International Tax Aspects of Foreign Currency Transactions

More documents

Recommendations

Info

currency. The IRS also noted that the currency into which theCFC hedged its exposures was relevant in determining itsfunctional currency.(4) QBUs Required to Use the U.S. Dollar as their Functional Currency (Reg.§ 1.985-1(b)(1)).(a)(b)(c)(d)(e)Individuals;QBUs with a principal place of business in the United States, orany U.S. Possession or other country in which the US dollar is thestandard currency;QBUs generating income or loss that is effectively connected withthe conduct of a U.S. trade or business;QBUs that operate primarily in U.S. dollars;QBUs that do not maintain books and records in a local currency inwhich they conduct significant activities.(5) Procedures for adopting a functional currency.(a)(b)(c)To establish a non-dollar functional currency, a QBU mustmaintain books and records in that currency.Treas. Reg. § 1.964-1(c)(6) provides that no accounting methodsneed to be adopted until there is a significant event that makes theforeign corporation’s earnings relevant. Thus, a CFC should beconsidered to adopt a functional currency for tax when it computesits earnings and profits in that currency, and those earnings andprofits are relevant for U.S. tax purposes. Until that time, theinitial adoption of a functional currency remains open to the CFCand its QBUs.Treas. Reg. § 1.985-1(c)(3) creates a presumption that a QBUmaintains books and records in its economic currency. Unlessthere is a substantial non-tax business reason, the QBU cannotavoid adopting a functional currency in which it has significantactivities by maintaining its books in another currency. 33However, consider the use of the U.S. dollar under § 1.985-1(b)(1) by a CFC that does not maintain its booksand records in a currency in which it conducts significant activities. In FSA #0991, the Service addresseswhether a taxpayer can effectively elect the US dollar as a foreign QBU’s functional currency by failing tomaintain Local Currency books and records. The IRS argued that the QBU would be required to use LocalCurrency because it conducted activities primarily in Local Currency.5© 2013 William R. Skinner, Esq.Fenwick & West LLPwrskinner@fenwick.com
D. Changes in Functional Currency.(1) Change in functional currency is a change in accounting method thatrequires IRS consent. See § 985(b)(4).(2) A change in the functional currency is subject to the automatic consentprocedures of Rev. Proc. 2011-14, Appendix § 29.(a)(b)(c)A condition of obtaining automatic consent to change is that therehas been a significant change in the facts and circumstancesunderlying the functional currency determination. Reg. § 1.985-5(b).The general scope limitations of RP 2011-24 also apply, such asonly one change every 5 years.The taxpayer must agree to make the adjustments required by Reg.§ 1.985-5, which are generally effected on a cut-off basis,including:(i) Recognizing § 988 gain or loss on transactionsdenominated in the new functional currency(ii)(iii)(iv)(v)Terminating § 987 QBUs with the same functionalcurrency as the owner’s new functional currencyTranslating the old functional currency basis of propertyinto the new functional currency at the spot rate on the dateof the changeTranslating the value of a § 987 QBU’s equity pool, ifapplicable, into the new functional currencyRecognizing § 986(c) gain or loss on PTI, if the QBU is aforeign corporation that is changing its functional currencyto the US dollar.Note that the above adjustments are made using the spot rate forthe last day of the taxable year preceding the taxable year of thefunctional currency change. 4(3) Effect of § 381 Transactions.(a)Reg. § 1.367(b)-2(j)(1) provides that, if a QBU changes itsfunctional currency as a result of a § 381 transaction, then it will be4Reg. § 1.985-5(a)(1).6© 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: (3) Examples.(a)(b)(c)Reg. § 1.985
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 and 58: allow a CFC to avoid the need to tr
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
show all

International Tax Aspects of Foreign Currency Transactions

Create successful ePaper yourself

Delete template?

Save as template?