International Tax Aspects of Foreign Currency Transactions

CFC allocates and apportions interest expense. See Treas. Reg.§ 1.954-2(g)(2)(iii).(b)Application of similar rule to gains or losses allocated as interestexpense under § 1.861-9 is reserved. See Reg. § 1.954-2(g)(5)(iv).C. Subpart F Elections.(1) Reg. § 1.954-2(g)(3) election.(a)(b)(c)(d)Transactions giving rise to Foreign Base Company Sales Income,or other subpart F income, cannot qualify for the business needsexception even if they occur in the ordinary course of the CFC’sbusiness.Treas. Reg. § 1.954-2(g)(3) permits the CFC to elect tocharacterize currency gain or loss arising from such ordinarycourse transactions giving rise to general basket subpart F income(or hedges thereof) as allocable to such category of subpart Fincome.The benefit of this election is to re-basket foreign currency gainsand losses as general basket for § 904(d) purposes, and net anylosses against foreign base company sales income. See Treas. Reg.§ 1.954-2(g)(3)(iv), ExampleAlso, as illustrated by PLR 201235007 (§ 9100 request), theelection might be used to allocate a currency loss against interestincome from loans made in the ordinary course of business.(2) Reg. § 1.954-2(g)(4) election.(a)This election supersedes the § 1.954-2(g)(3) election with respectto the CFC. Once made, the election cannot be revoked withoutIRS consent.(i)See, e.g., PLR 201226011, for a case where a CFC wasable to revoke a § 1.954-2(g)(4) election based on changedcircumstances that allowed it to trace its foreign currencyitems.(b)The election causes all foreign currency gains and losses from§ 988 transactions and § 1256 contracts that would be § 988transactions to be included in computing FPHCI. Thus, the CFCwaives the business needs exception. The intent of the rule is to53© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com