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Hello.

My name is Kevin MacKesey and I work for the Internal Revenue Service.

This presentation provides an introduction to IRC Section 5000C, an excise tax on procurement payments from the United States government acquiring agencies to a foreign person.

It is a provision of the James Zadroga 9/11 Health and Compensation Act of 2010.

James Zadroga was the first New York City police officer who died of a respiratory disease attributed to his exposure to toxic chemicals during his participation in the rescue and recovery operations in the rubble of the World Trade Center following the September 11th attacks.

The tax was included in the Act to pay for the World Trade Center Health Program.

The World Trade Center Health Program ensures that those affected by 9/11 continue to receive monitoring and treatment services for 9/11-related health problems.

The acquiring agency or U.S. government means any executive or military department, independent establishment, or wholly-owned government corporation that is a party to the contract.

It can also mean the department or agency that is making the payments according to the contract.

Independent establishments or agencies exist outside of the federal executive department.

To name a few, Central Intelligence Agency, Consumer Financial Protections Bureau, Environmental Protection Agency, and Federal Reserve Board of Governors.

Federal government chartered and owned corporations are a separate set of corporations that are chartered and owned by the federal government, which operate to provide public services.

To name a few, the Commodity Credit Corporation, the Community Development Financial Institutions Fund, and the Export/Import Bank of the United States.

It is the acquiring agency's responsibility to make sure that the foreign contracting party complies with Section 5000C.

The acquiring agency does this by determining if it has an obligation to withhold or is the contract is exempt or is the foreign contracting party eligible for relief.

If withholding is required, it must determine the amount of tax and deduct it from the payment, deposit the tax with the Internal Revenue Service, and report the withholding to the foreign contracting party and the IRS.

This is true, even if the payment is to a nominee or agent of the foreign contracting party.

The Act imposes a 2% excise tax on a specified federal procurement payment made to any foreign person from the U.S. government acquiring agency.

Let's break this down into fines and terms.

A specified federal procurement payment is any payment made pursuant to a contract with the United States government and a foreign person for either supplies or services.

Payments under IRC Section 5000C are any payments made pursuant to a contract, including purchases with a credit or purchase card, or the reimbursement of taxes.

It does not include payments that are for other purposes, such as the U.S.

government payment of a value-added tax.

The tax applies to foreign persons, also known as the foreign contracting party, and does not apply to U.S. persons.

The tax also applies to payments received by a nominee or agent on behalf of a foreign contracting party.

Contracts that are subject to Section 5000C include U.S. government contracts entered into after January 1st, 2011, for goods produced or for services provided in a foreign country by a foreign person.

The contracts covered include contracts that are not executed under the Federal Acquisition Regulations or FAR.

Contracts not subject to 5000C include grants or cooperative agreements, and contracts that are not for goods or services, such as the purchase or lease of land or interest in land.

Certain foreign contracts and their payments are exempt from Section 5000C tax.

The acquiring agency must make the determination based on the contract.

Simple acquisition contracts are when payments on contracts are for the purchase of supplies or services and where the value of the contract is at or less than the threshold, described in 48 CFR 2.101.

Emergency acquisitions are when imposing the excise tax would impede the United States government from making acquisitions.

Examples of emergencies consist of nuclear, biological, or chemical attack, or when the President issues an emergency declaration, or a major disaster declaration, or military operations.

A personal service contract exemption is when contracts are with and services provided by a single individual, and the payments do not or will not exceed the simple acquisition threshold described in 48 CFR 2.101 annually for the life of the contract.

Foreign humanitarian contracts are when the United States government is not procuring goods or services for its own benefit but rather to provide humanitarian assistance for the benefit of another country; for example, payments made to a foreign contracting party that USAID engages to execute its development projects and programs in a host country.

In addition to the previous four exemptions, there are three additional relief provisions under IRC Section 5000C that reduce in whole, or in part, the withholding.

First, the foreign contractor is entitled to relief due to an international agreement, such as an income tax treaty to which the United States is a party.

IRS Notice 2015-35 provides a discussion of this exemption and a current list of all countries with qualified income tax treaties for the purpose of Section 5000C.

If the foreign person is covered by a tax treaty under this provision, it doesn't matter where the goods are manufactured or produced, or services provided, or whether that country is a party to an international procurement agreement.

If relief is based on a qualified income tax treaty, then the tax treaty has a non-discrimination clause.

Foreign contracting parties may claim relief for goods manufactured or services provided in the United States.

The foreign contracting party may claim relief for a payment made pursuant to a contract to the extent the payment is for goods manufactured or produced in, or services provided in a country that is party to an international procurement agreement.

Under an international procurement agreement it is immaterial where the foreign person or contractor is located.

The governing factor is the country where the supplies will be manufactured or where the services are performed.

An example of an international procurement agreement is the World Trade Organization's agreement on government procurement.

To claim relief the foreign contracting party provides a form W-14, Certificate of Foreign Contracting Party receiving federal procurement payments.

Each certificate applies to a single contract.

All foreign contracting parties must provide a complete certificate to receive the relief.

Relief may be allocated to a portion of the payment of a contract based on the facts and circumstances of that particular contract.

A certificate should be submitted as early as practical in the contracting process.

If there is a change in circumstance, a foreign contracting party can submit a revised certificate.

The acquiring agency can request a revised certificate at any time.

If the foreign contracting party submits a form W-14, it must be inspected for completeness and accuracy before being accepted and relief granted.

If the product is manufactured or service provided in more than one country, the form W-14 shall reflect the contract ratio of eligible and ineligible relief.

