International Tax Aspects of Foreign Currency Transactions

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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
allow a CFC to avoid the need to trace gains and losses under thebusiness needs exception. See TD 8216.7. Foreign Currency Hedging Transactions.A. Integrated Treatment under § 988(d) and Reg. § 1.988-5.(1) This regulation allows taxpayer to integrate certain non-functionalcurrency transactions and hedges into synthetic functional currencytransactions.(2) Eligible transactions.(a)(b)(c)Non-functional currency debt instrument.Payables or receivables arising under an executory contract.Purchases or sales of publicly traded securities.(3) Specific requirements for integrated treatment.(a) The hedge is entered into with an unrelated party. 38(b)(c)Both the § 988 transaction and the hedge are entered into by thesame corporation (the same member of a consolidated group) andreflected on the books and records of the same QBU.The transaction is identified as an integrated hedging transactionby the end of the date on which the financial instrument isexecuted.(4) Specific Rules for Debt and Executory Contracts.(a)(b)In the case of a debt instrument, it is possible to compute a yield tomaturity on the synthetic dollar debt instrument that is created bycombining the debt instrument with the hedge. This would appearto rule out the use of a series of rolling forward contracts to hedgethe debt.Unlike the rules for hedged executory contracts, the regulationspermit the hedge to be entered after the DI is created throughlegging in procedures. 39 Gain or loss is recognized on a deemed3839In other contexts, i.e., Regs. § 1.1275-6 and § 1.1221-2, the taxpayer may enter into a hedge with a related partyacting as a dealer in securities under § 475. It is unclear why this rule does not also apply for purposes of§ 988(d).See Treas. Reg. § 1.988-5(a)(6).54© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
Page 1 and 2:
Overview of the Taxation of Foreign
Page 3 and 4:
Table of ContentsPage1. Determinat
Page 5 and 6: processes orders and maintains sepa
Page 7 and 8: (3) Examples.(a)(b)(c)Reg. § 1.985
Page 9 and 10: D. Changes in Functional Currency.(
Page 11 and 12: (1) Application of Mark-to-market.(
Page 13 and 14: (ii) Accrued foreign income tax pay
Page 15 and 16: Gain or loss is computed, without r
Page 17 and 18: (4) Rules Applicable to Debt Instru
Page 19 and 20: The obligor of a non-functional cur
Page 21 and 22: (iii) Rollover of an Existing Contr
Page 23 and 24: can rebut this presumption by showi
Page 25 and 26: (a)(b)Specifically, losses attribut
Page 27 and 28: (i)Actual distributions of PTI to t
Page 29 and 30: the paid-in-capital account under R
Page 31 and 32: (d)Taxes for which the taxpayer mak
Page 33 and 34: were typically translated at the sp
Page 35 and 36: (b)Brazilian ORTNs.During a period
Page 37 and 38: Under the profit and loss method, t
Page 39 and 40: egard to the form of enterprise thr
Page 41 and 42: D. The 2006 Proposed § 987 Regulat
Page 43 and 44: Examples:i. Cashii. Payables and Re
Page 45 and 46: 3) Owner ceases to exist in a non-
Page 47 and 48: 5) Simply following GAAP may not be
Page 49 and 50: (5) Consequences of a Change to DAS
Page 51 and 52: (a)Certain cases have addressed a M
Page 53 and 54: E. Hyperinflationary Debt Instrumen
Page 55: (c)(d)The underlying transaction is
Page 59 and 60: (a) PLR 200813026. IRS granted a PL
Page 61 and 62: (a)(b)(c)(d)Reg. § 1.446-4 provide
Page 63: 60© 2013 William R. Skinner, Esq.F
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International Tax Aspects of Foreign Currency Transactions

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