International Tax Aspects of Foreign Currency Transactions

egard to the form of enterprise through which the taxpayerconducts business (e.g., sole proprietorship, partnership, orcorporation), as long as the enterprise rises to the level of aQBU.” 27(c)(d)Congress intended for regulations to limit the deduction of branchlosses under § 987 to the taxpayer’s total U.S. dollar basis in thebranch. 28“Remittances” should include transfers of property betweenbranches operating in different functional currencies. § 987 gainor loss should be recognized on any remittance of property, not justcurrency and regardless whether the property is converted into USdollars. 29C. 1991 Proposed Regulations.(1) Taxable income calculations (§ 1.987-1).(a)The QBU’s taxable income is computed in a similar manner to aCFC’s computation of earnings and profits:(i)(ii)(iii)Start with books and records to determine profit and lossMake US tax adjustments to items reflected in the profitand lossTranslate the resulting FC taxable income/loss into owner’sfunctional currency at the average exchange rate for theyear(2) Remittances and Transfers of Property (§ 1.987-2).(a)Basis Pool and Equity Pool.(i)The Basis Pool = the US Dollar cost basis of the taxpayer’sinvestment in the QBU. The basis pool is increased by theDollar taxable income as determined under § 1.987-1; andby the amount of property contributed to the QBU,translated into the owner’s functional currency on the dateof the transfer, and decreased by branch losses and theamount of any remittances from the branch (translated into272829Id. at p. 1108.Id. at p. 1109. The 1991 Proposed Regulations, however, allow the basis pool to become negative, subject tolater recapture. See Prop. Reg § 1.987-1(a)(4).Id.36© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com