International Tax Aspects of Foreign Currency Transactions

5) Simply following GAAP may not be reasonable,because FAS 52 does not have a remittanceconcept.5. Special Considerations for Hyperinflationary Currencies.A. Definitions.(1) “Hyperinflationary” for tax purposes = Country’s consumer price indexshows a 100% cumulative increase over three years. 33(2) “Inflationary” as used for § 905(c) purposes = Country’s CPI increases bya cumulative 30% over three years. Note that “inflationary” taxes must betranslated at the date-of-payment spot rate under § 986.(3) DASTM = US Dollar Approximated Separate Transactions Method(DASTM) for translating results of a QBU operating in a hyperinflationarycurrency. Requires the branch to translate its balance sheet back into USdollars and include the translation adjustment as an adjustment to E&P.B. DASTM (§ 1.985-3).(1) Theory of DASTM. Profit and loss accounting of §§ 986 and 987 willcreate distortions in hyperinflationary environment. Entities with fixedcosts will earn excessive income as inflation increases gross receipts butnot historic costs recovered through COGS and depreciation. Interestbearing debt will also be distorted, as higher interest coupons offset FXloss on principal.To prevent these distortions, DASTM requires a QBU to compute itsearnings in dollars. In addition, the QBU must compute a $USD net worthat the beginning and end of every period. The change in $USD net worthis DASTM gain / loss that is included in earnings and profits.(2) Profit and Loss translation (Reg. § 1.985-3(c)).(a)(b)Items are translated at the exchange rate for the translation periodto which they related. Translation period = any regular period of amonth or less that may be adopted by the taxpayer.Depreciation, inventory cost, and other historic cost items arereflected at the spot rate for the translation period in which theywere incurred.33Reg. § 1.985-1(c)(2)(ii)(D).44© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com