FAR 52.229-9—Taxes-Cost-Reimbursement Contracts with Foreign Governments.
Plain-English Summary
FAR 52.229-9, Taxes-Cost-Reimbursement Contracts with Foreign Governments, addresses how taxes and duties are treated when the Government is buying on a cost-reimbursement basis and the work involves a foreign government or foreign tax regime. The clause covers two main subjects: first, it makes certain taxes or duties unallowable when the United States is exempt from them by agreement with a foreign government, or when a subcontractor is exempt under the laws of the foreign country; second, it requires repayment to the U.S. Treasury when a subcontractor receives a foreign tax credit that lowers its U.S. Federal income tax because a reimbursed foreign tax or duty was paid. In practice, the clause prevents the Government from paying costs it should not bear under international tax exemptions and avoids double benefit to subcontractors who both receive reimbursement and later obtain a tax credit. It is used only in cost-reimbursement contracts where foreign tax issues can affect allowable cost, and it requires careful coordination among the contracting officer, prime contractor, and subcontractors to identify exempt taxes, document eligibility, and track any later tax-credit benefit. The clause also ties directly to the contract’s cost allowability rules, meaning the contractor must segregate and exclude disallowed taxes from billed costs and ensure any required remittance to Treasury is made on time.
Key Rules
Exempt taxes are unallowable
Any tax or duty from which the United States is exempt by agreement with the foreign government is not an allowable cost under the contract. The same is true for any subcontractor tax or duty from which the subcontractor is exempt under the laws of the foreign country.
Foreign government name must be inserted
The clause requires insertion of the specific foreign government and country names in the blanks. This makes the exemption reference contract-specific and ties the clause to the applicable foreign tax arrangement.
Applies to cost-reimbursement contracts
This clause is prescribed for cost-reimbursement contracts, where the Government reimburses allowable costs. Because taxes can be billed as part of reimbursable cost, the clause ensures only properly allowable foreign taxes are charged.
Subcontractor tax credits trigger repayment
If a subcontractor later receives a foreign tax credit that reduces its U.S. Federal income tax liability because of a reimbursed tax or duty, the amount of that reduction must be paid to the Treasurer of the United States.
No contract credit for tax benefit
The subcontractor may not simply credit the amount against the contract. The clause requires actual payment to the Treasurer at the time the Federal income tax return is filed, preventing the benefit from being retained as a contract offset.
Responsibilities
Contracting Officer
Insert the correct foreign government and country names in the clause when the contract is awarded. Ensure the clause is used when required by the prescription and that the contract administration team understands which foreign taxes or duties are unallowable.
Prime Contractor
Exclude unallowable foreign taxes and duties from claimed costs, flow down and monitor the clause as needed, and ensure subcontractors understand the repayment obligation if they receive a related foreign tax credit.
Subcontractor
Identify any foreign tax or duty exemptions under local law, avoid charging exempt amounts as allowable costs, and if a reimbursed tax or duty later produces a foreign tax credit that reduces U.S. Federal income tax, pay the reduction amount to the Treasurer of the United States when filing the Federal return.
Agency/Government
Reimburse only allowable costs and enforce the contract’s tax treatment rules so the Government does not pay taxes or duties from which it is exempt by agreement or that are otherwise nonallowable under the clause.
Practical Implications
Contractors must track foreign taxes and duties separately from other costs, because exempt amounts cannot be billed as allowable cost.
The biggest compliance risk is double recovery: a subcontractor could be reimbursed for a foreign tax and later benefit from a U.S. tax credit unless the repayment rule is followed.
Contracting officers should make sure the correct foreign government/country names are inserted; leaving the blanks incomplete can create ambiguity about which exemptions apply.
Prime contractors should obtain subcontractor certifications or supporting records when foreign tax issues are present, since subcontractor tax credits can create downstream repayment obligations.
Because the clause is limited to cost-reimbursement contracts, parties should verify the contract type and the presence of foreign tax agreements before applying the rule.
Official Regulatory Text
As prescribed in 29.402-2 (b) , insert the following clause: Taxes-Cost-Reimbursement Contracts with Foreign Governments (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 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 any subcontractor 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 (not credited to the contract) to the Treasurer of the United States at the time the Federal income tax return is filed. (End of clause)