) Exemption when goods are manufactured or produced or services 
provided in the United States, or in a foreign country that is a party 
to an international procurement agreement. An acquiring agency is not 
required to withhold on payments pursuant to a contract with a foreign 
contracting party to the extent that the payments are for goods 
manufactured or produced or services provided in the United States or 
in a foreign country that is a party to an international procurement 
agreement with the United States, provided that the foreign contracting 
party has submitted a Section 5000C Certificate that includes all of 
the information described in paragraphs (d)(4)(i) and (iii) of this 
section. If the Section 5000C Certificate provides that the payment is 
only partially exempt from withholding under section 5000C, the 
acquiring agency must withhold to the extent that the payment is not 
exempt.
    (4) Information required for Section 5000C Certificate--(i) In 
general. The Section 5000C Certificate, entitled ``Section 5000C 
Certificate,'' must be signed under penalties of perjury by the foreign 
contracting party, and contain--
    (A) The name of the foreign contracting party, country of 
organization (if applicable), and permanent residence address of the 
foreign contracting party;
    (B) The mailing address of the foreign contracting party (if 
different than the permanent residence address);
    (C) The TIN assigned to the foreign contracting party (if any);
    (D) The identifying or reference number on the contract (if known);
    (E) The name and address of the acquiring agency;
    (F) A statement that the person signing the Section 5000C 
Certificate is the foreign contracting party listed in paragraph 
(d)(4)(i)(A) of this section (or is authorized to sign on behalf of the 
foreign contracting party);
    (G) A statement that the foreign contracting party is not acting as 
an agent or nominee for another foreign person with respect to the 
goods manufactured or produced or services provided under the contract;
    (H) A statement that the foreign contracting party agrees to pay an 
amount equal to any tax (including any applicable penalties and 
interest) due under section 5000C that the acquiring agency does not 
withhold under section 5000C;
    (I) A statement that the foreign contracting party acknowledges and 
understands the rules in Sec.  1.5000C-4 relating to procedural 
obligations related to section 5000C; and
    (J) A statement that the foreign contracting party has not engaged 
in a transaction (or series of transactions) with a principal purpose 
of avoiding the tax imposed under section 5000C as defined in Sec.  
1.5000C-5.
    (ii) Additional information required for claiming an exemption 
based on the certain international agreements with the United States. 
In addition to the information required by paragraph (d)(4)(i) of this 
section, a foreign contracting party claiming an exemption from 
withholding in reliance on a provision of an international agreement 
with the United States, including a qualified income tax treaty, must 
provide--
    (A) The name of the international agreement under which the foreign 
contracting party is claiming benefits;
    (B) The specific provision of the international agreement relied 
upon (for example, the nondiscrimination article of a qualified income 
tax treaty); and
    (C) The basis on which it is entitled to the benefits of that 
provision (for example, because the foreign contracting party is a 
corporation organized in a foreign country that has in force a 
qualified income tax treaty with the United States that covers all 
nationals, regardless of their residence).
    (iii) Additional required information for claiming exemption based 
on country where goods are manufactured or services provided. (A) In 
general. In addition to the information required by paragraph (d)(4)(i) 
of this section, a foreign contracting party claiming an exemption from 
withholding (in whole or in part) because payments will be pursuant to 
a contract for goods manufactured or produced or services provided in 
the United States or a foreign country that is party to an 
international procurement agreement, the information submitted on the 
Section 5000C Certificate must describe the relevant goods or services 
and the country (or countries) in which they are manufactured or 
produced or are provided and include the name of the international 
procurement agreement or agreements (if relevant).
    (B) Information on allocation to exempt and nonexempt amounts. (1) 
In general. In situations in which a foreign contracting party claims 
the exemption in paragraph (d)(3) of this section with respect to only 
a portion of the payments received under the contract, the Section 
5000C Certificate must include an explanation of the method used by the 
foreign contracting party to allocate the total contract price among 
the countries, as described in Sec.  1.5000C-1(e)(3), if applicable. In 
general, the Section 5000C Certificate also must include the total 
contract price and the nonexempt amount; however, when necessary, an 
estimate

