foreign currency transactionsa123.g.akamai.net/7/123/121311/abc123/yorkmedia... · 7/24/2013 ·...

Foreign Currency Transactions

Doug Chestnut – Ernst & Young – Washington D.C.

Jon Zelnik – KPMG – Washington D.C.

Richard Larkins – Ernst & Young – Washington D.C.

Practising Law Institute

July 24, 2013

Foreign Currency TransactionsPLI 24 July 2013

Objectives of foreign currency rules

► Foreign activities of a U.S. multinational typically

conducted in foreign currency

► Branch operations

► Foreign subsidiaries

► Transactions with customers and suppliers

► When results of these foreign activities reported in U.S.

tax return, must be reported in U.S. dollars

► Items requiring translation include:

► Income and deductions

► Gains and losses

► Foreign withholding taxes

► Foreign income taxes


Foreign currency rules

► Definition of Functional Currency – §985

► Foreign Corp’s Taxes and E&P – §986

► Translation of Branch Income – §987

► Foreign Currency Transactions – §988

► Other Definitions and Special Rules – §989

► Dollar Approximate Separate Transactions Method

(DASTM) – Treas. Reg. §1.985-3


► For U.S. income tax purposes,

each qualified business unit

must make all of its

determinations in its functional

currency. §985(a)

Currency translation: Basic principles

Translation Required?

Functional Currency

Qualified Business Unit

(QBU)


QBU definition

► A QBU is a separate and clearly identified unit of a

taxpayer’s trade or business.

► A unit must maintain separate books and records.

► §989(a)


QBU definition – trade or business

► Treas. Reg. §1.989(a)-1(c) defines trade or business for

purposes of identifying a QBU as a ―specific unified group

of activities that constitutes an independent economic

enterprise carried on for profit‖:

► Must ordinarily include every operation in profit-generation process

► Includes vertical, functional, or geographic divisions of same trade

or business

► Activity generates expenses deductible under §§162 or 212

► §212 investment activities treated as a QBU only under §989 rules—

not for other provisions of the Code – Treas. Reg. §1.989(a)-1(c)


► Corporation is at least one QBU.

► Domestic or Foreign.

► Treas. Reg. §1.989(a)-1(b)(2)(i).

► Corporation may have multiple

QBUs.

► Treas. Reg. §1.985-1(d)

QBU – corporations

U.S.

corp

Foreign

corp

Mfg.

branchSales

branchMfg.

branch

Sales

branch


QBU – corporations (cont.)

► A foreign corporation is a QBU and reports its income and

E&P in its own functional currency.

► A foreign corporation’s branches may also constitute

QBUs and use a different functional currency.

► Branch income originally accounted for using a different

functional currency from that of the home office ultimately

must be translated into the home office’s functional

currency. (Treas. Reg. §1.985-1(d)(2))

► Branch distributions to the home office may result in

currency gain or loss.


QBU – individuals

► An individual is not a QBU.

► Trade or business conducted by

an individual constitutes a QBU.

► Treas. Reg. §1.989(a)-1(b)(2)(i)

NOT QBU QBU

Trade or

Business


QBU – flow-through entities

► Activities of a partnership,

estate, or trust constitute a QBU

to partners or beneficiaries if

activities are a trade or business

at the partnership, estate, or

trust level.

► Treas. Reg. §1.989(a)-1(b)(2)(ii)

QBU

Partnership,

estate,

or trust


Functional currency defined

► Generally, currency of ―economic environment‖ in which a

significant part of QBU’s activities are conducted

► QBU’s books and records must be kept in this currency.

► §985(b) definition is generally same as the FAS 52 definition.

► U.S. dollar is default functional currency for all U.S. QBUs

and if an activity is either not a QBU or is a QBU that does

not qualify to use a foreign functional currency

(§985(b)(1)(A))


U.S. Dollar as functional currency

► QBU is required to use U.S. dollar as functional currency if:► QBU conducts activities primarily in dollars

► QBU is a U.S. resident

► QBU does not keep books and records in currency of its ―economic environment‖

► QBU produces income or loss that is ECI

► §985(b)(3) and Treas. Reg. §1.985-2 allow eligible QBU (with hyperinflationary functional currency) to elect dollar as functional currency► QBU must keep books and records in dollars or use separate

transactions method


QBU economic environment

► Determination of ―economic environment‖ based on all

relevant facts and circumstances

► Examples of factors provided in Treas. Reg. §1.985-

1(c)(2):

► Local currency of country in which QBU is a resident

► Currencies of QBU’s cash flows

► Currencies in which QBU earns revenues and incurs expenses

► Currencies in which QBU borrows or lends


Changing functional currency

► Functional currency treated as an accounting method (Treas. Reg. §1.985-4)

