Tax on Certain Foreign Procurement, 55133-55146 [2016-19452]

Download as PDF rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations assumption of responsibility, hold harmless, and indemnification, as set forth in paragraphs 2(a) and 3(a), respectively, to its Contractors and Subcontractors by requiring them to waive and release all claims they may have against each Customer, the United States, any Part 440 Customer, and each of their respective Contractors and Subcontractors, and to agree to be responsible, for Property Damage they sustain and to be responsible, hold harmless and indemnify each Customer, the United States, any Part 440 Customer, and each of their respective Contractors and Subcontractors, for Bodily Injury or Property Damage sustained by their own employees, resulting from Permitted Activities, regardless of fault. (b) Each Customer shall extend the requirements of the waiver and release of claims, and the assumption of responsibility, hold harmless, and indemnification, as set forth in paragraphs 2(b) and 3(a), respectively, to its customers, Contractors, and Subcontractors, by requiring them to waive and release all claims they may have against Permittee, the United States, any other customer, and each of their respective Contractors and Subcontractors, and to agree to be responsible, for Property Damage they sustain and to be responsible, hold harmless and indemnify Permittee, the United States, any other customer, and each of their respective Contractors and Subcontractors, for Bodily Injury or Property Damage sustained by their own employees, resulting from Permitted Activities, regardless of fault. (c) The United States shall extend the requirements of the waiver and release of claims, and the assumption of responsibility as set forth in paragraphs 2(c) and 3(b), respectively, to its Contractors and Subcontractors by requiring them to waive and release all claims they may have against Permittee, each Customer, any Part 440 Customer, and each of their respective Contractors and Subcontractors, and to agree to be responsible, for any Property Damage they sustain and for any Bodily Injury or Property Damage sustained by their own employees, resulting from Permitted Activities, regardless of fault, to the extent that claims they would otherwise have for such damage or injury exceed the amount of insurance or demonstration of financial responsibility required under § 440.9(c) and (e), respectively, of the Regulations. 5. Indemnification (a) Permittee shall hold harmless and indemnify each Customer and its directors, officers, servants, agents, subsidiaries, employees and assignees, or any of them; the United States and its agencies, servants, agents, subsidiaries, employees and assignees, or any of them; and any Part 440 Customer and its directors, officers, servants, agents, subsidiaries, employees and assignees, or any of them, from and against liability, loss or damage arising out of claims that Permittee’s Contractors and Subcontractors may have for Property Damage sustained by them and for Bodily Injury or Property Damage sustained by their employees, resulting from Permitted Activities and arising out of the indemnifying VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 party’s failure to implement properly the waiver requirement. (b) Each Customer shall hold harmless and indemnify Permittee and its directors, officers, servants, agents, subsidiaries, employees and assignees, or any of them; the United States and its agencies, servants, agents, subsidiaries, employees and assignees, or any of them; and any other customer and its directors, officers, servants, agents, subsidiaries, employees and assignees, or any of them, from and against liability, loss or damage arising out of claims that each Customer’s Contractors, Subcontractors, and customers, may have for Property Damage sustained by them and for Bodily Injury or Property Damage sustained by their employees, resulting from Permitted Activities and arising out of the indemnifying party’s failure to implement properly the waiver requirement. 6. Assurances Under 51 U.S.C. 50914(e) Notwithstanding any provision of this Agreement to the contrary, Permittee shall hold harmless and indemnify the United States and its agencies, servants, agents, employees and assignees, or any of them, from and against liability, loss or damage arising out of claims for Bodily Injury or Property Damage, resulting from Permitted Activities, regardless of fault, except to the extent that: (i) As provided in paragraph 7(b) of this Agreement, claims result from willful misconduct of the United States or its agents; (ii) claims for Property Damage sustained by the United States or its Contractors and Subcontractors exceed the amount of insurance or demonstration of financial responsibility required under § 440.9(e) of the Regulations; (iii) claims by a Third Party for Bodily Injury or Property Damage exceed the amount of insurance or demonstration of financial responsibility required under § 440.9(c) of the Regulations, and do not exceed $1,500,000,000 (as adjusted for inflation after January 1, 1989) above such amount, and are payable pursuant to the provisions of 51 U.S.C. 50915 and § 440.19 of the Regulations; or (iv) Licensee has no liability for claims exceeding $1,500,000,000 (as adjusted for inflation after January 1, 1989) above the amount of insurance or demonstration of financial responsibility required under § 440.9(c) of the Regulations. 7. Miscellaneous (a) Nothing contained herein shall be construed as a waiver or release by Permittee, any Customer or the United States of any claim by an employee of the Permittee, any Customer or the United States, respectively, including a member of the Armed Forces of the United States, for Bodily Injury or Property Damage, resulting from Permitted Activities. (b) Notwithstanding any provision of this Agreement to the contrary, any waiver, release, assumption of responsibility or agreement to hold harmless and indemnify herein shall not apply to claims for Bodily Injury or Property Damage resulting from willful misconduct of any of the Parties, the Contractors and Subcontractors of any of the Parties, any Part 440 Customer, the Contractors and Subcontractors of any Part 440 Customer, and in the case of Permittee, PO 00000 Frm 00023 Fmt 4700 Sfmt 4700 55133 each Customer, any Part 440 Customer, and the Contractors and Subcontractors of each of them, the directors, officers, agents and employees of any of the foregoing, and in the case of the United States, its agents. (c) References herein to Customer shall apply to, and be deemed to include, each such customer severally and not jointly. (d) This Agreement shall be governed by and construed in accordance with United States Federal law. In witness whereof, the Parties to this Agreement have caused the Agreement to be duly executed by their respective duly authorized representatives as of the date written above. Permittee By: lllllllllllllllllll Its: lllllllllllllllllll Customer 1 By: lllllllllllllllllll Its: lllllllllllllllllll [Signature lines for each additional customer] Federal Aviation Administration of the Department of Transportation on Behalf of the United States Government By: lllllllllllllllllll Its: lllllllllllllllllll Issued under authority provided by 49 U.S.C. 106(f), 44701(a), and 44703 in Washington, DC, on July 25, 2016. Michael P. Huerta, Administrator. [FR Doc. 2016–18765 Filed 8–17–16; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 301, and 602 [TD 9782] RIN 1545–BK06 Tax on Certain Foreign Procurement Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. AGENCY: This document contains final 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 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 final regulations under section 6114, with respect to foreign persons claiming an exemption from the 2 percent tax under an income tax treaty. DATES: Effective Date: These regulations are effective on August 18, 2016. SUMMARY: E:\FR\FM\18AUR1.SGM 18AUR1 55134 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations Explanation and Summary of Comments Applicability Date: For dates of applicability, see § 1.5000C–7 and § 301.6114–1(e)(2). FOR FURTHER INFORMATION CONTACT: Kate rmajette on DSK2TPTVN1PROD with RULES Hwa at (202) 317–6934, and for questions related to tax treaties and the regulations under section 6114, Rosy Lor at (202) 317–6933, (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background 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 Internal Revenue Code (Code). Section 5000C(a) imposes on any foreign person that receives a specified Federal procurement payment a tax equal to 2 percent of the amount such payment. Section 5000C(b) defines the term specified Federal procurement payment as any payment made pursuant to a contract with the Government of the United States (U.S. government) for goods or services if the goods are manufactured or produced or the services are provided in any country that is not a party to an international procurement agreement with the United States. 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)(c) of the Act states that this section must be applied in a manner consistent with U.S. obligations under international agreements. 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. On April 22, 2015, the Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) published in the Federal Register (80 FR 22449) a notice of proposed rulemaking (REG–103281–11) (NPRM) under sections 5000C and 6114 (the proposed regulations). The regulations set forth a number of exemptions from the tax and provided procedures for collecting the tax. Notice 2015–35, 2015–18 I.R.B. 943, issued contemporaneously with the proposed regulations, provided a list of income tax treaties in effect that prevented the imposition of the tax. No public hearing was requested or held. Written comments on the proposed regulations were received and are available at www.regulations.gov or upon request. After consideration of the comments, the proposed regulations are adopted as amended by this Treasury decision. The revisions are discussed below. VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 1. Payments by Contracting Parties to Subcontractors A commenter asked for clarification that the proposed regulations apply only to payments made by the U.S. government to direct (prime) contractors with the U.S. government, and not to payments made by prime contractors pursuant to subcontracts. Consistent with the proposed regulations, the final regulations provide section 5000C imposes the tax on any foreign contracting party, which means a foreign person that is a party to a contract with the U.S. government that was entered into on or after January 2, 2011. Therefore, the final regulations do not generally impose the tax on a subcontractor that is not party to a contract with the U.S. government. For example, if an acquiring agency contracts with a domestic corporation (prime contractor) for goods or services, and the prime contractor separately contracts with a foreign subcontractor for goods and services to be provided under the contract, section 5000C will not ordinarily apply to payments by the prime contractor to its foreign subcontractor that relate to those goods or services. However, the activities of a subcontractor are taken into account when determining the country in which goods are manufactured or produced or in which services are provided under § 1.5000C–1(e). Furthermore, the final regulations retain the rules in the proposed regulations that payments received by a nominee or agent on behalf of a contracting party are considered to be received by that contracting party. For the definition of a contracting party, see § 1.5000C– 1(c)(4). The final regulations also retain the anti-abuse rule in § 1.5000C–5 that in certain circumstances may treat a subcontractor that is a foreign person as being liable for tax under section 5000C. 2. Exemption for Certain Foreign Humanitarian Assistance Contracts The United States Agency for International Development (USAID) regularly enters into contracts with foreign persons for goods and services for purposes of implementing USAID’s development projects and programs in a host country. The proposed regulations do not provide relief from the tax under section 5000C for payments made pursuant to some of these contracts. The Treasury Department and the IRS have concluded that it is appropriate to exempt from the tax payments made to foreign contracting parties that USAID PO 00000 Frm 00024 Fmt 4700 Sfmt 4700 engages to execute its development projects and programs in a host country. In this context, the U.S. government is not procuring goods and services for its own benefit, but rather to provide humanitarian assistance for the benefit of the host countries. As a result, the final regulations add an exemption under which section 5000C does not apply to a contract for the purpose of obtaining goods or services described in or authorized under certain specified statutes that are for the purpose of providing foreign humanitarian assistance when the acquiring agency determines that the payment is for the purpose of providing foreign humanitarian assistance. This exemption generally applies to a contract entered into by an acquiring agency with a foreign contracting party to obtain goods or services for purposes of implementing an agreement between the United States and a foreign country or a group of countries to provide foreign humanitarian assistance as authorized under the Food for Peace Act (7 U.S.C. 1691, et seq.) and the Foreign Assistance Act of 1961 (22 U.S.C. 2151, et seq.). Similarly, this exemption also generally applies to contacts providing foreign humanitarian assistance under the Migration and Refugee Assistance Act of 1962 (22 U.S.C. 2601 et seq.), the Freedom Support Act of 1992 (22 U.S.C. 5801 et seq.), and the SEED Act of 1989 (22 U.S.C. 5401 et seq.), and to transportation of humanitarian relief supplies to foreign countries described in 10 U.S.C. 402, foreign disaster assistance described in 10 U.S.C. 404, humanitarian demining assistance described in 10 U.S.C. 407, excess nonlethal supplies for humanitarian relief purposes described in 10 U.S.C. 2557, and transportation of humanitarian relief and for other humanitarian purposes described in 10 U.S.C. 2561. See § 1.5000C–1(d)(4). A corresponding change is made to the withholding rules to take into account this exemption. See § 1.5000C–2(b)(6). 