International Tax Aspects of Foreign Currency Transactions

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translated at the current spot rate on the effective date of its changein functional currency.B. Translation of Foreign Income Taxes.(1) General rule. Translate foreign income taxes (and any adjustmentsthereto) at the average exchange rate for the taxable year to which thetaxes relate. The general rule was intended to limit the need for § 905(c)redeterminations arising from exchange rate fluctuations between theaccrual date and payment date. 18Under the general rule, any adjustments to accrued taxes (includingrefunds) are translated at the average exchange rate for the year.(2) Exceptions Requiring Spot Rate Translation.(a)(b)Two-year rule. Taxes paid more than 2 years after the end of thetaxable year to which they relate. See § 986(a)(1)(B)(i).Taxes paid before the beginning of the U.S. taxable year to whichthey relate.(i) Estimated taxes. In TAM 8943003, the IRS ruled thatmonthly estimated tax payments made during the taxableyear should be treated as payments of tax (rather thanmerely deposits) and translated for § 905(c) purposes at thespot rate on the date of payment. The legislative history ofthe 1986 TRA also indicates that Congress intended forprepayments of estimated tax to be translated at the spotrate prevailing on the date of payment. 19 The fact that thecurrency had been devalued by the end of the year did notresult in an adjustment to the taxpayer’s foreign tax credit.(ii)Under current law, however, these estimated tax paymentsmade during the U.S. taxable year of the CFC would betranslated under the general rule of § 986(a)(1). Thisexception is limited to cases where the estimated taxes arepaid before the beginning of the U.S. taxable year to whichthey relate.(c)Taxes denominated in an inflationary currency. See discussion ofBrazilian ORTNs below for the rationale behind this rule.1819See Conference Committee Report on P.L. 105-34 (Section 1102 of the 1997 Taxpayer Relief Act).1986 TRA Bluebook at p. 1110.27© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
(d)Taxes for which the taxpayer makes a one-time binding election totranslate at the spot rate on the date of payment. See§ 986(a)(1)(D). Under the spot rate election, in the case of accruedbut unpaid taxes, the translation is done using the spot rate for thelast day of the year. Reg. § 1.905-3T(b)(1)(ii)(D).The election may be made either for all foreign income taxes, oronly non-functional currency taxes attributable to US dollar QBUs.2007 Temp. Reg. § 1.905-3T(b)(1)(ii)(D). See also Notice 2006-47, § 4 (interim guidance with respect to election). The electioncan be made in any year, but once made, it continues to applyabsent IRS consent to revoke the election. See id.(e)Sec. 905(c) Consequences of Spot Rate Election. If the taxpayer isusing the spot rate election, then the Dollar amount of taxesaccrued on the last day of the foreign tax year may differ from theDollar value of taxes actually paid in the subsequent year.If the fluctuations in $USD value of foreign taxes result in a percountrychange of more than the lesser of $10,000 or 2% of the USDollar tax liability, then a § 905(c) redetermination is required for§ 901 direct foreign tax credits. See Reg. § 1.905-3T(d)(1). Noredetermination is required for § 902 credits due to currencyfluctuations, because these § 905(c) adjustments (like other§ 905(c) adjustments affecting a CFC) are generally made to theCFC’s E&P and tax pools. See Reg. § 1.905-3T(d)(2)(i).(3) Translation of Foreign tax refunds.(a)(b)Prior law. “The redetermination should be made by subtractingfrom the original foreign tax credit the dollar value of the refundmeasured at the prevailing exchange rate on the day the refund ismade.” AT&T v. United States, 430 F. Supp. 172 (S.D.N.Y. 1977),aff'd, 567 F.2d 554 (2d Cir. 1978).General Rule of Current Regulations.(i)(ii)Under the average exchange rate translation of § 986(a)(1),the refund should be treated as an “adjustment thereto” thatis translated at the average rate for the year to which the taxrelates. See Reg. § 1.905-3T(b)(3).If the foreign taxes are translated at the spot rate, anyrefund would be translated at the exchange rate used totranslate the original payment of foreign taxes.§ 986(a)(2)(B)(ii); see also Reg. § 1.905-3T(b)(3).28© 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 and 10: D. Changes in Functional Currency.(
Page 11 and 12: (1) Application of Mark-to-market.(
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: the paid-in-capital account under R
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

International Tax Aspects of Foreign Currency Transactions

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