► Changing QBU’s functional currency is a change in accounting method

► Requires IRS permission, but most changes are automatic under Rev. Proc. 2011-14

► Form 3115 must still be filed and usually requires significant changes in QBU’s economic environment

► QBUs changing their functional currency must make all necessary adjustments under Treas. Reg. § §1.985-5 and 1.985-8(c)

Foreign currency transactions


Section 988

► ―§988 transaction‖ defined as one of the transactions

described (acquiring or becoming an obligor on a debt

instrument, accruing an item of expense or gross income,

or entering into a forward, futures, option, or similar

financial instrument) if the amount the taxpayer will

receive or pay is denominated in a nonfunctional currency


Section 988 transactions

► Disposition of nonfunctional currency

► Entering into or acquiring nonfunctional currency

denominated debt instruments

► Accruing nonfunctional currency denominated item of

income or expense

► Entering into nonfunctional currency forwards, futures,

options, or similar financial instruments (such as, currency

swaps)


Section 988 transactions (cont.)

► §988 transactions do not include:

► FX denominated equity transactions

► FX denominated equity or commodity swaps

► Any other FX denominated derivative

instrument where underlying position is not a §988 transaction (for

example, forward contract to purchase commodity denominated in

nonfunctional currency)


Section 988 key principles

Nonfunctional currency is property

Nonfunctional currency has a cost basis in the

functional currency of QBU.

FX gain or loss is triggered upon distribution of the

nonfunctional currency based on FX movement. (See

1.988-2 for specific rules on how to determine FX gain

or loss.)


Section 988 key principles (cont.)

FX gain or loss is separate from the underlying

transaction.

FX gain or loss is generally ordinary income (capital

gain treatment allowed for certain forwards, futures, or

options, if elected).

FX gain or loss is generally sourced based on the

residence of the taxpayer.


Disposition of nonfunctional currency

► Exchange gain or loss realized upon sale or disposition

(Treas. Reg. §1.988-2(a))

► Difference between amount realized and adjusted basis

► Exchange of nonfunctional currency for property (Treas.

Reg. §1.988-2(a)(2)(ii)(B))

► Treated as exchange of nonfunctional currency for functional

currency, and

► Property acquired for functional currency


Disposition of nonfunctional currency (cont.)

► Disposition of nonfunctional currency in settlement of a

forward contract, futures contract, option contract, or

similar financial instrument is considered a

sale/disposition of the nonfunctional currency (Treas. Reg.

§1.988-2(a)(1)(i))


Disposition of nonfunctional currency (cont.)

► No exchange gain/loss (Treas. Reg. §1.988-2(a)(2)(iii))► Exchange of units of nonfunctional currency for different units

of same nonfunctional currency

► Deposit/withdrawal of nonfunctional currency in/from a demand or time deposit issued by a bank if such instrument is denominated in such currency

► Receipt of nonfunctional currency from a bank or other financial institution from which the taxpayer purchased a certificate of deposit or similar instrument denominated in such currency by reason of maturing or other termination

► Transfer of nonfunctional currency from a demand or time deposit issued by a bank to another demand or time deposit denominated in the same nonfunctional currency issued by a bank


Debt Instruments: Interest income/expense

► Translation of interest income or expense that is not required to be accrued prior to receipt or payment (Treas. Reg. §1.988-2(b)(2)(ii)(B))► Translated at the spot rate on the date of receipt or payment

► No exchange gain or loss

► Translation of interest income or expense that is required to be accrued prior to receipt or payment (Treas. Reg. §1.988-2(b)(2)(ii)(C))► Translated at the average rate for the accrual period

► When received or paid, translate at spot rate on such date

► Difference is exchange gain or loss (Treas. Reg. §1.988-2(b)(3) and (4))


Debt Instruments: Principal received

► Treatment to Holder (Treas. Reg. §1.988-2(b)(5))

► Exchange gain or loss recognized by holder of debt with respect to

principal

► Exchange gain or loss realized on date principal is received (or

instrument is disposed)

► The amount of exchange gain or loss is determined by:

► Translating units of nonfunctional currency principal at spot rate on

date payment is received (or instrument is disposed) and

► Subtracting the amount computed by translating the units of

nonfunctional currency principal at the spot rate on date holder

acquired instrument


Debt Instruments: Principal paid

► Treatment to Obligor (Treas. Reg. §1.988-2(b)(6))

► Exchange gain or loss recognized by obligor of debt with respect

to principal

► Exchange gain or loss realized with respect to principal amount on

date principal is paid (or obligation is transferred or extinguished)

► Exchange gain or loss determined by:

► Translating nonfunctional currency principal at spot rate on date

obligor became obligor, and

► Subtracting from such amount the amount computed by translating

nonfunctional currency principal at spot rate on date payment is made

(or obligation is transferred or extinguished)


Debt Instruments (cont.)