3. Procurement Not Pursuant to the Federal Acquisition Regulations A commenter noted that it was unclear whether payments by acquiring agencies under contracts that are not entered into pursuant to the Federal Acquisition Regulations (FAR) are subject to tax under section 5000C. The FAR is the body of rules that generally governs acquisitions and contracting procedures for federal agencies. See 48 CFR Chapter 1. Although the final regulations utilize certain concepts and definitions contained in the FAR, neither the Act nor the final regulations E:\FR\FM\18AUR1.SGM 18AUR1 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES are limited to contracts executed pursuant to the FAR. Thus, while the term ‘‘contract’’ in the proposed and final regulations uses the FAR definition of the term ‘‘contract’’, it can nevertheless include a contract that is not executed under the FAR. A sentence was added to the definition of contract in the final regulations to clarify this point. 4. Definition of International Procurement Agreement and Least Developed Countries The General Explanation of Tax Legislation prepared by the Staff of the Joint Committee on Taxation accompanying section 5000C explains that parties engaged in cross-border transactions are required to comply with relevant trade agreements of the jurisdictions in which they operate. See Staff of the Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 111th Congress (JCS–2–11), at 694, March 16, 2011 (Joint Committee Explanation). In describing these obligations, the Joint Committee Explanation listed the Government Procurement Agreement (GPA) that is an annex to the World Trade Organization agreement, as well as the government procurement obligations of U.S. free trade agreements. Id. Accordingly, the proposed regulations defined the term international procurement agreement as the World Trade Organization GPA (WTO GPA) 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. One commenter noted that the FAR provides that eligible products from WTO GPA and free trade agreement countries are entitled to certain nondiscriminatory treatment, and that 48 CFR 25.404 expands this nondiscriminatory treatment to include least developed countries described in 48 CFR 25.400(a)(3). The commenter requested that the final regulations also expand the definition of international procurement agreement to include goods manufactured or produced or services provided in a least developed country. The final regulations do not adopt this comment for two reasons. First, the proposed regulations referred to 48 CFR 25.400(a)(1) in order to utilize a term that was widely understood in the context of government procurement but was not intended to incorporate any related provisions of the FAR. Second, VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 the Joint Committee Explanation indicates that Congress intended the exemption under section 5000C(b) related to international procurement agreements to be limited to signatories of free trade agreements with government procurement obligations or procurement agreements. 5. Definition of International Agreements Section 301(c) of the Act requires that section 5000C be applied in a manner consistent with the United States’ obligations under international agreements. A commenter indicated that the proposed regulations limit international agreements that may affect the application of section 5000C to income tax treaties and requested that final regulations include other international agreements that may impact taxation. In particular, the commenter indicated that the Vienna Convention on Consular Relations and bilateral framework agreements negotiated and administered by USAID contain tax provisions. The final regulations do not adopt this request. The specific international agreements to which the commenter referred prohibit host country taxation of expenditures of a U.S. consulate or amounts provided through USAID programs but do not limit the United States’ taxing rights. Consequently, these international agreements do not provide relief from the tax imposed under section 5000C. Furthermore, in identifying the income tax treaties that provide relief from the tax under section 5000C, the regulations do not preclude a foreign contracting party from claiming relief from the tax under any other applicable international agreement. 6. Simplified Acquisition Threshold The proposed regulations provide that 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 in 48 CFR 2.101. One commenter recommended that the determination of the $150,000 simplified acquisition threshold should be computed on an annual basis rather than on a contract-by-contract basis. The final regulations do not adopt this suggestion because the Treasury Department and the IRS have determined that it is generally more administrable to make a determination of the threshold amount when entering into a particular contract. However, as described in 7. Personal Service Contacts of this preamble, this PO 00000 Frm 00025 Fmt 4700 Sfmt 4700 55135 suggestion has been adopted in the limited context of personal service contracts. 7. Personal Service Contracts A commenter requested a new exemption from the tax for service contracts entered into with individuals (personal service contracts). The commenter further stated that some acquiring agencies do not use the FAR to procure personal services from individuals. As such, the commenter stated that these personal service contracts do not fall within the simplified acquisition procedures of the FAR but typically are for an amount less than $150,000 per contract. The commenter also suggested that the threshold amount of personal service contracts with individuals would be more appropriately determined on an annual (rather than a per contract) basis. Section 5000C applies to contracts for the provision of services, so the final regulations do not provide an exemption for all personal service contracts. However, the Treasury Department and the IRS have decided that it is appropriate to extend the simplified acquisition exemption to personal service contracts, whether or not they are not executed pursuant to the FAR. Further, the Treasury Department and the IRS agree with the comment that when applying this exemption, the amount paid for personal services under the contracts should be determined on an annual basis. Accordingly, the final regulations provide an exemption in § 1.5000C– 1(d)(3) for payments for services provided by, and under contracts with, a single individual in which the payments do not exceed on an annual basis the simplified acquisition threshold as described in 48 CFR 2.101 for all years of the contract. A corresponding change is made to the withholding rules to take into account this exemption. See § 1.5000C–2(b)(5). 8. Definition of Emergency Acquisition Proposed § 1.5000C–1(d)(2) exempts payments pursuant to contracts awarded for certain emergency acquisitions. One commenter suggested that this exemption be broadened to include contracts that involve other agency acquisitions of importance to the government, such as contracts for acquisitions determined to be in the national interest by the acquiring agency. The final regulations do not adopt this comment for two reasons. First, the Treasury Department and the IRS have concluded that the more limited exemption in the proposed regulations appropriately balances E:\FR\FM\18AUR1.SGM 18AUR1 55136 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations compliance with section 5000C with the government’s need to procure goods and services in certain emergency situations. Second, the commenter’s suggestion would introduce a subjective, potentially overbroad exemption from the tax imposed by section 5000C. 9. Credit Card Payments One commenter requested a new exemption from the section 5000C tax for payments made with a credit card. The commenter indicated that applying the section 5000C tax to payments made with a credit card would be difficult to administer because of the volume of these transactions. The final regulations do not adopt this suggestion for several reasons. First, in most cases, payments made with a credit card will be in an amount that will fall within the exemption for payments for simplified acquisitions, which applies to purchases under the simplified acquisition procedures described in the FAR that do not exceed the simplified acquisition threshold as described in 48 CFR 2.101. See § 1.5000C–1(d)(1). Second, in cases in which payments made with a credit card do not meet the exemption for simplified acquisitions, adopting this comment would allow foreign contracting parties to avoid the tax by receiving payment with a credit card for large amounts that should be subject to the tax. rmajette on DSK2TPTVN1PROD with RULES 10. Payments Only in Part for Goods or Services A commenter indicated that, in some circumstances, a contract may be for goods or services but also include payments that are not for goods or services, giving as an example payments to reimburse taxes incurred by the contracting party. In response to the comment, the withholding steps in the final regulations clarify that acquiring agencies should not withhold to the extent that a payment is for something other than goods or services. See § 1.5000C–2(b)(1). However, this clarification should not be read to mean that payments to reimburse taxes incurred by the contracting party in providing goods or services are anything other than payments for those goods or services. 11. Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments’’ The proposed regulations provided that a foreign contracting party must submit a ‘‘Section 5000C Certificate’’ that provides all of the information required by the proposed regulations to claim an exemption from section 5000C. VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 The proposed regulations also contained a model Section 5000C Certificate. Simultaneous with the publication of the final regulations, the IRS is publishing Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments,’’ which may be used as the Section 5000C Certificate. Accordingly, the final regulations do not contain a model Section 5000C Certificate but rather provide that a foreign person may use Form W–14 as its Section 5000C Certificate provided that it includes all the necessary information. See §§ 1.5000C–1(c)(14) and 1.5000C– 2(d)(7). Notice 2015–35 listed the countries that had entered into qualified income tax treaties with the United States as of the date of its publication. The instructions to Form W–14, issued contemporaneously with the publication of these final regulations, identify income tax treaties in force, as of the date of the issuance of the form, that are qualified income tax treaties. When new income tax treaties come into force, foreign persons and acquiring agencies should review IRS Forms, Instructions, Publications or other media (including www.irs.gov) for an updated list of qualified income tax treaties, rather than Notice 2015–35. 12. Change in Circumstances Section 1.5000C–2(d)(6) provides that 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. One commenter suggested that an example would be helpful to illustrate this rule. In response to this comment, an example was added to illustrate the withholding obligation of an acquiring agency when it receives a revised Section 5000C Certificate due to a change in circumstances. See § 1.5000C–6, Example 6. 13. Effective Date of Section 5000C and the Final Regulations Comments recommended that the final regulations delay the applicability of the tax imposed by section 5000C to contracts entered into on or after the date of the publication of the final regulations. Alternatively, one commenter recommended that the final regulations delay the applicability of the tax until the issuance of final amendments to the FAR as promulgated PO 00000 Frm 00026 Fmt 4700 Sfmt 4700 by the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA), if any, that may take into account these final regulations. This commenter reasoned that a delay in the application of the final regulations would allow the necessary time needed to amend the FAR in order to take into account the rules provided in the final regulations. While the DoD, GSA, and NASA have amended some sections of the FAR to reflect the enactment of section 5000C (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)), commenters stated that other sections of the FAR (such as CFR 52.229–3) will also need to be amended. Section 301(a)(3) of the Act specifically provides that the tax imposed by section 5000C applies to payments received pursuant to contracts entered into on and after January 2, 2011, indicating a clear Congressional intent as to the effective date. Further, the Act does not require Treasury regulations or FAR amendments to be applicable before the requirements of the statute take effect. Thus, the final regulations do not adopt this comment and confirm the statutory effective date. Consistent with the proposed regulations, the final regulations apply on and after the date that is 90 days after the date they are published as final regulations in the Federal Register (applicability date). However, contracting parties and acquiring agencies may rely upon the rules in the final regulations before the applicability date. Under the Act, while acquiring agencies have an obligation to withhold, the foreign contracting parties remain liable for the tax if withholding does not fully satisfy the foreign person’s tax liability. The Treasury Department and the IRS are aware that some foreign persons subject to statutory obligations under section 5000C may have deferred compliance actions pending the applicability of the final regulations. The Treasury Department and the IRS have concluded that 90 days is sufficient for these foreign persons to satisfy their tax and filing obligations with respect to section 5000C for prior periods. Accordingly, § 1.5000C–7 provides that if a foreign contracting party fully