International Tax Aspects of Foreign Currency Transactions

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(i) Tiers of DREs are “flattened” into directly owned § 987QBUs. Thus, a transfer of property between a lower-tierparent and subsidiary QBU branch is re-characterized as atriangular flow of funds up to the parent, and down to therecipient QBU.(d)Disregarded transactions (§ 1.987-2(c)(2)).(i)Items resulting from disregarded transactions are ignoredfor § 987 purposes and instead are treated as a remittance(or contribution) of any related cash property between theQBUs. See Prop. Treas. Reg. § 1.987-2(c)(2).(ii) Example. A loan between a DRE and its owner isdisregarded for § 987 purposes. Payments on the loan aretreated as remittances of cash to the owner.(iii)§ 1.987-2(c)(9), Example 3. Interbranch sales of propertybetween QBUs of a single owner are re-characterized asseparate transfers of cash and property between the QBUssince cash is a marked asset. If the property purchasedfrom the other QBU is an historic asset, the differencebetween current and historic spot rates can result in aremittance from one of the two QBUs.(iv) § 1.987-2(c)(9), Example 4. Where there is a regardedtransaction between one entity and another entity’s QBU,this transaction is taken into account for § 987 purposes.(e)Partnership issues.(i)§ 1.987-2(c)(5) provides that where an owner of a DREsuffers a dilution in interest due to another person’spurchasing an interest in a DRE or contribution of propertyto the DRE, that results in a constructive remittance and recontributionof a portion of the underlying QBU’s assets.(2) Foreign Exchange Exposure Pool Method.(a)Distinction between “marked items” and “historic items” is crucialto operation of the 2006 Proposed Regulations.(i) Marked items = assets and liabilities that would be § 988transactions if not denominated in the QBU’s functionalcurrency.39© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
Examples:i. Cashii. Payables and Receivablesiii. Debt instrumentsiv. Foreign currency financial instrumentsMarked items are translated at the current spot rate forpurposes of measurement of unrecognized § 987 gain orloss.(ii)Historic items = everything other than marked items.Historic items are translated at all times at the historic spotrate which does not fluctuate over time.Examples:v. Inventoryvi. Equipment and other § 1231 propertyvii. Investment assets(iii)Compare net worth method of Rev. Rul. 75-106 and“temporal method” of applying FAS 52.(b) Taxable income calculation (§ 1.987-3).(i)(ii)Translation of income occurs on an item-by-item basis.General rule (§ 1.987-3(b)(1)). Translate items using theyearly average exchange rate. This general rule applies toamount realized, income items, and many ordinaryoperating expenses.1) Alternatively, owner may elect to apply the spotrate for the date the item is incurred to make thetranslation of any of the above items. § 1.987-3(b)(1)(ii); § 1.987-3(f), Examples 7 and 8.(iii) Exceptions (§ 1.987-3(b)(2)). Translate the followingitems using their historic exchange rates:1) Depreciation and Amortization40© 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 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: D. The 2006 Proposed § 987 Regulat
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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