[[Page 22459]]

of the total contract price or the nonexempt amount may be used. For 
example, total contract price may be estimated when a Section 5000C 
Certificate is being completed with respect to payments to be made 
pursuant to a cost-reimbursement contract that is paid on the basis of 
actual incurred costs and the total amount of such costs is not known 
at the time the certificate is provided.
    (2) Specific identification of exempt items. If agreed to by the 
acquiring agency, the Section 5000C Certificate may identify specific 
exempt and nonexempt amounts. For example, specific contract line items 
(such as a contract line item number or CLIN) identified in the 
contract may be listed on the Section 5000C Certificate as exempt and 
nonexempt amounts (in whole or in part), as applicable. When this 
paragraph applies, and whether or not the contract identifies exempt 
and nonexempt amounts, a foreign contracting party must provide the 
information required by paragraphs (d)(4)(iii)(A) and (d)(4)(iii)(B)(1) 
of this section, on the Section 5000C Certificate to explain why the 
contract line items are eligible for an exemption; however, the foreign 
contracting party is not required to include information about the 
total contract price under this paragraph. In these circumstances, only 
one Section 5000C Certificate is required to be provided identifying 
the exempt and nonexempt contract line items that relate to the 
contract (for example, a spreadsheet may be attached to the Section 
5000C Certificate that identifies the contract line items with an 
explanation for the treatment as exempt or nonexempt).
    (5) Validity period of Section 5000C Certificate. Except as 
otherwise provided in paragraph (d)(6) of this section, the Section 
5000C Certificate is valid for the term of the contract.
    (6) Change in circumstances. A foreign contracting party must 
submit a revised Section 5000C Certificate within 30 days of a change 
in circumstances that causes the information in a Section 5000C 
Certificate held by the acquiring agency to be incorrect with respect 
to the acquiring agency's determination of whether to withhold or the 
amount of withholding under Section 5000C. An acquiring agency must 
request a new Section 5000C Certificate from a contracting party in 
circumstances in which it knows (or has reason to know) that a 
previously submitted Section 5000C Certificate becomes incorrect or 
unreliable. An acquiring agency may request an updated Section 5000C 
Certificate at any time, including when other documentation is required 
under the contract, such as the annual representations and 
certifications required in 48 CFR 4.1201.
    (7) Model Section 5000C Certificate. The following is a sample of a 
Section 5000C Certificate. A foreign contracting party that chooses to 
use this model as a template for the Section 5000C Certificate must 
include all the necessary information required by this paragraph (d) on 
the completed model Section 5000C Certificate it submits to the 
acquiring agency.
BILLING CODE 4830-01-P

[[Page 22460]]

[GRAPHIC] [TIFF OMITTED] TP22AP15.000


[[Page 22461]]


[GRAPHIC] [TIFF OMITTED] TP22AP15.001

BILLING CODE 4830-01-C
    (8) Time for submitting Section 5000C Certificate or Form W-9, 
``Request for Taxpayer Identification Number and Certification.'' A 
contracting party must submit the Section 5000C Certificate or Form W-9 
(as applicable) as early as practicable (for example, when the offer 
for the contract is submitted to the U.S. government). In all cases, 
however, the Section 5000C Certificate or Form W-9 must be submitted to 
the acquiring agency no later than the date of execution of the 
contract.

[[Page 22462]]