satisfies its tax and filing obligations under section 5000C with respect to any payments received in tax years ending before the applicability date of the regulations on or before the later of the applicability date of the final regulations or the due date for the foreign person’s income tax return for the year in which the payment was E:\FR\FM\18AUR1.SGM 18AUR1 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES received in a manner consistent with the final regulations, penalties will not be asserted on the foreign contracting parties with respect to those payments or returns. For example, assume a foreign corporation received a single specified Federal procurement payment during its tax year ending on December 31, 2013 that is not described in any of the exemptions in these final regulations, and the payment was not withheld upon. If the corporation files Form 1120–F, ‘‘U.S. Income Tax Return of a Foreign Corporation,’’ for 2013 and pays the tax imposed under section 5000C in the manner described in § 1.5000C–4(d) before the applicability date of the final regulations, penalties will not be asserted with respect to that payment or return. However, the final regulations do not relieve a foreign person of any applicable rules relating to interest under Subtitle F. Additionally, for purposes of section 6114 and the regulations thereunder, if a foreign contracting party has received a payment exempt from tax under a qualified income tax treaty before the effective date of the final regulations under section 5000C, reporting is waived if the foreign contracting party has properly relied on Notice 2015–35. See § 301.6114–1(e)(2). Special Analyses Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. It has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to this regulation. It is hereby certified that the collection of information contained in this regulation will not have a significant economic impact on a substantial number of small entities. Accordingly, a regulatory flexibility analysis is not required. The collection of information requirement in the 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, in part because the final regulations provide exemptions for simplified acquisitions and for certain personal service contracts. Because section 5000C(a) applies to foreign persons regardless of the size of the entity, a limited number of small foreign entities that received specified Federal procurement payments are affected by the regulation. Pursuant to section 7805(f) of the Internal Revenue Code, the NPRM preceding these regulations was submitted to the Chief Counsel for VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal authors of these regulations are Kate Hwa and Rosy Lor, Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR 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. Adoption of Amendments to the Regulations Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows: PART I—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Section 1.5000C–1 is also issued under 26 U.S.C. 5000C Section 1.5000C–2 is also issued under 26 U.S.C. 5000C Section 1.5000C–3 is also issued under 26 U.S.C. 5000C Section 1.5000C–4 is also issued under 26 U.S.C. 5000C Section 1.5000C–5 is also issued under 26 U.S.C. 5000C Section 1.5000C–6 is also issued under 26 U.S.C. 5000C Par. 2. An undesignated center heading is added following § 1.5000A– 5 to read as follows: ■ Tax on Certain Foreign Procurement Par. 3. Section 1.5000C–0 is added after the undesignated center heading to read as follows: ■ § 1.5000C–0 Outline of regulation provisions for section 5000C. This section lists the captions contained in §§ 1.5000C–1 through 1.5000C–7. § 1.5000C–1 Tax on specified Federal procurement payments. (a) Overview. PO 00000 Frm 00027 Fmt 4700 Sfmt 4700 55137 (b) Imposition of tax. (c) Definitions. (d) Exemptions. (1) Simplified acquisitions. (2) Emergency acquisitions. (3) Certain personal service contracts. (4) Certain foreign humanitarian assistance contracts. (5) Certain international agreements. (6) Goods manufactured or produced or services provided in the United States. (7) 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. § 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 payment is for personal services under the simplified acquisition threshold. (6) Determine whether the payment is pursuant to a foreign humanitarian assistance contract. (7) Determine whether the foreign contracting party is entitled to relief pursuant to an international agreement. (8) 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. (9) Compute amounts to withhold. (10) 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. E:\FR\FM\18AUR1.SGM 18AUR1 55138 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations (5) Validity period of Section 5000C Certificate. (6) Change in circumstances. (7) Form W–14. (8) Time for submitting Section 5000C Certificate. (e) Offset for underwithholding or overwithholding. (1) In general. (2) Underwithholding. (3) Overwithholding. § 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 or confidential contracts. (d) Special arrangement for certain contracts. § 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. § 1.5000C–5 Anti-abuse rule. § 1.5000C–6 Examples. § 1.5000C–7 Effective/applicability date. Par. 4. Sections 1.5000C–1 through 1.5000C–7 are added to read as follows: ■ rmajette on DSK2TPTVN1PROD with RULES § 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 that apply to 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 VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 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 §§ 1.5000C–1 through 1.5000C–4. Finally, § 1.5000C–7 contains the effective/applicability date for §§ 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 §§ 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 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. A contract may include an agreement that is not executed under the Federal Acquisition Regulations (FAR), 48 CFR Chapter 1. (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. See § 1.5000C–1(b) for situations involving a nominee or agent. (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 PO 00000 Frm 00028 Fmt 4700 Sfmt 4700 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 quasigovernmental 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. E:\FR\FM\18AUR1.SGM 18AUR1 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations (14) The term Section 5000C Certificate means a written statement that includes the information described in § 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 may also include any form that the Internal Revenue Service may prescribe as a substitute for the Section 5000C Certificate, such as Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments.’’ (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)(5), (6) and (7) of this section, see § 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. Payments 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 personal service contracts. Payments for services provided by, and under contracts with, a single individual in which the payments do not (and will not) exceed on an annual calendar year basis the simplified acquisition threshold as described in 48 CFR 2.101 for all years of the contract. VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 Payments that satisfy this exemption remain exempt if the contract is later renegotiated so that future payments under the contract do not meet this exemption. (4) Certain foreign humanitarian assistance contracts. Payments made by the U.S. government pursuant to a contract with a foreign contracting party to obtain goods or services described in or authorized under 7 U.S.C. 1691, et seq., 22 U.S.C. 2151, et seq., 22 U.S.C. 2601 et seq., 22 U.S.C. 5801 et seq., 22 U.S.C. 5401 et seq., 10 U.S.C. 402, 10 U.S.C. 404, 10 U.S.C. 407, 10 U.S.C. 2557, and 10 U.S.C. 2561, if the acquiring agency determines that the payment is for the purpose of providing foreign humanitarian assistance. (5) Certain international agreements. Payments made by the U.S. government pursuant to a contract with a foreign contracting party when the payments are 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. (6) 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. (7) 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 PO 00000 Frm 00029 Fmt 4700 Sfmt 4700 55139 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 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 § 1.5000C–2(d). § 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 §§ 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 § 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 E:\FR\FM\18AUR1.SGM 18AUR1 rmajette on DSK2TPTVN1PROD with RULES 55140 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations 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. To the extent that 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 other 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 § 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 payment is for personal services under the simplified acquisition threshold. The acquiring agency determines whether payments for services under contracts with a single individual do not exceed the simplified acquisition threshold as described in 48 CFR 2.101 on an annual basis for all years of the contract. If that is the case, the acquiring agency does not have an obligation to withhold under section 5000C on the payment. (6) Determine whether the payment is pursuant to a foreign humanitarian assistance contract. The acquiring agency determines whether the payment is made pursuant to a foreign humanitarian assistance contract described in § 1.5000C–1(d)(4). If it is, the acquiring agency does not have an VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 obligation to withhold under section 5000C on the payment. (7) 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. (8) 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)(8) of this section. (9) 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 or the payment is only in part for goods or services. In cases in which the Section 5000C Certificate demonstrates that the exemption in Step 8 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 8 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. In PO 00000 Frm 00030 Fmt 4700 Sfmt 4700 the case in which the payment is only in part for goods or services, the acquiring agency reduces the amount of the payment subject to the tax to the extent it is for something other than goods or services. The acquiring agency withholds the computed amount from the payment. (10) Deposit and report amounts withheld. The acquiring agency deposits and reports the amounts determined in the prior step in accordance with § 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. 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 § 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 E:\FR\FM\18AUR1.SGM 18AUR1 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations 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 does not 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 does not 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 does not 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 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 VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 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 § 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 § 1.5000C–5. (ii) Additional information required for claiming an exemption based on 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). PO 00000 Frm 00031 Fmt 4700 Sfmt 4700 55141 (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, must describe on the Section 5000C Certificate the relevant goods or services and the country (or countries) in which they are manufactured or produced, or are provided, and must 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 § 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 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, E:\FR\FM\18AUR1.SGM 18AUR1 rmajette on DSK2TPTVN1PROD with RULES 55142 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations 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. See § 1.5000C–6, Example 6, for an illustration of this paragraph (6). (7) Form W–14. A foreign contracting party may choose to use Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments’’ (or other form that the IRS may prescribe), as its Section 5000C Certificate, provided that it includes all the necessary information required by this paragraph (d). (8) Time for submitting Section 5000C Certificate. A contracting party must submit the Section 5000C Certificate (such as Form W–14 or Form W–9) 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 must be submitted to the acquiring agency no later than the date of execution of the contract. (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 VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 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 § 1.5000C–3. See § 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 § 1.5000C–4(e) for procedures for foreign contracting parties to file a claim for refund for the overwithheld amount under section 5000C. § 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 § 1.5000C–2. An acquiring agency with a section 5000C withholding obligation must increase the amount it deducts and PO 00000 Frm 00032 Fmt 4700 Sfmt 4700 withholds under chapter 3 for fixed or determinable annual or periodical income (FDAP income) by the amount it must withhold under § 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 § 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 § 1.5000C–2 as an additional amount of tax withheld under chapter 3 for purposes of the deposit rules of § 1.6302–2. Thus, depending on the combined amount withheld under chapter 3 and § 1.5000C–2, an acquiring agency subject to this paragraph (b)(1) must make monthly deposits, quartermonthly deposits, or annual deposits under the rules in § 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 § 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 § 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 § 