Thai firms can escape new US tax, but action needed
A VERY obscure tax was enacted in 2011 that imposes a 2-per-cent levy on foreign contractors that provide goods and services to the US government.
It is an excise tax (IRC 5000C), and the US Internal Revenue Service issued final regulations on the tax in August. Remarkably, it took the IRS five years to do so.
The tax applies to a foreign company (or individual) that contracts to provide goods or services to the US government or any US government agency where the contract value exceeds US$150,000.
There are certain exemptions to the tax. The first is if the country of the foreign contractor has a “qualified income-tax treaty” with the US. While Thailand has a tax treaty with the US, the IRS has issued a notice listing which treaties are “qualified”, and Thailand’s is not.
The second exemption is if the foreign country is a party to the World Trade Organisation Agreement on Government Procurement. Thailand is not a party to this agreement.
The third exemption is if the county has a free-trade or other international agreement with the US. Thailand does not have an FTA with the US.
However, Thailand does have the Treaty of Amity and Economic Relations with the US. Article VI of this TOA provides that nationals and companies of either party will not be subject to taxes that are “more burdensome than those borne by nationals and companies of [the] other party”. Since the 5000C tax does not apply to US companies, under Article VI of the TOA it cannot apply to Thai companies.
While this is good news, there still remains an administrative filing obligation on the part of a Thai contractor to avoid the tax. It is the duty of the US government agency that is entering the contract with the Thai company to withhold 2 per cent of the contract payment unless the Thai company submits Form W-14, a “Certificate of Foreign Contracting Party Receiving Federal Procurement Payments”. Form W-14 is the only way to claim the exemption to the withholding based on the TOA.
Thai companies are most likely to provide goods and services to the US Embassy or consulates here in Thailand. But such contracts could also include the US military and other agencies with a presence here.
At this point it is not known if the embassy here is aware of the requirements and the need for Form W-14. Attempts to reach the embassy for comments were unsuccessful. But it is hoped that in the near future it will notify Thai firms entering contracts with a value exceeding $150,000 of the requirement.
The author, Greg Lamont, PwC Thailand, can be reached at [email protected].
