Overview
This section details the requirement for federal agencies to withhold a 2% excise tax on specific foreign contract payments in accordance with 26 U.S.C. 5000C. It establishes that while agencies perform the withholding, the Internal Revenue Service (IRS) maintains sole jurisdiction over the interpretation, imposition, and adjudication of the tax.
Key Rules
- Withholding Mandate: Agencies must collect the section 5000C tax by withholding funds from applicable contract payments.
- IRS Form W-14: Contractors must submit IRS Form W-14 (Certificate of Foreign Contracting Party Receiving Federal Procurement Payments) with every voucher or invoice.
- Default Rate: In the absence of a completed Form W-14, the agency must apply a default withholding rate of 2% to the payment.
- Exemption Procedures:
- Certain exemptions are managed by the Contracting Officer via the omission of specific contract clauses.
- Other exemptions (per 26 CFR 1.5000C-1(d)(5)-(7)) must be claimed by the offeror at the time of the initial offer; failure to do so results in the loss of those exemptions for the duration of the contract.
- Jurisdiction: Tax disputes and audits are handled exclusively by the IRS as tax matters, not as contract disputes under the Contracting Officer's authority.
- Exclusivity of Rules: General tax exemptions listed in FAR 29.201 through 29.302 do not apply to this specific excise tax.
Practical Implications
- Contracting Officer Role: COs act as collection agents rather than tax advisors; they are explicitly instructed to refer all technical tax interpretation questions to the IRS.
- Administrative Burden on Foreign Contractors: Foreign entities must be diligent in submitting Form W-14 both at the proposal stage and with every subsequent invoice to avoid mandatory 2% withholdings that cannot be resolved through standard contract dispute channels.