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 § 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 E:\FR\FM\18AUR1.SGM 18AUR1 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations 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 the instructions for Form 1042–S and to the transmittal form. Section 5000C Certificates or other statements or information as prescribed by § 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 § 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 § 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 or confidential contracts. An acquiring agency is not required to report information otherwise required by this section on Form 1042– S for payments made pursuant to classified or confidential contracts (as described in section 6050M(e)(3)), unless the acquiring agency determines that the information reported on the VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 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. § 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 § 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 §§ 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 §§ 1.5000C–2 and 1.5000C–3. (c) Return of tax by the foreign contracting party. If the tax liability under § 1.5000C–1 relating to a payment is not fully satisfied by withholding in accordance with §§ 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 § 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 PO 00000 Frm 00033 Fmt 4700 Sfmt 4700 55143 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 § 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 § 1.5000C–2(e)(3), if the acquiring agency has overwithheld amounts under section 5000C and has made a deposit of the amounts under § 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 E:\FR\FM\18AUR1.SGM 18AUR1 55144 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations is overwithheld if the amount withheld from the payment pursuant to section 5000C and §§ 1.5000C–1 through 1.5000C–7 exceeds the contracting party’s tax liability under § 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 § 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). § 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. rmajette on DSK2TPTVN1PROD with RULES § 1.5000C–6 Examples. The rules of §§ 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 exemptions described in § 1.5000C–1(d) apply, unless otherwise explicitly stated; 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 or confidential 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 domestic corporation and the contracting party, 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), VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 pursuant to the first step in § 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 Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments,’’ and properly fills the relevant sections 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 § 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 § 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 § 1.5000C–3(c)(1) from the due date for the Form 1042 (if it were required). 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. PO 00000 Frm 00034 Fmt 4700 Sfmt 4700 (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 § 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 § 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 § 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 § 1.5000C–1(e)(3) to estimate that $3 million is the nonexempt amount that is allocated to the goods produced in Country S. Company C submits a valid and complete Section 5000C Certificate to Agency N in the time and manner required by §§ 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 §§ 1.5000C–1 through 1.5000C–7, tax of $30,000 (2 percent of the $5 million payment, or $100,000 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 E:\FR\FM\18AUR1.SGM 18AUR1 55145 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations each payment made to Company C. Agency N must deposit each $30,000 withholding tax under the rules in § 1.5000C–3 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. Agency N must retain a copy of the Form 1042 and the Form 1042– S for at least three years from the due date for the Form 1042 pursuant to § 1.5000C– 3(c)(1). Provided that Agency N properly withholds on the nonexempt portion as required under section 5000C and §§ 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 payments. 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 § 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. Example 6. Foreign contracting party submits revised Section 5000C Certificate due to change in circumstances. (i) Facts. The facts are the same as in Example 4, except that, after the first payment, Company C changes its business so that all of the goods manufactured with respect to the second payment are manufactured in Country R. Prior to the second payment, Company C submits a revised Section 5000C Certificate indicating this change in circumstance pursuant to § 1.5000C–2(d)(6). (ii) Analysis. Agency N withholds $30,000 on the first payment made to Company C and VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 does not withhold on the second payment. Company C does not have an additional tax liability or a U.S. tax return filing obligation as a result of receiving the payments. § 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 November 16, 2016. Contracting parties and acquiring agencies may rely upon the rules in the regulations before such date. If a foreign contracting party fully satisfies its tax and filing obligations under section 5000C with respect to any payments received in tax years ending before November 16, 2016 on or before the later of November 16, 2016 or the due date for the foreign person’s income tax return for the year in which the payment was received in a manner consistent with the final regulations, penalties will not be asserted on the foreign contracting parties with respect to those payments or returns. PART 301—PROCEDURE AND ADMINISTRATION Par. 5. The authority citation for part 301 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 6. Section 301.6114–1 is amended by adding paragraph (c)(1)(ix) and revising paragraph (e) to read as follows: ■ § 301.6114–1 positions. Treaty-based return * * * * * (c) * * * (1) * * * (ix) Notwithstanding paragraph (b)(1) of this section, that a nondiscrimination provision of a qualified income tax treaty, as defined in Treas. Reg. § 1.5000C–1(c)(13), exempts a payment from tax under section 5000C, but only if the foreign person claiming such relief has provided a Section 5000C Certificate (such as Form W–14, ‘‘Certificate of Foreign Contracting Party Receiving Federal Procurement Payments’’) to the acquiring agency 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 PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 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 applies to payments made on and after November 16, 2016 pursuant to contracts entered into on and after January 2, 2011. However, a taxpayer that receives payments exempt from tax under section 5000C by reason of a qualified income tax treaty before November 16, 2016 is not required to disclose this position on Form 8833, provided it has properly relied on Notice 2015–35, I.R.B. 2016–14, 533, in claiming the exemption. * * * * * PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par. 7. The authority citation for part 602 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 8. In § 602.101, paragraph (b) is amended by adding entries in numerical order to the table to read as follows: ■ § 602.101 * OMB Control numbers. * * (b) * * * * * CFR part or section where identified and described Current OMB control No. * * * * * 1.5000C–2 .................................. 1545–0096 1545–2263 1.5000C–3 .................................. 1545–0096 1545–2263 E:\FR\FM\18AUR1.SGM 18AUR1 55146 Federal Register / Vol. 81, No. 160 / Thursday, August 18, 2016 / Rules and Regulations CFR part or section where identified and described Current OMB control No. 1.5000C–4 .................................. 1545–1223 1545–0074 * * * * * John M. Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: July 22, 2016. Mark D. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2016–19452 Filed 8–17–16; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket No. USCG–2016–6017] RIN 1625–AA00 Safety Zone; Tall Ships Duluth 2016— Giant Duck, Lake Superior, Duluth, MN Coast Guard, DHS. Temporary final rule. AGENCY: ACTION: The Coast Guard is establishing a safety zone around the Giant Duck barge and its corresponding tug during the Tall Ships Duluth 2016 parade of sail in Lake Superior near Duluth, MN. This safety zone will provide for the regulation of vessel traffic in the vicinity of the tow in the navigable waters of the United States. This safety zone is necessary to safeguard participants and spectators from the hazards associated with the limited maneuverability of a barge and tow. Entry of vessels or persons into this zone is prohibited unless specifically authorized by the Captain of the Port Duluth. DATES: This rule is effective from 8 a.m. through 8 p.m. August 18, 2016. ADDRESSES: To view documents mentioned in this preamble as being available in the docket, go to http:// www.regulations.gov, type USCG–2016– 6017 in the ‘‘SEARCH’’ box and click ‘‘SEARCH.’’ Click on Open Docket Folder on the line associated with this rule. FOR FURTHER INFORMATION CONTACT: If you have questions on this rule, call or email Lieutenant Junior Grade John Mack, Waterways management, MSU Duluth, Coast Guard; telephone 218– 725–3818, email John.V.Mack@uscg.mil. rmajette on DSK2TPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 15:00 Aug 17, 2016 Jkt 238001 SUPPLEMENTARY INFORMATION: I. Table of Abbreviations CFR Code of Federal Regulations DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking § Section U.S.C. United States Code II. Background Information and Regulatory History The Coast Guard is issuing this temporary rule without prior notice and opportunity to comment pursuant to authority under section 4(a) of the Administrative Procedure Act (APA) (5 U.S.C. 553(b)). This provision authorizes an agency to issue a rule without prior notice and opportunity to comment when the agency for good cause finds that those procedures are ‘‘impracticable, unnecessary, or contrary to the public interest.’’ Under 5 U.S.C. 553(b)(B), the Coast Guard finds that good cause exists for not publishing a notice of proposed rulemaking (NPRM) with respect to this rule because doing so would be impracticable and contrary to the public interest. Because the event is scheduled for August 18, 2016, there is insufficient time to accommodate the comment period. Thus, delaying the effective date of this rule to wait for the comment period to run would be both impracticable and contrary to public interest because it would inhibit the Coast Guard’s ability to protect spectators and vessels from the hazards associated with the event. We are issuing this rule, and under 5 U.S.C. 553(d)(3), the Coast Guard finds that good cause exists for making it effective less than 30 days after publication in the Federal Register. Delaying the effective date of this rule would be contrary to public interest as it would inhibit the Coast Guard’s ability to protect spectators and vessels from the hazards associated with the event. III. Legal Authority and Need for Rule The Coast Guard is issuing this rule under authority in 33 U.S.C. 1231. The Captain of the Port Duluth (COTP) has determined that potential hazards associated with the Giant Duck tow operating in crowded harbors in close proximity to spectator craft necessitate a safety zone. The purpose of this rule is to ensure the safety of all vessels during the Tall Ship event in Duluth, MN. IV. Discussion of the Rule This rule establishes a safety zone from 8 a.m. through 8 p.m. August 18, 2016. The safety zone will cover all navigable waters within 100 yards of the Giant Duck and its corresponding tug PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 during the Tall Ships event in Duluth, MN. The duration of the zone is intended to protect personnel, vessels, and the marine environment in these navigable waters during the event. No vessel or person will be permitted to enter the safety zone without obtaining permission from the COTP or a designated representative. V. Regulatory Analyses We developed this rule after considering numerous statutes and Executive order related to rulemaking. Below we summarize our analyses based on a number of these statutes and Executive orders, and we discuss First Amendment rights of protestors. A. Regulatory Planning and Review Executive Orders 12866 and 13563 direct agencies to assess the costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This rule has not been designated a ‘‘significant regulatory action,’’ under Executive Order 12866. Accordingly, it has not been reviewed by the Office of Management and Budget. This regulatory action determination is based on the size, location, duration, and time-of-year of the safety zone. Vessel traffic will be able to safely transit around this safety zone which will impact a small designated area of Lake Superior near Duluth, MN. Moreover, the Coast Guard will issue Broadcast Notice to Mariners via VHF– FM marine channel 16 about the zone and the rule allows vessels to seek permission to enter the zone. B. Impact on Small Entities The Regulatory Flexibility Act of 1980, 5 U.S.C. 601–612, as amended, requires Federal agencies to consider the potential impact of regulations on small entities during rulemaking. The term ‘‘small entities’’ comprises small businesses, not-for-profit organizations that are independently owned and operated and are not dominant in their fields, and governmental jurisdictions with populations of less than 50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this rule will not have a significant economic impact on a substantial number of small entities. While some owners or operators of vessels intending to transit the safety zone may be small entities, for the reasons stated in section V.A above, this E:\FR\FM\18AUR1.SGM 18AUR1

