International Tax Aspects of Foreign Currency Transactions

More documents

Recommendations

Info

deemed to change its functional currency immediately before the§ 381 transaction.(i)The adjustments under § 1.985-5 must be made at that time.(b) Example. CFC1 is a French corporation with Euro activities.CFC2 operates a French branch that uses the US dollar as itsfunctional currency. CFC1 merges into CFC2, and the branchesare combined. Under § 985(b), the combined branch uses the Euroas its functional currency. Accordingly, CFC1 is deemed toundergo a functional currency change immediately before themerger. The last day of the year preceding the year of change forpurposes of §1.985-5 presumably is the closing date of the merger.2. Section 988 — Non Functional Currency Transactions.A. Separate transaction principle.(1) Foreign currency gain or loss attributable to a § 988 transaction is to betreated as ordinary income or expense. § 988(a)(1).(2) Gain or loss on property purchased with a foreign currency is taken intoaccount by translating the basis and amount realized into functionalcurrency, separately from any loan used to acquire the property. See Rev.Rul. 78-201; Reg. § 1.988-1(a)(6), Example 6.(a) Example. Foreign currency gain on satisfaction of a £ loanpayable used to acquire inventory was separately reported despitethe taxpayer’s loss on the sale of inventory. See Church’s EnglishShoes, Ltd. v. Commissioner, 56-1 USTC para. 9271 (2d Cir.1956).A second example. Taxpayer borrows £ to purchase a personalresidence. Later, when the currency has appreciated, the individualsells the property for £, and retires the debt. Taxpayer recognizesgain on sale of property that reflects the increased $ value of the £received on the sale of the home. Under the separate transactionprinciple, the taxpayer recognizes a separate § 988 loss onretirement of the debt. 5B. Certain Differences between § 988 and GAAP (FAS 52).5Since the purchase of a home is a personal transaction, however, such loss may be disallowed under § 165(c).See Quijano v. Commissioner, 96-2 USTC 50,441 (1 st Cir.); Rev. Rul. 90-79. This appears to create a potentialwhipsaw in that § 988(e)(2) requires foreign currency gains attributable to personal transactions to be recognizedif in excess of $200, while any losses on such transactions are disallowed as non-business losses under § 165(c).7© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
(1) Application of Mark-to-market.(a)(b)FAS 52, 15, provides for re-measurement and recognition offoreign currency gain or loss on certain types of foreign currencytransactions at each balance sheet date.Under § 988, by contrast, foreign currency gain or loss is takeninto account only as gain or loss is realized and recognized fromunderlying transaction. See § 988(b). In 1992, the IRS proposedregulations to permit the taxpayer to elect to treat all § 988transactions as MTM items. See Prop. Reg. § 1.988-5(f).However, unlike FAS 52, there is no exception for long-term itemsfrom this MTM requirement. In addition, the taxpayer and allrelated parties must conform to the same election.(2) Treatment of Intercompany Loans.(a)(b)Under FAS 52, 20(b), foreign exchange gain or loss from longterm,intercompany loans may be treated as a component of thecumulative translation adjustment (CTA) account.Under § 988, loans to affiliates are subject to the normal rulesgoverning § 988 transactions and trigger taxable income or losswhen gain or loss from those transactions is recognized.(3) Net investment hedges.(a)(b)Under FAS 52, 20(a), foreign currency contracts intended tohedge a subsidiary’s net balance sheet may be treated as acomponent of the CTA account with respect to that entity’s.For tax purposes, contracts entered into to hedge a net investmentin stock of a subsidiary are generally not eligible for hedgeaccounting. See Hoover Co. v. Commissioner, 72 T.C. 206 (1979);Barnes Group, Inc. v. United States, 697 F. Supp. 591 (D. Conn.1988). 6 However, if the net investment hedge relates to aDisregarded Entity (DRE), then it may be eligible for hedgeaccounting to the extent that it reduces risk with respect to ordinaryproperty or ordinary liabilities under the normal § 1221(b)(2) rules.6Losses on such contracts will generally not be treated as part of a “straddle” including the subsidiary’s stock, orsubject to deferral under § 1092, unless the subsidiary’s stock is itself actively traded personal property. SeePLR 9640023.8© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
Page 1 and 2: Overview of the Taxation of Foreign
Page 3 and 4: Table of ContentsPage1. Determinat
Page 5 and 6: processes orders and maintains sepa
Page 7 and 8: (3) Examples.(a)(b)(c)Reg. § 1.985
Page 9: D. Changes in Functional Currency.(
Page 13 and 14: (ii) Accrued foreign income tax pay
Page 15 and 16: Gain or loss is computed, without r
Page 17 and 18: (4) Rules Applicable to Debt Instru
Page 19 and 20: The obligor of a non-functional cur
Page 21 and 22: (iii) Rollover of an Existing Contr
Page 23 and 24: can rebut this presumption by showi
Page 25 and 26: (a)(b)Specifically, losses attribut
Page 27 and 28: (i)Actual distributions of PTI to t
Page 29 and 30: the paid-in-capital account under R
Page 31 and 32: (d)Taxes for which the taxpayer mak
Page 33 and 34: were typically translated at the sp
Page 35 and 36: (b)Brazilian ORTNs.During a period
Page 37 and 38: Under the profit and loss method, t
Page 39 and 40: egard to the form of enterprise thr
Page 41 and 42: D. The 2006 Proposed § 987 Regulat
Page 43 and 44: Examples:i. Cashii. Payables and Re
Page 45 and 46: 3) Owner ceases to exist in a non-
Page 47 and 48: 5) Simply following GAAP may not be
Page 49 and 50: (5) Consequences of a Change to DAS
Page 51 and 52: (a)Certain cases have addressed a M
Page 53 and 54: E. Hyperinflationary Debt Instrumen
Page 55 and 56: (c)(d)The underlying transaction is
Page 57 and 58: allow a CFC to avoid the need to tr
Page 59 and 60: (a) PLR 200813026. IRS granted a PL
Page 61 and 62:
(a)(b)(c)(d)Reg. § 1.446-4 provide
Page 63:
60© 2013 William R. Skinner, Esq.F
show all

International Tax Aspects of Foreign Currency Transactions

Create successful ePaper yourself

Delete template?

Save as template?