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Services contract with performance in the country of Bahrain. The contract has a base period and four options. The contractor is invoicing an employee Tax Allowance of $1,000 per person to consult with a tax expert on the employees' extended overseas travel and its impact on Federal and State taxes. They are also invoicing for a Car Allowance of $400 per employee and stating they chose this method to avoid actual receipts for such expenses a taxis, car rentals, bus rides, or car purchases. Part of their justification is these charges are normal in the course of business for overseas work.

Is the contractor allowed to charge these expenses under one of the cost reimbursable line items?

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While I agree that the question lacked sufficient context for a precise answer, I will chime in with some general observations based on over 20 years' contracts experience overseas, most of it in the Middle East, including my current job.

In my experience the $1,000 per employee tax allowance is not customary, and imho is not a cost that a reasonable and prudent business person would incur. Companies operating in the Middle East typically leave employees on their own for taxes, and will not offer employees any advice at all, other than to make sure you obey the law. I would definitely question this cost and challenge the contractor to support it with documentation, preferably sufficient to demonstrate that it is usual and customary in Bahrain, or at least consistent with the contractor's policies, procedures, and practices -- not just for this project -- that apply worldwide to a meaningful number of other projects.

A transportation allowance of BHD 150 per month may be OK, but I haven't been to Bahrain in quite some time, and what is reasonable would depend on many factors such as distance between residence and workplace, etc. Regarding the etc., bear in mind that personal transportation for normal domestic purposes has generally been recognized as an allowable cost in the Middle East, so shopping, restaurants, entertainment, etc. would be allowable destinations. In other Middle East countries, a vehicle is often provided to employees, so this allowance might be considered in lieu of a company owned or leased vehicle. A Taurus leases for the equivalent of BHD 419 per month in Riyadh. Often with such allowances, employees get very creative at finding ways to cut their own costs and pocket as much of the allowance as possible, defeating the purpose of the allowance. Again, I would question the cost and require the contractor to support it in sufficient detail to convince a potentially hostile auditor that the amount is consistent with the local market, the benefit is consistent with local practices, and the cost of administering receipted expenses outweighs the advantage of limiting compensation for transportation to reimbursement of documented actual costs.

Do you have access to an employee benefits survey report for the region, such as the one compiled by Towers Watson? If not, you could suggest to the contractor that something like this might support their questioned costs.

Edited to add an actual lease cost. Edited again to note the actual lease cost was for only 9 months, dropping each year thereafter.

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If the company wanted to provide tax assistance it could contract for the services, pay the fees, and recover the cost through the employee fringe benefit (or overhead) rate. So even though the payment is structured in an unusual manner it won't be unallowable solely for that reason. As cajuncharlie posted, it will be important to understand whether the expense is something normally covered by the company for all its OCONUS-assigned employees. Policies and procedures (and/or Disclosure Statement) will be critical to support that assertion.

As for a car allowance, I don't have much ME experience. The one trip I made to Qatar, we had a driver. But the trip was not related to a government contract.

Hope this helps.

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  • 4 weeks later...

I spent 7 years working in Saudi Arabia (in Controller and CFO positions for large contractors) and we proposed and negotiated both tax preparation and auto allowances for employees. No issues with either DCMA or DCAA. We provided vehicles so there were no opportunities for people to "pocket" allowances.

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