International Tax Aspects of Foreign Currency Transactions

(c)(d)The underlying transaction is not a foreign currency derivative.Such transactions may be excluded from FPHCI as bona fidehedging transactions.The CFC’s records are sufficient to identify the transaction as abusiness needs transaction.(2) Bona Fide Hedging Transactions.(a)(b)(c)A bona fide hedge is defined by Treas. Reg. § 1.954-2(a)(4)(ii) isdefined as a transaction that would qualify for § 1221(b)(2)hedging treatment, except that the exposure being hedged can beeither ordinary property, a § 988 transaction, or § 1231 property.The risk being hedged must arise from the CFC’s own trade orbusiness; i.e., a hedging center cannot hedge another CFC’s risksand rely on the exception. See Reg. § 1.954-2(g)(2)(ii)(D),Example. 37A derivative that constitutes a bona fide hedge with respect to abusiness needs transaction is excluded from FPHC income.(d) A bona fide hedge of a transaction within the scope as a § 1.954-2(g)(3) election is also covered by the election.(e)Effect of erroneous identifications (Reg. § 1.954-2(a)(4)(ii)(C)).(i)(ii)An identification of a transaction as a bona fide hedge isgenerally binding with respect to any loss from thetransaction (non-subpart F). However, gains remaindetermined under the general ruleFailure to identify establishes that the transaction is not abona fide hedge. However, if there is no reasonablegrounds for failure to identify, losses (but not gains) aretreated as if they were the result of a bona fide hedgingtransaction.(iii) Inadvertent error exception may relieve adverseconsequences of failure to identify hedging transactions.(3) Interest Bearing Liabilities.(a)Currency gain or loss on an interest bearing liability of the CFC ischaracterized for subpart F purposes in the same manner as the37See also Reg. § 1.954-2(f)(2)(v), Ex. 2 (example of Treasury center providing commodities hedge).52© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com