International Tax Aspects of Foreign Currency Transactions

(b)Brazilian ORTNs.During a period of hyper-inflation in Brazil, the Braziliangovernment instituted a “peg” to the taxpayer’s tax liability, whichwas due in 12 monthly installments. The tax was assessed in afixed number of ORTNs at year end. 1/12 of each ORTN was thenconverted into cruzeiros at the spot rate for each month ofpayment. Due to inflation, the total number of cruzeiros actuallypaid exceeded the amount accrued at the end of the year.Rev. Rul. 91-21 & CCA #003802 – the IRS set out its position thatthe amount of “foreign tax liability” for purposes of § 901 and§ 902 was the dollar value of the Cruzeiros when paid at eachmonthly due date.Thus, in the case of a branch, the total § 901 credit equaled theamount of cruzeiros paid, translated at the spot rates on the date ofpayment.In the case of a corporation, under the translation rules then ineffect under § 902, the tax was equal to the dollar value of theORTN liability on the dividend payment date. It was notredetermined to reflect the subsequent inflation in the cruzeiro. Asthe court recognized in AMP, applying § 905(c) to redetermine thetaxes would result in a hyping of the § 902 credit for the year ofthe dividend payment.AMP, Inc. v. United States,185 F.3d 1333 (Fed. Cir. 1999) –Reversing the Court of Claims, the Federal Circuit ruled that the§ 905(c) regulations reference to “units of currency” accrued orpaid meant the Cruzeiro not the ORTN. Therefore, the currencyfluctuation was required to be taken into account.The court noted that the 1986 Act corrected the issue in the case byrequiring hyperinflationary currencies to use the US dollar.Inflationary currencies now must be translated at the spot rate, 20and § 902 credits with respect to inflationary QBUs must beredetermined at the U.S. parent level and not as a poolingadjustment. 21 This causes the implicit currency gain in a paymentof inflationary taxes to be treated as a reduction of the taxes paid.2021§ 986(a)(1)(C).Reg. § 1.905-3T(d)(3)(i).32© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com