Thursday, January 31, 2013

Excise Tax on Foreign Companies with Government Contracts

Its not very often that a FAR cost principle gets added or modified but that's what happened last Tuesday, the 29th. The FAR councils added a provision to FAR 31.205-41, Taxes, making excise tax paid by foreign persons (individuals or legal persons) unallowable. Although this one is not likely to affect many contractors directly, it is important from the standpoint that prime contractors must administer the provision in dealings with foreign subcontractors.

It all started with Public Law 111-347, an Act to extend and improve protections and services to individuals directly impacted by the terrorist attack in New York on 9/11. Section 301 contains a provision that levies a 2% excise tax on foreign persons receiving payments under Government contracts for goods and services.

The statute also prohibited these foreign persons (or foreign contractors) from paying the tax but turning around and charging it back to the Government as a reimbursable cost, or including the cost in pricing negotiated contracts.

Paragraph (b)(8) was added to FAR 31.205-41 to make this clear. It adds the language "Any tax imposed under 26 U.S.C. 5000C" to the listing of enumerated unallowable taxes. The FAR revision also added companion contract clauses in FAR Part 52 which provides that taxes imposed under 26 U.S.C 5000C may not be included in the contract price nor reimbursed.

The effective date of this prohibition on excise taxes is February 28, 2013.

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