Agencies

[Federal Register Volume 81, Number 160 (Thursday, August 18, 2016)]
[Rules and Regulations]
[Pages 55133-55146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-19452]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9782]
RIN 1545-BK06


Tax on Certain Foreign Procurement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 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 final 
regulations under section 6114, with respect to foreign persons 
claiming an exemption from the 2 percent tax under an income tax 
treaty.

DATES: Effective Date: These regulations are effective on August 18, 
2016.

[[Page 55134]]

    Applicability Date: For dates of applicability, see Sec.  1.5000C-7 
and Sec.  301.6114-1(e)(2).

FOR FURTHER INFORMATION CONTACT: Kate Hwa at (202) 317-6934, and for 
questions related to tax treaties and the regulations under section 
6114, Rosy Lor at (202) 317-6933, (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    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 Internal Revenue Code (Code). Section 
5000C(a) imposes on any foreign person that receives a specified 
Federal procurement payment a tax equal to 2 percent of the amount such 
payment. Section 5000C(b) defines the term specified Federal 
procurement payment as any payment made pursuant to a contract with the 
Government of the United States (U.S. government) for goods or services 
if the goods are manufactured or produced or the services are provided 
in any country that is not a party to an international procurement 
agreement with the United States. 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)(c) of the Act states that this section must be applied in a 
manner consistent with U.S. obligations under international agreements. 
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.
    On April 22, 2015, the Department of Treasury (Treasury Department) 
and the Internal Revenue Service (IRS) published in the Federal 
Register (80 FR 22449) a notice of proposed rulemaking (REG-103281-11) 
(NPRM) under sections 5000C and 6114 (the proposed regulations). The 
regulations set forth a number of exemptions from the tax and provided 
procedures for collecting the tax. Notice 2015-35, 2015-18 I.R.B. 943, 
issued contemporaneously with the proposed regulations, provided a list 
of income tax treaties in effect that prevented the imposition of the 
tax. No public hearing was requested or held. Written comments on the 
proposed regulations were received and are available at 
www.regulations.gov or upon request. After consideration of the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision. The revisions are discussed below.

