International Tax Aspects of Foreign Currency Transactions

6. Subpart F Treatment of Foreign Currency Gains and Losses.A. General rule.(1) Section 954(c)(1)(D) generally treats the excess of a CFC’s currency gainsover its currency losses attributable to § 988 transactions in a taxable yearas foreign personal holding company income (FPHCI).(2) This category of FPHCI does not include foreign currency gains andlosses attributable to certain currency gains and losses (Reg. § 1.954-2(g)(5)):(a)(b)(c)Capital gains or losses on contracts identified as capital assetsunder § 988(a)(1)(B)Currency gain or loss treated as interestExchange traded futures and options that are excluded fromconstituting § 988 transactions by § 988(c)(1)(D)(i) (absentelection to treat such contracts as § 988 transactions). Thepreamble states that such contracts constitute commoditiestransactions, see T.D. 8618, although this seemingly can bequestioned based on the language of the definition of “commodity”within Reg. § 1.954-2(f) as an interest in “tangible property.”(3) Losses in one category of FPHCI (e.g., currency) generally cannot offsetgains in another category of FPHCI (e.g., interest) other than by operationof the earnings limitation. See Reg. § 1.954-1(c)(1)(ii). Therefore, onepriority is to avoid having a trapped currency loss in computing FPHCI.(4) Section 987(3) provides for characterization of § 987 gain (or loss) on aremittance by reference to the QBU’s underlying earnings. Thus, if a§ 987 QBU is engaged in activity that leads to the production of subpart Fincome, a § 987 gain or loss on that QBU’s remittance will result in anadjustment to subpart F income.B. Exceptions to Subpart F Treatment.(1) Business needs transactions.(a)(b)The currency exposure arises from a transaction entered into, orproperty used or held for use, in the normal course of the CFC’sbusiness (§ 1231 property, inventory, trade payables, etc.).The underlying transaction does not itself, and could notreasonably be expected to produce subpart F income.51© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com