International Tax Aspects of Foreign Currency Transactions

(a)(b)Specifically, losses attributable to a “qualifying basis” as describedSec. 4.02 of the revenue procedure. A qualifying basis is generallya basis attributable to a payment of cash, accrual of interestincome, and not transferred in a reorganization transaction.However, the exception for losses attributable to qualifying basisdoes not apply to losses treated as ordinary under § 988, unless thetaxpayer is a bank under § 581. Thus, this relief provision is fairlylimited in its application.Sec. 4.03 of Rev. Proc. 2013-11 also provides exceptionspotentially applicable to certain § 988 transactions:(i)(ii)(iii)Losses from mark-to-market of an item under § 475(a) or§ 1256Losses under § 475(f), from legging out of integratedtreatment under § 1.988-5 or § 1.1275-6, and certain otherMTM provisions.Losses from properly identified § 1221(b)(2) hedgingtransactions. This places a premium on properidentification of hedging transactions.3. Section 986 — Translation Rules for Earnings and Profits and Foreign IncomeTaxes.A. § 986 E&P Translation Rules.(1) A foreign corporation must maintain its E&P in its functional currencyand translate E&P into dollars at “the appropriate exchange rate” on thedate of a distribution or deemed distribution. § 986(b)(1).(a)If the foreign corporation operates non-functional currency QBUs,those QBUs’ earnings must be translated into the foreigncorporation’s E&P under § 987. See Reg. § 1.985-1(f), Example 9.(2) § 989(b) appropriate exchange rates:(a)(b)(c)Spot rate on date of distribution for an actual distributionSpot rate on the last day of the year for a § 956 inclusionAverage yearly exchange rate for a subpart F inclusion22© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com