    (e) Offset for underwithholding or overwithholding--(1) In general. 
If the foreign contracting party discovers that amounts withheld on 
prior payments either were insufficient or in excess of the amount 
required to satisfy its tax liability under section 5000C, the foreign 
contracting party may request the acquiring agency to increase or 
decrease the amount of withholding on future payments for which 
withholding is required under section 5000C. The request must be in 
writing, signed under penalties of perjury, contain the amount by which 
the foreign contracting party requests to increase or decrease future 
amounts withheld under section 5000C, and explain the reason for the 
request. The request may be submitted in conjunction with an original 
or updated Section 5000C Certificate.
    (2) Underwithholding. Upon receipt of a request described in 
paragraph (e)(1) of this section, acquiring agencies may increase the 
amount of withholding under this paragraph to correct underwithholding 
only if the payment for which the increase is applied is otherwise 
subject to withholding under section 5000C and made before the date 
that Form 1042, ``Annual Withholding Tax Return for U.S. Source Income 
of Foreign Persons,'' is required to be filed (not including 
extensions) with respect to the payment for which the underwithholding 
occurred. Amounts withheld under this paragraph must be deposited and 
reported in the time and manner as prescribed by Sec.  1.5000C-3. See 
Sec.  1.5000C-4 for procedures for a foreign contracting party that 
must pay tax due when its tax liability under section 5000C was not 
fully satisfied by withholding by an acquiring agency.
    (3) Overwithholding. Upon receipt of a request described in 
paragraph (e)(1) of this section, acquiring agencies may decrease the 
amount of withholding on subsequent payments made to the foreign 
contracting party that are otherwise subject to withholding under 
section 5000C provided that the payment for which the decrease is 
applied is made on or before the date on which Form 1042, ``Annual 
Withholding Tax Return for U.S. Source Income of Foreign Persons,'' is 
required to be filed (not including extensions) with respect to the 
payment for which the overwithholding occurred. See Sec.  1.5000C-4(e) 
for procedures for foreign contracting parties to file a claim for 
refund for the overwithheld amount under section 5000C.


Sec.  1.5000C-3  Payment and returns of tax withheld by the acquiring 
agency.

    (a) In general. This section provides administrative procedures 
that acquiring agencies must follow to satisfy their obligations to 
deposit and report amounts withheld under Sec.  1.5000C-2. An acquiring 
agency with a section 5000C withholding obligation must increase the 
amount it deducts and withholds under chapter 3 for fixed or 
determinable annual or periodical income (FDAP income) by the amount it 
must withhold under Sec.  1.5000C-2. Accordingly, this section 
generally applies the administrative provisions of chapter 3 for FDAP 
income relating to the deposit, payment, and reporting for amounts 
withheld under Sec.  1.5000C-2, and contains some variation from those 
provisions to take into account the nature of the tax imposed under 
section 5000C.
    (b) Deposit rules--(1) Acquiring agency with a chapter 3 deposit 
requirement treats amounts withheld as under chapter 3. If an acquiring 
agency has a chapter 3 deposit obligation for a period, it must treat 
any amount withheld under Sec.  1.5000C-2 as an additional amount of 
tax withheld under chapter 3 for purposes of the deposit rules of Sec.  
1.6302-2. Thus, depending on the combined amount withheld under chapter 
3 and Sec.  1.5000C-2, an acquiring agency subject to this paragraph 
(b)(1) must make monthly deposits, quarter-monthly deposits, or annual 
