FAR 52.229-8—Taxes-Foreign Cost-Reimbursement Contracts.
Plain-English Summary
FAR 52.229-8, Taxes-Foreign Cost-Reimbursement Contracts, allocates responsibility for certain foreign taxes and duties in cost-reimbursement contracts performed overseas. It addresses two main subjects: first, it makes taxes or duties nonallowable when the United States is exempt from them by treaty or agreement with the foreign government, or when the contractor or subcontractor is exempt under the foreign country’s laws; second, it requires the contractor to remit or credit to the Government any foreign tax credit that reduces U.S. Federal income tax liability because a reimbursed foreign tax or duty was paid. In practice, the clause prevents the Government from paying costs it should not bear and avoids double recovery when a contractor gets both reimbursement and a tax benefit. It is especially important in foreign environments where tax treaties, host-nation exemptions, VAT/GST regimes, customs duties, and local tax credits can materially affect contract cost. Because this is a cost-reimbursement clause, careful accounting, documentation, and coordination with tax advisors are essential to determine what is allowable and what must be returned to the Government.
Key Rules
Exempt taxes are unallowable
Any tax or duty from which the United States is exempt by agreement with the foreign government, or from which the contractor or subcontractor is exempt under the foreign country’s laws, is not an allowable cost under the contract. The Government will not reimburse those amounts even if they were incurred or paid.
Foreign law and treaty exemptions matter
The clause applies both to exemptions arising from an international agreement involving the United States and to exemptions available under the host country’s laws. Contractors must identify applicable exemptions before billing the Government for foreign taxes or duties.
Subcontractor taxes are covered too
The rule applies not only to the prime contractor but also to subcontractors under the contract. A subcontractor’s exempt tax or duty is likewise unallowable if it falls within the clause’s exemption language.
Tax credits must be passed through
If the contractor or subcontractor receives a foreign tax credit that reduces U.S. Federal income tax liability because of payment of a tax or duty that was reimbursed under the contract, the amount of the reduction must be paid or credited to the Government as directed by the Contracting Officer.
No double benefit from reimbursement and credit
The clause prevents a contractor from being reimbursed for a foreign tax or duty and then also retaining the benefit of a related U.S. tax credit. The Government is entitled to the value of the offset to the extent the reimbursed tax produced the credit.
Contracting Officer controls the offset
The Contracting Officer directs how and when the amount of the tax credit reduction is paid or credited to the Government. Contractors should follow the CO’s instructions and maintain records supporting the calculation.
Responsibilities
Contracting Officer
Identify and apply the clause in covered foreign cost-reimbursement contracts; determine, with support from the contractor, whether a tax or duty is exempt and therefore unallowable; and direct the contractor on how to pay or credit any foreign tax credit reduction owed to the Government.
Contractor
Exclude exempt foreign taxes and duties from allowable contract costs; ensure subcontractors do the same; track any foreign tax credits that reduce U.S. Federal income tax liability because of reimbursed taxes; and remit or credit the Government the amount required by the Contracting Officer.
Subcontractor
Comply with applicable foreign tax exemptions and avoid charging exempt taxes or duties as allowable costs through the prime contractor; if it receives a related foreign tax credit, support the prime contractor’s compliance with the clause’s pass-through and offset requirements.
Government of the United States
Receive the benefit of treaty-based or host-nation exemptions and recover the value of any tax-credit reduction attributable to reimbursed foreign taxes or duties.
Practical Implications
Contractors should verify foreign tax status before incurring or billing costs, because reimbursing an exempt tax can create an unallowable cost issue and later repayment obligation.
The clause requires close coordination between project accounting and tax compliance teams; foreign VAT, GST, customs duties, and similar charges may be exempt, recoverable, or only partially allowable depending on the host country and treaty terms.
Documentation is critical: contractors should retain treaty references, exemption certificates, invoices, tax filings, and calculations showing whether a tax was exempt and whether a U.S. tax credit was received.
A common pitfall is treating all foreign taxes as allowable simply because they were paid; under this clause, exempt taxes are not allowable even if the contractor initially bears the cost.
If a foreign tax credit is later realized, the contractor must be prepared to calculate the portion attributable to reimbursed taxes and return that value to the Government promptly as directed by the Contracting Officer.
Official Regulatory Text
As prescribed in 29.402-2 (a) , insert the following clause: Taxes-Foreign Cost-Reimbursement Contracts (Mar 1990) (a) Any tax or duty from which the United States Government is exempt by agreement with the Government of ______ [ insert name of the foreign government ] , or from which the Contractor or any subcontractor under this contract is exempt under the laws of ______ [ insert name of country ] , shall not constitute an allowable cost under this contract. (b) If the Contractor or subcontractor under this contract obtains a foreign tax credit that reduces its Federal income tax liability under the United States Internal Revenue Code (Title26, U.S. Code) because of the payment of any tax or duty that was reimbursed under this contract, the amount of the reduction shall be paid or credited at the time of such offset to the Government of the United States as the Contracting Officer directs. (End of clause)