Explanation and Summary of Comments

1. Payments by Contracting Parties to Subcontractors

    A commenter asked for clarification that the proposed regulations 
apply only to payments made by the U.S. government to direct (prime) 
contractors with the U.S. government, and not to payments made by prime 
contractors pursuant to subcontracts. Consistent with the proposed 
regulations, the final regulations provide section 5000C imposes the 
tax on any foreign contracting party, which means a foreign person that 
is a party to a contract with the U.S. government that was entered into 
on or after January 2, 2011. Therefore, the final regulations do not 
generally impose the tax on a subcontractor that is not party to a 
contract with the U.S. government. For example, if an acquiring agency 
contracts with a domestic corporation (prime contractor) for goods or 
services, and the prime contractor separately contracts with a foreign 
subcontractor for goods and services to be provided under the contract, 
section 5000C will not ordinarily apply to payments by the prime 
contractor to its foreign subcontractor that relate to those goods or 
services.
    However, the activities of a subcontractor are taken into account 
when determining the country in which goods are manufactured or 
produced or in which services are provided under Sec.  1.5000C-1(e). 
Furthermore, the final regulations retain the rules in the proposed 
regulations that payments received by a nominee or agent on behalf of a 
contracting party are considered to be received by that contracting 
party. For the definition of a contracting party, see Sec.  1.5000C-
1(c)(4). The final regulations also retain the anti-abuse rule in Sec.  
1.5000C-5 that in certain circumstances may treat a subcontractor that 
is a foreign person as being liable for tax under section 5000C.

2. Exemption for Certain Foreign Humanitarian Assistance Contracts

    The United States Agency for International Development (USAID) 
regularly enters into contracts with foreign persons for goods and 
services for purposes of implementing USAID's development projects and 
programs in a host country. The proposed regulations do not provide 
relief from the tax under section 5000C for payments made pursuant to 
some of these contracts. The Treasury Department and the IRS have 
concluded that it is appropriate to exempt from the tax payments made 
to foreign contracting parties that USAID engages to execute its 
development projects and programs in a host country. In this context, 
the U.S. government is not procuring goods and services for its own 
benefit, but rather to provide humanitarian assistance for the benefit 
of the host countries. As a result, the final regulations add an 
exemption under which section 5000C does not apply to a contract for 
the purpose of obtaining goods or services described in or authorized 
under certain specified statutes that are for the purpose of providing 
foreign humanitarian assistance when the acquiring agency determines 
that the payment is for the purpose of providing foreign humanitarian 
assistance. This exemption generally applies to a contract entered into 
by an acquiring agency with a foreign contracting party to obtain goods 
or services for purposes of implementing an agreement between the 
United States and a foreign country or a group of countries to provide 
foreign humanitarian assistance as authorized under the Food for Peace 
Act (7 U.S.C. 1691, et seq.) and the Foreign Assistance Act of 1961 (22 
U.S.C. 2151, et seq.).
    Similarly, this exemption also generally applies to contacts 
providing foreign humanitarian assistance under the Migration and 
Refugee Assistance Act of 1962 (22 U.S.C. 2601 et seq.), the Freedom 
Support Act of 1992 (22 U.S.C. 5801 et seq.), and the SEED Act of 1989 
(22 U.S.C. 5401 et seq.), and to transportation of humanitarian relief 
supplies to foreign countries described in 10 U.S.C. 402, foreign 
disaster assistance described in 10 U.S.C. 404, humanitarian demining 
assistance described in 10 U.S.C. 407, excess non-lethal supplies for 
humanitarian relief purposes described in 10 U.S.C. 2557, and 
transportation of humanitarian relief and for other humanitarian 
purposes described in 10 U.S.C. 2561. See Sec.  1.5000C-1(d)(4). A 
corresponding change is made to the withholding rules to take into 
account this exemption. See Sec.  1.5000C-2(b)(6).

3. Procurement Not Pursuant to the Federal Acquisition Regulations

    A commenter noted that it was unclear whether payments by acquiring 
agencies under contracts that are not entered into pursuant to the 
Federal Acquisition Regulations (FAR) are subject to tax under section 
5000C. The FAR is the body of rules that generally governs acquisitions 
and contracting procedures for federal agencies. See 48 CFR Chapter 1. 
Although the final regulations utilize certain concepts and definitions 
contained in the FAR, neither the Act nor the final regulations

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are limited to contracts executed pursuant to the FAR. Thus, while the 
term ``contract'' in the proposed and final regulations uses the FAR 
definition of the term ``contract'', it can nevertheless include a 
contract that is not executed under the FAR. A sentence was added to 
the definition of contract in the final regulations to clarify this 
point.

4. Definition of International Procurement Agreement and Least 
Developed Countries

    The General Explanation of Tax Legislation prepared by the Staff of 
the Joint Committee on Taxation accompanying section 5000C explains 
that parties engaged in cross-border transactions are required to 
comply with relevant trade agreements of the jurisdictions in which 
they operate. See Staff of the Joint Committee on Taxation, General 
Explanation of Tax Legislation Enacted in the 111th Congress (JCS-2-
11), at 694, March 16, 2011 (Joint Committee Explanation). In 
describing these obligations, the Joint Committee Explanation listed 
the Government Procurement Agreement (GPA) that is an annex to the 
World Trade Organization agreement, as well as the government 
procurement obligations of U.S. free trade agreements. Id. Accordingly, 
the proposed regulations defined the term international procurement 
agreement as the World Trade Organization GPA (WTO GPA) 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.
    One commenter noted that the FAR provides that eligible products 
from WTO GPA and free trade agreement countries are entitled to certain 
nondiscriminatory treatment, and that 48 CFR 25.404 expands this 
nondiscriminatory treatment to include least developed countries 
described in 48 CFR 25.400(a)(3). The commenter requested that the 
final regulations also expand the definition of international 
procurement agreement to include goods manufactured or produced or 
services provided in a least developed country.
    The final regulations do not adopt this comment for two reasons. 
First, the proposed regulations referred to 48 CFR 25.400(a)(1) in 
order to utilize a term that was widely understood in the context of 
government procurement but was not intended to incorporate any related 
provisions of the FAR. Second, the Joint Committee Explanation 
indicates that Congress intended the exemption under section 5000C(b) 
related to international procurement agreements to be limited to 
signatories of free trade agreements with government procurement 
obligations or procurement agreements.

5. Definition of International Agreements

    Section 301(c) of the Act requires that section 5000C be applied in 
a manner consistent with the United States' obligations under 
international agreements. A commenter indicated that the proposed 
regulations limit international agreements that may affect the 
application of section 5000C to income tax treaties and requested that 
final regulations include other international agreements that may 
impact taxation. In particular, the commenter indicated that the Vienna 
Convention on Consular Relations and bilateral framework agreements 
negotiated and administered by USAID contain tax provisions.
    The final regulations do not adopt this request. The specific 
international agreements to which the commenter referred prohibit host 
country taxation of expenditures of a U.S. consulate or amounts 
provided through USAID programs but do not limit the United States' 
taxing rights. Consequently, these international agreements do not 
provide relief from the tax imposed under section 5000C. Furthermore, 
in identifying the income tax treaties that provide relief from the tax 
under section 5000C, the regulations do not preclude a foreign 
contracting party from claiming relief from the tax under any other 
applicable international agreement.

6. Simplified Acquisition Threshold

    The proposed regulations provide that 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 in 48 CFR 2.101. One 
commenter recommended that the determination of the $150,000 simplified 
acquisition threshold should be computed on an annual basis rather than 
on a contract-by-contract basis. The final regulations do not adopt 
this suggestion because the Treasury Department and the IRS have 
determined that it is generally more administrable to make a 
determination of the threshold amount when entering into a particular 
contract. However, as described in 7. Personal Service Contacts of this 
preamble, this suggestion has been adopted in the limited context of 
personal service contracts.