► Limitation of exchange gain or loss on payment or

disposition of debt (Treas. Reg. §1.988-2(b)(8))

► Sum of exchange gain or loss with respect to principal and interest

is realized only to extent of total gain or loss realized on

transaction


Example 1. (i) X is an individual on the cash method of accounting with

the dollar as his functional currency. On January 1, 1992, X converts

$13,000 to 10,000 British pounds ([British pounds]) at the spot rate of

[British pounds]1 =$ 1.30 and loans the [British pounds]10,000 to Y for 3

years. The terms of the loan provide that Y will make interest payments

of [British pounds]1,000 on December 31 of 1992, 1993, and 1994, and

will repay X's [British pounds]10,000 principal on December 31, 1994.

Assume the spot rates for the pertinent dates are as follows:

Date Spot rate (pounds to dollars)

Jan. 1, 1992 [British pounds] 1 = $ 1.30

Dec. 31, 1992 [British pounds] 1 = $ 1.35



TREAS. REG. §1.988-2(b)(9)

TREAS. REG. §1.988-2(b)(9) (con’t)

(ii) Under paragraph (b)(2)(ii)(B) of this section, X will trans1ate the [British pounds]1,000

Interest payments at the spot rate on the date received. Accordingly, X will have interest income

of $ 1,350 in 1992, $1,400 in1993, and $1,450 in 1994. Because X is a cash basis taxpayer,

X does not realize exchange gain or loss on the receipt of interest income.

(iii) Under paragraph (b)(5) of this section, X will realize exchange gain upon repayment of the

[British pounds]10,000 principal amount determined by translating the [British pounds]10,000 at

the spot rate on the date it is received [British pounds]10,000 X $1.45 = $14,500) and

subtracting from such amount, the amount determined by translating the [British pounds]10,000

at the spot rate on the date the loan was made [British pounds]10,000 X $1.30 = $13,000).

Accordingly, X will realize an exchange gain of $1,500 on the repayment of the loan on

December 31, 1994.

Example 2. (i) Assume the same facts as in Example 1 except that X is an accrual

method taxpayer and that average rates are as follows:

Accrual period Average rate (pounds to dollars)

1992 [British pounds] 1 = $ 1.32




(ii) Under paragraph (b)(2)(ii)(C) of this section, X will accrue the [British pounds]1,000

interest payments at the average rate for the accrual period. Accordingly, X will have

Interest income of $ 1,320 in 1992, $ 1,370 in 1993, and $ 1,420 in 1994. Because X is

an accrual basis taxpayer, X determines exchange gain or loss for each interest accrual

period by translating the units of nonfunctional currency interest income received with

respect to such accrual period at the spot rate on the date received and subtracting the

amounts of interest income accrued for such period. Thus, X will realize $ 90 of exchange

gain with respect to interest received under the loan, computed as follows:

YearSpot value interest received Accrued interest @ average rate Exch. gain

1992 $1,350 $1,320 $30

1993 $1,400 $1,370 $30

1994 $1,450 $1,420 $30

Total ------- -------- $90

TREAS. REG. §1.988-2(b)(9) (con’t)


(iii) Under paragraph (b)(5) of this section, X will realize exchange gain upon

repayment of the [British pounds]10,000 loan principal determined in the

same manner as in Example 1. Accordingly, X will realize an exchange gain of

$1,500 on the repayment of the loan principal on December 31, 1994.

Example 4. Assume the same facts as in Example 1 except that on December

31, 1993, X sells Y's note for 9,821.13 British pounds ([British pounds]) after

the interest payment. Under paragraph (b)(8) of this section, X will compute

exchange gain on the [British pounds]10,000 principal. The exchange gain is $

1,000 ([British pounds]10,000 X $ 1.40) - ([British pounds]10,000 X $ 1.30)].

This exchange gain, however, is only realized to the extent of the total gain on

the disposition. X's total gain is $ 749.58 [British pounds]9,821.13 X $ 1.40) –

([British pounds]10,000 X $ 1.30)]. Thus, X will realize $ 749.58 of exchange

gain (and will realize no market loss).

