The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9782) under section 5000C relating to the 2% tax on payments made by the U.S. government to foreign persons pursuant to certain contracts.
The final regulations also include rules under section 6114, with respect to foreign persons claiming an exemption from the tax under an income tax treaty.
The final regulations [PDF 253 KB] will be published in the Federal Register on August 18, 2016. The preamble explains that the final regulations apply on and after a 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. Penalty relief may be available for foreign persons who substantially comply with the reporting requirements within the time frame in the final regulations.
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 pursuant to contracts entered into on and after January 2, 2011.
Section 6114(a) generally requires reporting when a taxpayer takes the position that a U.S. tax treaty overrules (or otherwise modifies) an internal revenue law. Section 6114(b) provides that the Treasury Secretary may waive the reporting requirement under section 6114(a) with respect to classes of cases for which the Secretary determines that the waiver will not impede assessment or collection of the tax.
Proposed regulations were released in April 2015 under section 5000C relating to the 2% tax on payments made by the U.S. government to foreign persons pursuant to certain contracts. The IRS also released Notice 2015-35 to provide a list of qualified income tax treaties that exempt all nationals of that country from the 2% tax imposed under section 5000C. In releasing Notice 2015-35, the IRS explained:
The preamble explains that in finalizing these regulations, comments were received and considered and that changes were made in the final regulations to address certain comments. For instance, the final regulations include measures concerning:
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