International Tax Aspects of Foreign Currency Transactions

(5) Consequences of a Change to DASTM (Reg. § 1.985-7).Consequences generally are similar to a change in functional currencyfrom local currency to $USD. Importantly, Reg. § 1.985-7(a) implementsthe DASTM transition as of the transition date, which is the beginning ofthe 3-year period during which the hyper-inflation began. In the case of aCFC, the following adjustments are prescribed:(a)(b)(c)Section 988 transactions of the CFC denominated in $USD areclosed out.Assets and liabilities are translated into $USD as if the CFC hadapplied DASTM beginning on the transition date and madeadjustments under Reg. § 1.985-3(d)(1) throughout the look-backperiod.Post-1986 earnings are translated by assuming the CFC hadchanged to DASTM on the transition date. Thus, E&P as of thetransition date is translated at the transition date exchange rate.E&P during the intervening look-back period is translated as if theCFC had applied Reg. § 1.985-3 during the period.Note: Given the distortion that DASTM aims to correct, in thecase of an operating company with substantial retained earnings,the change to DASTM would tend to reduce E&P in most cases.US shareholders in CFCs make additional adjustments.(d)First, shareholders increase or reduce subpart F income beginningin the year of change to reflect the fact that the amount of subpart Fincome would have been different. This adjustment, if positive, istreated as an increase to subpart F income that carries a § 960credit as if actually included in income.(e) Gain or loss deemed recognized on close-out of $USD § 988transactions is characterized under the normal subpart F rules.(f)PTI accounts are deemed distributed on the DASTM CFC’sconversion to the $USD as its functional currency.Any gain or loss recognized under the above adjustments is takeninto account under a mandatory 4-year spread period, whetherpositive or negative.Section 987 QBUs converting to DASTM must make similar adjustmentsto CFCs. However, since they are directly owned by another owner, the46© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com