deposits under the rules in Sec.  1.6302-2. To the extent provided in 
forms, instructions, or publications prescribed by the Internal Revenue 
Service (IRS), acquiring agencies must deposit all withheld amounts by 
electronic funds transfer, as that term is defined in Sec.  31.6302-
1(h)(4)(i) of this chapter.
    (2) Acquiring agency with no chapter 3 filing obligation deposits 
withheld amounts monthly. If an acquiring agency has no chapter 3 
deposit obligation to which the deposit rules of Sec.  1.6302-2 apply 
for a calendar month, it must make monthly deposits of the amounts 
withheld under the rules in this paragraph (b)(2). Thus, an acquiring 
agency with no chapter 3 deposit obligations and that has withheld any 
amount under Sec.  1.5000C-2 during any calendar month must deposit 
that amount by the 15th day of the month following the payment. To the 
extent provided in forms, instructions, or publications prescribed by 
the Internal Revenue Service (IRS), acquiring agencies must deposit all 
withheld amounts by electronic funds transfer, as that term is defined 
in Sec.  31.6302-1(h)(4)(i) of this chapter.
    (c) Return requirements. (1) In general. Except as provided in 
paragraph (c)(2) of this section, an acquiring agency that withholds an 
amount pursuant to section 5000C generally must file Form 1042-S, 
``Foreign Person's U.S. Source Income Subject to Withholding,'' and 
Form 1042, ``Annual Withholding Tax Return for U.S. Source Income of 
Foreign Persons,'' each year, or other such forms as the IRS may 
prescribe, to report information related to amounts withheld under 
section 5000C. The acquiring agency must prepare a Form 1042-S for each 
contracting party reporting the amount withheld under section 5000C for 
the preceding calendar year. The Form 1042 must show the aggregate 
amounts withheld under section 5000C that were required to be reported 
on Forms 1042-S (including those amounts withheld under section 5000C 
for which a Form 1042-S is not required to be filed pursuant to 
paragraph (c)(2) of this section). The Form 1042 must also include the 
information required by the form and accompanying instructions. 
Further, any forms required under this paragraph (c) are due at the 
same time, at the same place, and eligible for the same extended due 
dates and may be amended in the same manner as Form 1042 and Form 1042-
S (or such other forms as the IRS may prescribe related to chapter 3). 
The acquiring agency must furnish a copy of the Form 1042-S (or such 
other form as the IRS may prescribe for the same purpose) to the 
contracting party for whom the form is prepared on or before March 15 
of the calendar year following the year in which the amount subject to 
reporting under section 5000C was paid. It must be filed with a 
transmittal form as provided in instructions to the Form 1042-S and to 
the transmittal form. Section 5000C Certificates or other statements or 
information as prescribed by Sec.  1.5000C-2 that are provided to the 
acquiring agency are not required to be attached to the Form 1042 filed 
with the IRS. However, an acquiring agency that is required to file 
Form 1042 must retain a copy of Form 1042, Form 1042-S, the Section 
5000C Certificates, or other statements or information prescribed by 
Sec.  1.5000C-2 for at least three years from the original due date of 
Form 1042 or the date it was filed, whichever is later. An acquiring 
agency that is not required to file Form 1042 must retain any Section 
5000C Certificates or other statements or information as prescribed by 
Sec.  1.5000C-2 for at least three years from the date the Form 1042 
would have been due had the acquiring agency had an obligation to file.
    (2) Classified contracts. An acquiring agency is not required to 
report information otherwise required by this

