DFARS Part 229: Taxes

In plain English

DFARS Part 229 covers how DoD handles taxes in contracts, including resolving tax problems, reporting foreign taxation on U.S. assistance programs, and using specific clauses for foreign tax exemptions. It matters to contractors because it dictates when taxes apply, how to claim exemptions, and what reporting is required, especially for work performed outside the United States.

Key rules

• Within DoD, designated legal counsels are the defense agency General Counsels, the General Counsels of the Navy and Air Force, and for the Army, the Chief, Contract Law Division, Office of the Judge Advocate General. (229.101)
• Commodities acquired under contracts funded by U.S. assistance programs must be exempt from taxation by foreign governments, and if taxes are imposed, the foreign government must reimburse the U.S. Government. (229.170-2)
• The foreign tax exemption applies to contracts or subcontracts for commodities valued at $500 or more funded by annual foreign operations appropriations, but does not apply to services. (229.170-2)
• The contracting officer must report when a foreign government imposes tax or customs duties on commodities that should be exempt. (229.170-3)
• Use the clause at 252.229-7011, Reporting of Foreign Taxes—U.S. Assistance Programs, in solicitations and contracts funded with U.S. assistance appropriations. (229.170-4)
• The contracting officer shall not authorize the Governmentwide commercial purchase card as a payment method if the contract includes FAR 52.229-12, Tax on Certain Foreign Procurements, unless the contract also includes 252.229-7014, Full Exemption from Two-Percent Excise Tax on Certain Foreign Procurements. (229.204)
• Use the basic or alternate of the clause at 252.229-7001, Tax Relief, when awarding to a foreign concern for performance in a foreign country; use the basic clause for countries other than Germany and alternate I for Germany. (229.402-70)
• Use specific tax exemption clauses for performance in Germany, Italy, Spain, and the United Kingdom, as detailed in 229.402-70. (229.402-70)

Who does what

In practice

• If you are bidding on a contract for commodities funded by U.S. foreign assistance, ensure you understand that taxes should be exempt and report any taxes imposed.
• For contracts performed in Germany, Italy, Spain, or the United Kingdom, check that the correct tax exemption or relief clause is included in your contract.
• If your contract includes FAR 52.229-12, you may not be paid via the Governmentwide commercial purchase card unless the contract also includes 252.229-7014.

Common pitfalls

• Assuming the foreign tax exemption applies to services—it does not; it only applies to commodities.
• Overlooking the requirement to report foreign taxes imposed on exempt commodities, which could delay reimbursement.
• Failing to verify that the correct tax relief clause is used for the country of performance, which could result in unexpected tax liabilities.

Written by AI from this part's codified text (2026-10-04); cited sections are checked against the part. A guide, not legal advice: the regulation text, the solicitation and your contract rule.