7. Personal Service Contracts

    A commenter requested a new exemption from the tax for service 
contracts entered into with individuals (personal service contracts). 
The commenter further stated that some acquiring agencies do not use 
the FAR to procure personal services from individuals. As such, the 
commenter stated that these personal service contracts do not fall 
within the simplified acquisition procedures of the FAR but typically 
are for an amount less than $150,000 per contract. The commenter also 
suggested that the threshold amount of personal service contracts with 
individuals would be more appropriately determined on an annual (rather 
than a per contract) basis.
    Section 5000C applies to contracts for the provision of services, 
so the final regulations do not provide an exemption for all personal 
service contracts. However, the Treasury Department and the IRS have 
decided that it is appropriate to extend the simplified acquisition 
exemption to personal service contracts, whether or not they are not 
executed pursuant to the FAR. Further, the Treasury Department and the 
IRS agree with the comment that when applying this exemption, the 
amount paid for personal services under the contracts should be 
determined on an annual basis. Accordingly, the final regulations 
provide an exemption in Sec.  1.5000C-1(d)(3) for payments for services 
provided by, and under contracts with, a single individual in which the 
payments do not exceed on an annual basis the simplified acquisition 
threshold as described in 48 CFR 2.101 for all years of the contract. A 
corresponding change is made to the withholding rules to take into 
account this exemption. See Sec.  1.5000C-2(b)(5).

8. Definition of Emergency Acquisition

    Proposed Sec.  1.5000C-1(d)(2) exempts payments pursuant to 
contracts awarded for certain emergency acquisitions. One commenter 
suggested that this exemption be broadened to include contracts that 
involve other agency acquisitions of importance to the government, such 
as contracts for acquisitions determined to be in the national interest 
by the acquiring agency. The final regulations do not adopt this 
comment for two reasons. First, the Treasury Department and the IRS 
have concluded that the more limited exemption in the proposed 
regulations appropriately balances

[[Page 55136]]

compliance with section 5000C with the government's need to procure 
goods and services in certain emergency situations. Second, the 
commenter's suggestion would introduce a subjective, potentially 
overbroad exemption from the tax imposed by section 5000C.

9. Credit Card Payments

    One commenter requested a new exemption from the section 5000C tax 
for payments made with a credit card. The commenter indicated that 
applying the section 5000C tax to payments made with a credit card 
would be difficult to administer because of the volume of these 
transactions.
    The final regulations do not adopt this suggestion for several 
reasons. First, in most cases, payments made with a credit card will be 
in an amount that will fall within the exemption for payments for 
simplified acquisitions, which applies to purchases under the 
simplified acquisition procedures described in the FAR that do not 
exceed the simplified acquisition threshold as described in 48 CFR 
2.101. See Sec.  1.5000C-1(d)(1). Second, in cases in which payments 
made with a credit card do not meet the exemption for simplified 
acquisitions, adopting this comment would allow foreign contracting 
parties to avoid the tax by receiving payment with a credit card for 
large amounts that should be subject to the tax.

10. Payments Only in Part for Goods or Services

    A commenter indicated that, in some circumstances, a contract may 
be for goods or services but also include payments that are not for 
goods or services, giving as an example payments to reimburse taxes 
incurred by the contracting party. In response to the comment, the 
withholding steps in the final regulations clarify that acquiring 
agencies should not withhold to the extent that a payment is for 
something other than goods or services. See Sec.  1.5000C-2(b)(1). 
However, this clarification should not be read to mean that payments to 
reimburse taxes incurred by the contracting party in providing goods or 
services are anything other than payments for those goods or services.

11. Form W-14, ``Certificate of Foreign Contracting Party Receiving 
Federal Procurement Payments''

    The proposed regulations provided that a foreign contracting party 
must submit a ``Section 5000C Certificate'' that provides all of the 
information required by the proposed regulations to claim an exemption 
from section 5000C. The proposed regulations also contained a model 
Section 5000C Certificate. Simultaneous with the publication of the 
final regulations, the IRS is publishing Form W-14, ``Certificate of 
Foreign Contracting Party Receiving Federal Procurement Payments,'' 
which may be used as the Section 5000C Certificate. Accordingly, the 
final regulations do not contain a model Section 5000C Certificate but 
rather provide that a foreign person may use Form W-14 as its Section 
5000C Certificate provided that it includes all the necessary 
information. See Sec. Sec.  1.5000C-1(c)(14) and 1.5000C-2(d)(7).
    Notice 2015-35 listed the countries that had entered into qualified 
income tax treaties with the United States as of the date of its 
publication. The instructions to Form W-14, issued contemporaneously 
with the publication of these final regulations, identify income tax 
treaties in force, as of the date of the issuance of the form, that are 
qualified income tax treaties. When new income tax treaties come into 
force, foreign persons and acquiring agencies should review IRS Forms, 
Instructions, Publications or other media (including www.irs.gov) for 
an updated list of qualified income tax treaties, rather than Notice 
2015-35.

12. Change in Circumstances

    Section 1.5000C-2(d)(6) provides that 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. One commenter suggested that 
an example would be helpful to illustrate this rule. In response to 
this comment, an example was added to illustrate the withholding 
obligation of an acquiring agency when it receives a revised Section 
5000C Certificate due to a change in circumstances. See Sec.  1.5000C-
6, Example 6.

13. Effective Date of Section 5000C and the Final Regulations

    Comments recommended that the final regulations delay the 
applicability of the tax imposed by section 5000C to contracts entered 
into on or after the date of the publication of the final regulations. 
Alternatively, one commenter recommended that the final regulations 
delay the applicability of the tax until the issuance of final 
amendments to the FAR as promulgated by the Department of Defense 
(DoD), General Services Administration (GSA), and National Aeronautics 
and Space Administration (NASA), if any, that may take into account 
these final regulations. This commenter reasoned that a delay in the 
application of the final regulations would allow the necessary time 
needed to amend the FAR in order to take into account the rules 
provided in the final regulations. While the DoD, GSA, and NASA have 
amended some sections of the FAR to reflect the enactment of section 
5000C (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)), commenters stated that other sections of 
the FAR (such as CFR 52.229-3) will also need to be amended.
    Section 301(a)(3) of the Act specifically provides that the tax 
imposed by section 5000C applies to payments received pursuant to 
contracts entered into on and after January 2, 2011, indicating a clear 
Congressional intent as to the effective date. Further, the Act does 
not require Treasury regulations or FAR amendments to be applicable 
before the requirements of the statute take effect. Thus, the final 
regulations do not adopt this comment and confirm the statutory 
effective date.
    Consistent with the proposed regulations, the final regulations 
apply on and after the date that is 90 days after the date they are 
published as final regulations in the Federal Register (applicability 
date). However, contracting parties and acquiring agencies may rely 
upon the rules in the final regulations before the applicability date.
    Under the Act, while acquiring agencies have an obligation to 
withhold, the foreign contracting parties remain liable for the tax if 
withholding does not fully satisfy the foreign person's tax liability. 
The Treasury Department and the IRS are aware that some foreign persons 
subject to statutory obligations under section 5000C may have deferred 
compliance actions pending the applicability of the final regulations. 
The Treasury Department and the IRS have concluded that 90 days is 
sufficient for these foreign persons to satisfy their tax and filing 
obligations with respect to section 5000C for prior periods. 
Accordingly, Sec.  1.5000C-7 provides that if a foreign contracting 
party fully satisfies its tax and filing obligations under section 
5000C with respect to any payments received in tax years ending before 
the applicability date of the regulations on or before the later of the 
applicability date of the final regulations or the due date for the 
foreign person's income tax return for the year in which the payment 
was

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received in a manner consistent with the final regulations, penalties 
will not be asserted on the foreign contracting parties with respect to 
those payments or returns. For example, assume a foreign corporation 
received a single specified Federal procurement payment during its tax 
year ending on December 31, 2013 that is not described in any of the 
exemptions in these final regulations, and the payment was not withheld 
upon. If the corporation files Form 1120-F, ``U.S. Income Tax Return of 
a Foreign Corporation,'' for 2013 and pays the tax imposed under 
section 5000C in the manner described in Sec.  1.5000C-4(d) before the 
applicability date of the final regulations, penalties will not be 
asserted with respect to that payment or return. However, the final 
regulations do not relieve a foreign person of any applicable rules 
relating to interest under Subtitle F.
    Additionally, for purposes of section 6114 and the regulations 
thereunder, if a foreign contracting party has received a payment 
exempt from tax under a qualified income tax treaty before the 
effective date of the final regulations under section 5000C, reporting 
is waived if the foreign contracting party has properly relied on 
Notice 2015-35. See Sec.  301.6114-1(e)(2).