[[Page 22463]]

section on Form 1042-S for payments made pursuant to classified 
contracts (as described in section 6050M(e)(3)), unless the acquiring 
agency determines that the information reported on the Form 1042-S does 
not compromise the safeguarding of classified information or national 
security.
    (d) Special arrangement for certain contracts. In limited 
circumstances, the IRS may authorize the amount otherwise required to 
be withheld under section 5000C to be deposited in the time and manner 
mutually agreed upon by the acquiring agency and the foreign 
contracting party. In these circumstances, the IRS may in its sole 
discretion also modify any reporting or return requirements of the 
acquiring agency or the foreign contracting party.


Sec.  1.5000C-4  Requirement for the foreign contracting party to file 
a return and pay tax, and procedures for the contracting party to seek 
a refund.

    (a) In general. For purposes of subtitle F of the Internal Revenue 
Code (``Procedure and Administration''), the tax imposed under section 
5000C on foreign persons is treated as a tax imposed under subtitle A. 
Except as provided elsewhere in the regulations under section 5000C, 
forms, or accompanying instructions, the tax imposed on foreign 
contracting parties under section 5000C is administered in a manner 
similar to gross basis income taxes. This section provides procedures 
that a foreign contracting party must follow to satisfy its obligations 
to report and deposit tax due under Sec.  1.5000C-1 as well as 
procedures for contracting parties to seek a refund of amounts 
overwithheld.
    (b) Tax obligation of foreign contracting party independent of 
withholding. A foreign contracting party subject to tax under section 
5000C and Sec. Sec.  1.5000C-1 through 1.5000C-7 remains liable for the 
tax unless its tax obligation was fully satisfied by withholding by an 
acquiring agency in accordance with Sec. Sec.  1.5000C-2 and 1.5000C-3.
    (c) Return of tax by the foreign contracting party. If the tax 
liability under Sec.  1.5000C-1 relating to a payment is not fully 
satisfied by withholding in accordance with Sec. Sec.  1.5000C-2 and 
1.5000C-3 (including as a result of the use of an estimated nonexempt 
amount or estimated total contract price in computing the contract 
ratio), a foreign contracting party subject to tax under Sec.  1.5000C-
1 during a calendar year must make a return of tax on, for example, 
Form 1120-F, ``U.S. Income Tax Return of a Foreign Corporation,'' or 
such other form as the Internal Revenue Service (IRS) may prescribe to 
report the amount of tax due under section 5000C (required return). A 
foreign contracting party with no other U.S. tax filing obligation 
other than with respect to its liability for the tax imposed under 
section 5000C must file its required return on or before the fifteenth 
day of the sixth month following the close of its taxable year. The 
required return must include the information required by the form and 
accompanying instructions. The required return must be filed at the 
place and time (including any extension of time to file) provided by 
the form and accompanying instructions. Penalties for failure to file 
contained in Subtitle F can apply to foreign contracting parties who 
fail to file the required return. A foreign contracting party must 
attach copies of all Forms 1042-S, ``Foreign Person's U.S. Source 
Income Subject to Withholding,'' received from acquiring agencies (if 
any) to the required return.
    (d) Time and manner of paying tax. A foreign contracting party must 
pay the tax imposed under section 5000C in the manner provided and in 
the time prescribed in the required return and accompanying 
instructions. In general, the foreign contracting party must pay the 
tax at the time that the required return is due, excluding extensions. 
To the extent provided in forms, instructions, or publications 
prescribed by the IRS, each foreign contracting party must deposit tax 
due under section 5000C by electronic funds transfer, as that term is 
defined in Sec.  31.6302-1(h)(4)(i) of this chapter. A foreign 
contracting party that fails to pay tax in the time and manner 
prescribed in this section (or under forms, instructions, or 
publications prescribed by the IRS under this section) may be subject 
to penalties and interest under Subtitle F.
    (e) Refund requests when amount withheld exceeds tax liability. 
After taking into account any offsets pursuant to Sec.  1.5000C-
2(e)(3), if the acquiring agency has overwithheld amounts under section 
5000C and has made a deposit of the amounts under Sec.  1.5000C-3(b), 
the contracting party may claim a refund of the amount overwithheld 
pursuant to the procedures described in chapter 65. The contracting 
party's claim for refund must meet the requirements of section 6402 and 
the regulations thereunder, as applicable, and must be filed before the 
expiration of the period of limitations on refund in section 6511 and 
the regulations thereunder. In general, the contracting party making a 
refund claim must file the required return to claim a refund, stating 
the grounds upon which the claim is based. A Section 5000C Certificate 
and a copy of the Form 1042-S received from the acquiring agency must 
be attached to the required return. For purposes of this section, an 
amount is overwithheld if the amount withheld from the payment pursuant 
to section 5000C and Sec. Sec.  1.5000C-1 through 1.5000C-7 exceeds the 
contracting party's tax liability under Sec.  1.5000C-1, regardless of 
whether the overwithholding was in error or appeared correct when it 
occurred. A U.S. person may seek a refund under this paragraph (e) even 
if it was treated as a foreign person under the rules in Sec.  1.5000C-
2 (for example, because it neither had a taxpayer identification number 
on file in the System for Award Management nor submitted Form W-9, 
``Request for Taxpayer Identification Number (TIN) and Certification,'' 
to the acquiring agency).


Sec.  1.5000C-5  Anti-abuse rule.

    If a foreign person engages in a transaction (or series of 
transactions) with a principal purpose of avoiding the tax imposed 
under section 5000C, the transaction (or series of transactions) may be 
disregarded or the arrangement may be recharacterized (including 
disregarding an intermediate entity), in accordance with its substance. 
If this section applies, the foreign person remains liable for any tax 
(including any tax obligation unsatisfied as a result of 
underwithholding) and the Internal Revenue Service retains all other 
rights and remedies under any applicable law available to collect any 
tax imposed on the foreign contracting party by section 5000C.


