Tax treaties providing exemption from 2% tax

Tax treaties providing exemption from 2% tax

The IRS today released an advance version of Notice 2015-35 that provides a list of qualified income tax treaties that exempt all nationals of that country from the 2% tax imposed under section 5000C.

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Notice 2015-35 [PDF 19 KB] provides a list of qualified income tax treaties that exempt all nationals of that country from the tax imposed under section 5000C.

Background

Section 5000C imposes on any “foreign person” a 2% tax on certain payments received from the U.S. government for goods and services, and applies to payments received under contracts entered into on and after January 2, 2011.

Section 6114 generally requires reporting when a taxpayer takes the position that a treaty of the United States overrules (or otherwise modifies) an internal revenue law, but also provides that the Treasury Secretary may waive the reporting requirement with respect to instances when the Secretary determines that the waiver will not impede assessment or collection of the tax.

The Treasury Department and IRS, late April 20, released for publication in the Federal Registerproposed regulations under section 5000C relating to the 2% tax on payments made by the U.S. government to foreign persons pursuant to certain contracts. There are also proposed regulations provided under section 6114, with respect to foreign persons claiming an exemption from the tax under an income tax treaty.

Notice 2015-35

Notice 2015-35 explains that the tax imposed under section 5000C applies only to specified federal procurement payments made to foreign persons, regardless of their residence, and does not apply to U.S. persons.

The definition of “national” in U.S. income tax treaties generally includes citizens or nationals of a contracting state as well as legal persons, such as corporations, whose status as such is derived from the laws of that country. The tax imposed by section 5000C would not apply to payments to nationals resident in the United States.

Notice 2015-35 continues to explain that not all treaty nondiscrimination articles cover taxes of every kind and description, such as the tax imposed by section 5000C. Some treaty provisions apply only to federal income taxes, in which case, the treaty article would not cover the tax imposed under section 5000C.

In one table, Notice 2015-35 provides a list of the following countries that have qualified income tax treaties that exempt all nationals of that country from the tax imposed under section 5000C.

 

Austria   Bangladesh   Belgium   Bulgaria   Canada  
Czech Republic       Denmark    Estonia Finland Germany
Hungary Iceland Italy Jamaica Japan
Latvia Lithuania Luxembourg Malta Mexico
Netherlands Portugal Slovak Republic     Slovenia South Africa
Spain Sri Lanka Sweden Switzerland Turkey
United Kingdom    Venezuela      
Venezuela
Venezuela
Venezuela

 

A second table provides a list of the following countries that have qualified income tax treaties that exempt only individual nationals of that treaty country.

Cyprus   Israel   Kazakhstan   Russia   Ukraine   
 

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