Special Analyses

    Certain IRS regulations, including these, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. It has been determined that section 553(b) of 
the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
this regulation. It is hereby certified that the collection of 
information contained in this regulation will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis is not required. The collection of 
information requirement in the 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, in part because the final regulations 
provide exemptions for simplified acquisitions and for certain personal 
service contracts. Because section 5000C(a) applies to foreign persons 
regardless of the size of the entity, a limited number of small foreign 
entities that received specified Federal procurement payments are 
affected by the regulation. Pursuant to section 7805(f) of the Internal 
Revenue Code, the NPRM preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

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

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR 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.

Adoption of Amendments to the Regulations

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

PART I--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.5000C-1 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-2 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-3 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-4 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-5 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-6 is also issued under 26 U.S.C. 5000C


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

Tax on Certain Foreign Procurement

0
Par. 3. Section 1.5000C-0 is added after the undesignated center 
heading to read as follows:


Sec.  1.5000C-0  Outline of regulation provisions for section 5000C.

    This section lists the captions contained in 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 personal service contracts.
    (4) Certain foreign humanitarian assistance contracts.
    (5) Certain international agreements.
    (6) Goods manufactured or produced or services provided in the 
United States.
    (7) 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 payment is for personal services under 
the simplified acquisition threshold.
    (6) Determine whether the payment is pursuant to a foreign 
humanitarian assistance contract.
    (7) Determine whether the foreign contracting party is entitled 
to relief pursuant to an international agreement.
    (8) 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.
    (9) Compute amounts to withhold.
    (10) 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.

[[Page 55138]]

    (5) Validity period of Section 5000C Certificate.
    (6) Change in circumstances.
    (7) Form W-14.
    (8) Time for submitting Section 5000C Certificate.
    (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 or confidential 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.

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 that apply to 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-4. 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 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. 
A contract may include an agreement that is not executed under the 
Federal Acquisition Regulations (FAR), 48 CFR Chapter 1.
    (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. See Sec.  1.5000C-1(b) for situations involving a 
nominee or agent.
    (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.

[[Page 55139]]

    (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 may also 
include any form that the Internal Revenue Service may prescribe as a 
substitute for the Section 5000C Certificate, such as Form W-14, 
``Certificate of Foreign Contracting Party Receiving Federal 
Procurement Payments.''
    (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)(5), (6) and (7) 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. Payments 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 personal service contracts. Payments for services 
provided by, and under contracts with, a single individual in which the 
payments do not (and will not) exceed on an annual calendar year basis 
the simplified acquisition threshold as described in 48 CFR 2.101 for 
all years of the contract. Payments that satisfy this exemption remain 
exempt if the contract is later renegotiated so that future payments 
under the contract do not meet this exemption.
    (4) Certain foreign humanitarian assistance contracts. Payments 
made by the U.S. government pursuant to a contract with a foreign 
contracting party to obtain goods or services described in or 
authorized under 7 U.S.C. 1691, et seq., 22 U.S.C. 2151, et seq., 22 
U.S.C. 2601 et seq., 22 U.S.C. 5801 et seq., 22 U.S.C. 5401 et seq., 10 
U.S.C. 402, 10 U.S.C. 404, 10 U.S.C. 407, 10 U.S.C. 2557, and 10 U.S.C. 
2561, if the acquiring agency determines that the payment is for the 
purpose of providing foreign humanitarian assistance.
    (5) Certain international agreements. Payments made by the U.S. 
government pursuant to a contract with a foreign contracting party when 
the payments are 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.
    (6) 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.
    (7) 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 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

[[Page 55140]]

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. To the extent 
that 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 other 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 payment is for personal services under 
the simplified acquisition threshold. The acquiring agency determines 
whether payments for services under contracts with a single individual 
do not exceed the simplified acquisition threshold as described in 48 
CFR 2.101 on an annual basis for all years of the contract. If that is 
the case, the acquiring agency does not have an obligation to withhold 
under section 5000C on the payment.
    (6) Determine whether the payment is pursuant to a foreign 
humanitarian assistance contract. The acquiring agency determines 
whether the payment is made pursuant to a foreign humanitarian 
assistance contract described in Sec.  1.5000C-1(d)(4). If it is, the 
acquiring agency does not have an obligation to withhold under section 
5000C on the payment.
    (7) 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.
    (8) 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)(8) of this section.
    (9) 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 or the payment is only in part for goods or services. 
In cases in which the Section 5000C Certificate demonstrates that the 
exemption in Step 8 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 8 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. In the case in which the payment is only in 
part for goods or services, the acquiring agency reduces the amount of 
the payment subject to the tax to the extent it is for something other 
than goods or services. The acquiring agency withholds the computed 
amount from the payment.
    (10) 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. 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

[[Page 55141]]

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 does not 
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 does not 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 does not 
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 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 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, must describe on the Section 5000C 
Certificate the relevant goods or services and the country (or 
countries) in which they are manufactured or produced, or are provided, 
and must 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 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,

[[Page 55142]]

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. See Sec.  1.5000C-6, Example 
6, for an illustration of this paragraph (6).
    (7) Form W-14. A foreign contracting party may choose to use Form 
W-14, ``Certificate of Foreign Contracting Party Receiving Federal 
Procurement Payments'' (or other form that the IRS may prescribe), as 
its Section 5000C Certificate, provided that it includes all the 
necessary information required by this paragraph (d).
    (8) Time for submitting Section 5000C Certificate. A contracting 
party must submit the Section 5000C Certificate (such as Form W-14 or 
Form W-9) 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 must be submitted to the acquiring agency 
no later than the date of execution of the contract.
    (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

[[Page 55143]]

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 the 
instructions for 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 or confidential contracts. An acquiring agency is 
not required to report information otherwise required by this section 
on Form 1042-S for payments made pursuant to classified or confidential 
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

[[Page 55144]]

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 
exemptions described in Sec.  1.5000C-1(d) apply, unless otherwise 
explicitly stated; 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 or confidential 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 domestic corporation and the contracting 
party, 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 Form W-14, ``Certificate of 
Foreign Contracting Party Receiving Federal Procurement Payments,'' 
and properly fills the relevant sections 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) from the due date for the Form 1042 (if it were 
required).
    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 
that is allocated to the goods 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, or $100,000 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

[[Page 55145]]

each payment made to Company C. Agency N must deposit each $30,000 
withholding tax under the rules in Sec.  1.5000C-3 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. Agency N must retain a copy of 
the Form 1042 and the Form 1042-S for at least three years from the 
due date for the Form 1042 pursuant to Sec.  1.5000C-3(c)(1). 
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 payments.
    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.
    Example 6. Foreign contracting party submits revised Section 
5000C Certificate due to change in circumstances. (i) Facts. The 
facts are the same as in Example 4, except that, after the first 
payment, Company C changes its business so that all of the goods 
manufactured with respect to the second payment are manufactured in 
Country R. Prior to the second payment, Company C submits a revised 
Section 5000C Certificate indicating this change in circumstance 
pursuant to Sec.  1.5000C-2(d)(6).
    (ii) Analysis. Agency N withholds $30,000 on the first payment 
made to Company C and does not withhold on the second payment. 
Company C does not have an additional tax liability or a U.S. tax 
return filing obligation as a result of receiving the payments.


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 November 
16, 2016. Contracting parties and acquiring agencies may rely upon the 
rules in the regulations before such date. If a foreign contracting 
party fully satisfies its tax and filing obligations under section 
5000C with respect to any payments received in tax years ending before 
November 16, 2016 on or before the later of November 16, 2016 or the 
due date for the foreign person's income tax return for the year in 
which the payment was received in a manner consistent with the final 
regulations, penalties will not be asserted on the foreign contracting 
parties with respect to those payments or returns.

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 * * *


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 a qualified income tax treaty, as 
defined in Treas. Reg. Sec.  1.5000C-1(c)(13), exempts a payment from 
tax under section 5000C, but only if the foreign person claiming such 
relief has provided a Section 5000C Certificate (such as Form W-14, 
``Certificate of Foreign Contracting Party Receiving Federal 
Procurement Payments'') to the acquiring agency 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 applies to 
payments made on and after November 16, 2016 pursuant to contracts 
entered into on and after January 2, 2011. However, a taxpayer that 
receives payments exempt from tax under section 5000C by reason of a 
qualified income tax treaty before November 16, 2016 is not required to 
disclose this position on Form 8833, provided it has properly relied on 
Notice 2015-35, I.R.B. 2016-14, 533, in claiming the exemption.
* * * * *

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...................................................   1545-0096
                                                               1545-2263
1.5000C-3...................................................   1545-0096
                                                               1545-2263

[[Page 55146]]

 
1.5000C-4...................................................   1545-1223
                                                               1545-0074
 
                                * * * * *
------------------------------------------------------------------------


John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: July 22, 2016.
Mark D. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-19452 Filed 8-17-16; 8:45 am]
 BILLING CODE 4830-01-P