Sec.  1.5000C-6  Examples.

    The rules of Sec. Sec.  1.5000C-1 through 1.5000C-4 are illustrated 
by the following examples. For purposes of the examples: all contracts 
are executed with acquiring agencies on or after January 2, 2011, and 
are for the provision of either goods or services; none of the 
contracts are for emergency acquisitions described in Sec.  1.5000C-
1(d)(2); the acquiring agencies have no other withholding obligations 
under chapter 3 of the Code and have no other contracts subject to 
section 5000C; the foreign contracting parties do not have any U.S. 
source income or a U.S. tax return filing obligation other than a tax 
return filing obligation that arises based on the facts described in 
the particular example; and none of the contracts are classified 
contracts as described in section 6050M(e)(3).

    Example 1. U.S. person not subject to tax; no withholding. (i) 
Facts. Company A Inc., a U.S. corporation and the contracting party,

[[Page 22464]]

enters into a contract with Agency L, the acquiring agency. Before 
making its first payment under the contract (for example, on the 
date of execution of the contract), pursuant to the first step in 
Sec.  1.5000C-2(b) Agency L determines that the contract will be for 
services. Under the second step, Agency L reviews Company A Inc.'s 
record in the System for Award Management (SAM) and determines that 
Company A is a corporation and is considered to be a U.S. person 
because Agency L's records demonstrate that Company A Inc. is a 
business entity treated as a corporation for tax purposes that has a 
TIN that does not begin with ``98.''
    (ii) Analysis. Company A Inc. is a U.S. person and thus is not 
subject to the tax under section 5000C. Moreover, because Company A 
Inc. is a corporation for tax purposes that has a TIN that does not 
begin with ``98,'' Agency L is able to determine that it has no 
obligation to withhold any amounts under section 5000C on the 
payment made to Company A Inc. For purposes of section 5000C, 
Company A Inc. could also establish that it is a U.S. person by 
providing a Form W-9, ``Request for Taxpayer Identification Number 
(TIN) and Certification,'' to Agency L. Company A Inc. does not need 
to file a Section 5000C Certificate to demonstrate its eligibility 
for an exemption from withholding.
    Example 2. Foreign national entitled to the benefit of a 
nondiscrimination provision of a treaty; no withholding. (i) Facts. 
Company B, a foreign contracting party and a national of Country T, 
provides goods to Agency M, the acquiring agency. Company B 
determines that it is exempt from tax under section 5000C because it 
is entitled to the benefit of the nondiscrimination article of a 
qualified income tax treaty between the United States and Country T. 
Company B submits a Section 5000C Certificate to Agency M when the 
contract is executed. Company B uses the model Section 5000C 
Certificate and properly fills out Sections II and IV stating the 
name of the treaty, the specific article relied upon, and the basis 
on which it is entitled to the benefits of that article. Following 
the steps in Sec.  1.5000C-2, Agency M determines that the 
nondiscrimination provision of the Country T-United States income 
tax treaty applies to exempt Company B from the tax imposed under 
section 5000C. Agency M makes one lump sum payment of $50 million to 
Company B pursuant to the contract.
    (ii) Analysis. Company B has no liability for tax under section 
5000C because it is entitled to the benefit of a nondiscrimination 
article of a qualified income tax treaty. Because Company B 
submitted a Section 5000C Certificate meeting the requirements in 
Sec.  1.5000C-2 and Agency M does not have reason to know that the 
submitted information is incorrect or unreliable, Agency M is not 
required to withhold under section 5000C. Agency M must retain the 
Section 5000C Certificate for at least three years pursuant to Sec.  
1.5000C-3(c)(1).
    Example 3. Foreign treaty beneficiary does not submit Section 
5000C Certificate; withholding required. (i) Facts. The facts are 
the same as in Example 2, except that Company B does not submit a 
Section 5000C Certificate to Agency M before Agency M makes the $50 
million payment.
    (ii) Analysis. Company B is not subject to tax under section 
5000C, but Agency M must nevertheless withhold on the payment made 
to Company B because Agency M did not receive a Section 5000C 
Certificate from Company B in the time and manner required pursuant 
to Sec.  1.5000C-2(d). Agency M must withhold $1 million (2 percent 
of $50 million) on the payment, and deposit that amount under the 
rules in Sec.  1.5000C-3 no later than the 15th day of the month 
following the month in which the payment was made. Agency M must 
also complete Forms 1042, ``Annual Withholding Tax Return for U.S. 
Source Income of Foreign Persons,'' and 1042-S, ``Foreign Person's 
