International Tax Aspects of Foreign Currency Transactions

More documents

Recommendations

Info

sale at the leg-in date, and deferred until the maturity or dispositionof the DI.(c)If a hedge of DI or executory contract is terminated beforematurity, the taxpayer is deemed to have “legged out” of thehedge. Both sides of the transaction (not just the leg actuallydisposed of) are deemed disposed of, and the net gain or loss isrecognized on that date.(i)(ii)In TD 9598 (Sept. 6, 2012), the IRS issued new temporaryregulations clarifying the application of the leg-out rules incases where one of an interest rate or FX swap wasselectively terminated, where the other hedge remained inplace. In such cases, the taxpayer is deemed to dispose ofall legs of all hedges, as well as the DI, on the leg-out date.Example. TP enters a qualifying DI, interest rate swap, andFX swap and elects integrated treatment. On a dispositionof the FX swap, the TP’s net gain or loss is determined byreference to the DI, the FX swap and the interest rate swap,and not solely the FX swap and the DI.(d)In the case of a hedged executory contract, the hedge must beentered after the executory contract is entered into and before theaccrual date, and must hedge all exposure at least through theaccrual date of the payable or receivable. By contrast to the rulesgoverning debt instruments, there is no leg-in on entry of a hedgeduring the executory contract period because the exposure on thecontract is otherwise ignored for tax purposes until the accrualdate.(5) Identification rules.(a)(b)Taxpayer must make a contemporaneous identification of theinstrument on the date of the hedge when the financial instrumentis entered into that clearly identifies the integrated transaction.IRS discretion to integrate if, based on the facts and circumstances,the transaction “is in substance hedged.” The IRS discretionapplies even if the two instruments are held by different taxpayersand cannot satisfy the requirements for hedge treatment. See Regs.§§ 1.988-5(a)(8)(iii) and 1.988-5(b)(3)(ii).(6) Private letter ruling option (§ 1.988-5(e)).55© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
(a) PLR 200813026. IRS granted a PLR allowing integratedtransaction treatment for anticipatory hedging program used tohedge taxpayer’s expected currency exposure under master supplyagreements.B. § 1221(b)(2) hedging transactions.(1) Reg. § 1.1221-2(b) allows the taxpayer to hedge currency exposure withrespect to—(a)“Ordinary property”(i)(ii)Reg. § 1.1221-2(c)(2) defines as property that could onlygive rise to ordinary income or loss under anycircumstances.Issue as to whether a § 988 loan receivable constitutes“ordinary property,” if the loan itself is held as a capitalasset. In this case, the hedge relates to the FX exposure(which is ordinary), but embedded in a larger capitaltransaction. Cf. § 1.954-2(a)(4)(ii)’s expansion of§ 1221(b)(2)’s definition of ordinary property to include,inter alia, § 988 transactions.(b)Borrowings and “Ordinary Obligations” of the Taxpayer.(i)“Ordinary obligations” are defined as those obligations, theperformance or termination of which could not give rise tocapital gain or loss in any circumstances. See § 1.1221-2(c)(2).(c)Proper and timely identification must be made (§ 1.1221-2(f)).(i)(ii)(iii)(iv)Financial instrument must be identified as a hedge whenentered into.Underlying transaction must identified as part of the hedgeon a “substantially contemporaneous” basis (within 35 daysof entering the financial instrument).Reg. § 1.1221-2(f)(4)(ii) – unambiguous ID for taxrequired. ID for Financial accounting purposes does notsatisfy this requirement, unless the records indicate that theID is also being made for tax purposes.Examples of Forms of ID:56© 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 and 56: (c)(d)The underlying transaction is
Page 57: allow a CFC to avoid the need to tr
Page 61 and 62: (a)(b)(c)(d)Reg. § 1.446-4 provide
Page 63: 60© 2013 William R. Skinner, Esq.F
show all

International Tax Aspects of Foreign Currency Transactions

Create successful ePaper yourself

Delete template?

Save as template?