A foreign contractor may identify specific line items in the contract as either exempt or nonexempt from the tax based on where they are produced.

This is done on the form W-14 itself.

This table summarizes the application of the seven types of exemption.

The international agreement relief, such as the income tax treaty, is based on the home country of the foreign contracting party.

A form W-14 must be provided by the foreign contracting party.

If relief is requested under an international procurement agreement, it is immaterial where the foreign person or contractor is located.

The governing factor is the country where the supplies will be manufactured or where the services are performed.

For example, if the foreign person or contractor is located in a country that is a member of the international procurement agreement with the United States but the supplies will be manufactured or services provided in a non-member country, the tax is imposed on the payments to the contractor.

On the contrary, if the contract is awarded to a contractor in a non-member country but the supplies will be manufactured or services performed in a member country, the tax would not be imposed on the payments to that contractor.

If the goods are produced or manufactured, or the services were provided in the United States by the foreign contracting party, a W-14 is required.

For the exemptions discussed, the form W-14 isn't required.

The acquiring U.S. government agency makes the exemption determination based on the contract.

Once the agency determines it has an obligation to withhold, the acquiring agency is required to deduct and withhold an amount equal to 2% of the specified federal procurement payment on the contract.

The agency may have to take into account the contract ratio for specifically identified items if goods are partially covered by a relief provision.

IRC Section 5000C tax should be combined with any Chapter 3 taxes already being withheld to calculate deposit requirements.

If the agency has no Chapter 3 filing obligations, deposit withheld amounts monthly.

The acquiring agency will report the total excise tax withheld on line 64D on form 1042, Annual Withholding Tax Return with Source Income of Foreign Persons.

Form 1042 must be filed by its due date of March 15th.

Any overpayment attributed to 5000C must be identified on line 70B.

The reporting agency will also prepare a form 1042-S,Foreign Persons U.S. Source Income Subject to Withholding, for each foreign contracting party.

The instructions to the form 1042-S explains how Section 5000C withholding is to be reported.

The form must be provided to the foreign contracting party and the IRS by March 15th of the year after the payment date.

If an acquiring agency believes including specific information on the 1042-S will compromise national security, that information may be omitted.

The tax is still required to be withheld and reported on forms 1042 and 1042-S.

If the acquiring agency fails to withhold the tax, then the foreign contracting party must file a U.S. Income Tax Return and pay the tax due.

Although the law requires the acquiring agency to withhold, it is not liable for any tax not withheld.

If an acquiring agency has over-withheld, has made a deposit of the amount withheld, and reported it to the IRS, the foreign person may claim a refund of the amount over-withheld based on the form 1042-S issued by the acquiring agency.

Note that the refund claim is made with the IRS, not the acquiring agency.

The 2% tax applies to contracts entered into after January 1st, 2011.

The contracting party is responsible for submitting a completed and accurate form W-14 when seeking relief from the 2% tax.

A foreign contracting party files either a 1040-NR, a U.S. Non-resident Alien Income Tax Return, or a form 1120-F, U.S. Income Tax Return of a Foreign Corporation if, and only if the acquiring agency's withholding did not satisfy the tax due, or to request a refund of overpaid tax.

At no other time is a tax return required from a foreign contracting party for this 2% tax.

Now let's see if we can apply what we learned.

I will present a scenario and we will determine whether or not the excise tax applies.

The first scenario, an acquiring agency enters into a three-year contract in 2016 with a German resident to review U.S. flight data.

All services are provided by a single individual in Germany.

The annual payment schedule is $125,000 for calendar year 2016, $145,000 for calendar year 2017, and $165,000 for calendar year 2018.

Does the excise apply?

Yes, the excise applies throughout the life of the contract.

The acquiring agency payments exceed the simplified acquisition threshold set by 48 CFR 2.101 of $150,000 in calendar year 2018.

In scenario two an acquiring agency enters into a contract with a company based in Singapore to manufacture jackets.

The value of the contract is $200,000,000.

Singapore is party to an international procurement agreement with the United States and provides a form W-14 to the acquiring agency at the time the contract is executed.

The jackets are manufactured in Vietnam, which isn't party to an international procurement agreement.

Should the excise tax apply to this contract?

Yes, the excise tax applies.

It is immaterial where the contract is awarded or where the contractor is located.

The controlling factor for relief under international procurement agreement is where the supplies will be manufactured or where the services are performed.

The jackets are manufactured in Vietnam, not Singapore.

Vietnam isn't a party to an international procurement agreement with the United States; therefore, the 2% tax applies.

In scenario three an acquiring U.S. government agency purchases vehicles from a Saudi Arabian supplier.

The value of the contract is $400,000,000.

The supplier provides a form W-14, which states the vehicles will be manufactured in the United States.

Does the 2% excise tax apply to the payments of this contract?

No, the excise does not apply.

Even though the supplier is a Saudi Arabian company, the vehicles were manufactured the United States.

The Saudi supplier has provided a W-14 to qualify for the relief.

In the final scenario the United States government acquires land in Bolivia from a Columbian national for $300,000.

Should the excise tax apply to this contract?

No, it doesn't apply since this is for the purchase of land.

Foreign contracts and their payments that are not for goods or services are exempt from Section 5000C.

For example, purchase or lease of land, grants or cooperative agreements are exempt from 5000C.

For more on the Internal Revenue Code Section 5000C excise tax and their related documents, please visit us online at irs.gov, and enter "IRC 5000C" in the search box.

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