U.S. Source Income Subject to Withholding,'' on or before the date 
specified on those forms and the accompanying instructions. Agency M 
must furnish copies of Form 1042-S to Company B. Agency M must 
retain a copy of the Form 1042 and the Form 1042-S for 3 years from 
the due date for the Form 1042 pursuant to Sec.  1.5000C-3(c)(1). As 
Company B is not liable for the tax, it may later file a claim for 
refund pursuant to the procedures described in chapter 65.
    Example 4. Foreign contracting party partially exempt from tax 
under section 5000C when goods are manufactured in different 
countries. (i) Facts. Company C, a foreign contracting party, 
provides goods to Agency N in 2015. The terms of the contract 
require that payment be made to Company C by Agency N in two $5 
million installments in 2015. Company C has a TIN that begins with 
``98'' and is not entitled to relief pursuant to an international 
agreement with the United States, such as relief pursuant to a 
nondiscrimination provision of a qualified income tax treaty. Some 
of the goods are manufactured in Country R, which is a party to an 
international procurement agreement with the United States, with the 
remainder being manufactured in Country S, a country that is not a 
party to an international procurement agreement with the United 
States. Company C uses a reasonable allocation method based on the 
information available to it at the time in accordance with Sec.  
1.5000C-1(e)(3) to estimate that $3 million is the nonexempt amount 
produced in Country S. Company C submits a valid and complete 
Section 5000C Certificate to Agency N in the time and manner 
required by Sec. Sec.  1.5000C-1 through 1.5000C-7 that provides 
that the nonexempt amount is $3 million. In 2015, Agency N pays 
Company C in two installments pursuant to the terms of the contract.
    (ii) Analysis. Using a reasonable allocation method to determine 
the estimated nonexempt amount, Company C determines that pursuant 
to section 5000C and Sec. Sec.  1.5000C-1 through 1.5000C-7, tax of 
$30,000 (2 percent of the $5 million payment, multiplied by a 
fraction (the numerator of which is the estimated nonexempt amount, 
$3 million, and the denominator of which is the estimated total 
contract price, or $10 million)) is imposed on each payment made to 
Company C. Because Company C has timely submitted a Section 5000C 
Certificate explaining the basis for this allocation, Agency N 
withholds $30,000 on each payment made to Company C. Agency N must 
deposit each $30,000 withholding tax no later than the 15th day of 
the month following the month in which each payment is made. Agency 
N must also complete Forms 1042 and 1042-S and furnish copies of 
Form 1042-S to Company C. Provided that Agency N properly withholds 
on the nonexempt portion as required under section 5000C and 
Sec. Sec.  1.5000C-1 through 1.5000C-7 and that Company C's estimate 
of the nonexempt amount is the actual nonexempt amount, Company C 
does not have an additional tax liability or a U.S. tax return 
filing obligation as a result of receiving the payment.
    Example 5. Foreign contracting party liable for additional tax 
under Section 5000C not fully withheld upon due to errors on the 
Section 5000C Certificate. (i) Facts. The facts are the same as in 
Example 4, except that the Section 5000C Certificate submitted to 
Agency N by Company C erroneously provides that the estimated 
nonexempt amount is $1.5 million instead of $3 million. As a result, 
Agency N only withholds $15,000 (2 percent of the $5 million payment 
multiplied by a fraction (the numerator of which is the estimated 
nonexempt amount stated on the Section 5000C Certificate, $1.5 
million, and the denominator of which is the estimated total 
contract price, or $10 million)) on each payment made to Company C. 
Agency N neither discovered nor had reason to know that the 
information on the Section 5000C Certificate was incorrect or 
unreliable. After both payments have been made and after the filing 
due date for Form 1042 for 2015, Company C determines that the 
estimated nonexempt amount should have been stated as $3 million on 
the Section 5000C Certificate.
    (ii) Analysis. The tax imposed under section 5000C on Company C 
as a result of the receipt of specified Federal procurement payments 
is $60,000 and this amount has not been fully satisfied by 
withholding by Agency N. Accordingly, Company C must remit 
additional tax of $30,000 ($60,000 tax liability less $30,000 
amounts already withheld by Agency N) and file its required return, 
a Form 1120-F, ``U.S. Income Tax Return of a Foreign Corporation,'' 
for 2015 to report this tax liability, as required by Sec.  1.5000C-
4. Company C must explain its corrected allocation method in its 
Form 1120-F. Company C must also attach a copy of the Form 1042-S it 
received from Agency N to Form 1120-F.

Sec.  1.5000C-7  Effective/applicability date.

    Section 5000C applies to specified Federal procurement payments 
received pursuant to contracts entered into on and after January 2, 
2011. Sections 1.5000C-1 through 1.5000C-7 apply on and after the date 
that is 90 days after the date they are published as final regulations 
in the Federal Register.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805 * * *

[[Page 22465]]

0
Par. 6. Section 301.6114-1 is amended by adding paragraph (c)(1)(ix) 
and revising paragraph (e) to read as follows:


Sec.  301.6114-1  Treaty-based return positions.

* * * * *
    (c) * * *
    (1) * * *
    (ix) Notwithstanding paragraph (b)(1) of this section, that a 
nondiscrimination provision of an income tax treaty exempts a payment 
from tax under section 5000C, but only if the foreign person claiming 
such relief has provided a Section 5000C Certificate (or such other 
form as may be prescribed by the Commissioner pursuant to section 
5000C) in accordance with section 5000C and the regulations thereunder.
* * * * *
    (e) Effective/applicability date--(1) In general. This section is 
effective for taxable years of the taxpayer for which the due date for 
filing returns (without extensions) occurs after December 31, 1988. 
However, if--
    (i) A taxpayer has filed a return for such a taxable year, without 
complying with the reporting requirement of this section, before 
November 13, 1989, or
    (ii) A taxpayer is not otherwise than by paragraph (a) of this 
section required to file a return for a taxable year before November 
13, 1989. Such taxpayer must file (apart from any earlier filed return) 
the statement required by paragraph (d) of this section before June 12, 
1990, by mailing the required statement to the Internal Revenue 
Service, P.O. Box 21086, Philadelphia, PA 19114. Any such statement 
filed apart from a return must be dated, signed and sworn to by the 
taxpayer under the penalties of perjury. In addition, with respect to 
any return due (without extensions) on or before March 10, 1990, the 
reporting required by paragraph (a) of this section must be made no 
later than June 12, 1990. If a taxpayer files or has filed a return on 
or before November 13, 1989, that provides substantially the same 
information required by paragraph (d) of this section, no additional 
submission will be required. Foreign insurers and reinsurers subject to 
reporting described in paragraph (c)(7)(ii) of this section must so 
report for calendar years 1988 and 1989 no later than August 15, 1990.
    (2) Section 5000C. Paragraph (c)(1)(ix) of this section is 
effective on the date that is 90 days after the date these regulations 
are published as final regulations in the Federal Register. However, a 
foreign contracting party may rely on Sec. Sec.  1.5000C-1 through 
1.5000C-7 before that date.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 7. The authority citation for part 602 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 8. In Sec.  602.101, paragraph (b) is amended by adding entries in 
numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR Part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.5000C-2...............................................       1545-xxxx
1.5000C-3...............................................       1545-xxxx
1.5000C-4...............................................       1545-xxxx
 
                                * * * * *
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John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-09383 Filed 4-20-15; 4:15 pm]
 BILLING CODE 4830-01-P