TREAS. REG. §1.988-2(b)(9) (con’t)


Accrued income

► Exchange gain or loss on item of gross income or receipts

(other than interest) (Treas. Reg. §1.988-2(c)(2))

► Exchange gain or loss determined by:

► Multiplying nonfunctional currency received by spot rate on

payment date, and subtracting the amount determined by

multiplying nonfunctional currency received by spot rate on

booking date

► Spot rate on booking date is the spot rate on date item of

gross income is accrued


Example 1. X is a calendar year corporation with the dollar as its

functional currency. X is on the accrual method of accounting. On

January 15, 1989, X sells inventory for 10,000 Canadian dollars (C$).

The spot rate on January 15, 1989, is C$ 1 = U.S. $.55. On

February 23,1989, when X receives payment of the C$ 10,000, the

spot rate is C$ 1 = U.S. $ .50. On February 23, 1989, X will realize

exchange loss. X's loss is computed by multiplying the C$10,000 by

the spot rate on the date the C$ 10,000 are received (C$10,000 X .50

= U.S. $5,000) and subtracting from such amount, the amount

computed by multiplying the C$ 10,000 by the spot rate on the

booking date (C$ 10,000 X .55 = U.S. $ 5,500). Thus, X's exchange

loss on the transaction is U.S. $ 500 (U.S. $ 5,000 - U.S. $ 5,500).

TREAS. REG. §1.988-2(c)(4)


Accrued expense

► Exchange gain or loss with respect to item of expense

(other than interest) (Treas. Reg. §1.988-2(c)(3))

► Exchange gain or loss determined by multiplying

nonfunctional currency paid by spot rate on booking date

and subtracting the amount determined by multiplying

nonfunctional currency paid by spot rate on payment date

► Spot rate on booking date is spot rate determined on date

item of expense is accrued


Forwards, futures and options

► General realization rules (e.g., §§1001, 1092, 1256) apply

(Treas. Reg. §1.988-2(d)(2)(i))

► Exchange gain or loss is not realized because of offset by

another transaction unless:

► Taxpayer derives an economic benefit from any gain in offsetting

positions; or

► Transaction is traded on an exchange, and general practice of

exchange is to terminate offsetting contracts

► Treas. Reg. §1.988-2(d)(2)(ii)

► Exchange gain or loss equals amount paid, less amount

received (Treas. Reg. §1.988-2(d)(4))


Example 1. On August 1, 1989, X, a calendar year corporation with the

dollar as its functional currency, enters into a forward contract with

Bank A to buy 100 New Zealand dollars for $ 80 for delivery on January

31, 1990. (The forward purchase contract is not a section 1256 [26

USCS § 1256] contract.) On November 1, 1989, the market price for

the purchase of 100 New Zealand dollars for delivery on January 31,

1990, is $ 76. On November 1, 1989, X cancels its obligation under the

forward purchase contract and pays Bank A $ 3.95 (the present value

of $ 4 discounted at 12% for the period) in cancellation of such

contract. Under section 1001 (a) [26 USCS § 1001 (a)], X realizes an

exchange loss of $ 3.95 on November 1, 1989, because cancellation of

the forward purchase contract for cash results in the termination of X's

contract.

TREAS. REG. §1.988-2(d)(2)(iv)

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Notional principal contracts

► Timing of income, deduction, and loss for an NPC that is a §988 transaction is governed by §446 (Treas. Reg. §1.988-2(e)(1))► Income, deduction, and loss generally characterized as exchange

gain or loss

► Special Rules for Currency Swaps (Treas. Reg. §1.988-2(e)(2))► A currency swap contract is a contract involving different

currencies between two or more parties to:► Exchange periodic interim payments on or prior to maturity of the

contract; and

► Exchange the swap principal amount upon maturity of the contract (contract may also require an exchange of the swap principal amount at commencement).


Timing of periodic payments

► Payments made are treated as payments made pursuant

to a hypothetical borrowing that is denominated in the

currency in which payments are required to be made

under the swap.

► Payments received are treated as payments received

pursuant to a hypothetical loan that is denominated in the

currency in which payments are received under the swap.

► The hypothetical issue price is the swap principal amount.


Timing of swap principal amount

► Exchange gain or loss is realized on the day the units of

swap principal in each currency are exchanged.

► Gain or loss is determined by subtracting the value of the

units of swap principal paid, from the value of the units of

swap principal received.

► This does not apply to an equal exchange of the swap

principal amount at the commencement of the agreement

at a market exchange rate.


Foreign currency transactions – character rule

► Gain or loss on §988 transactions is generally ordinary

(Treas. Reg. §1.988-3(a))

► Exceptions:

► Capital gain or loss on exchange traded non-equity options and

exchange traded futures though taxpayer may elect ordinary

treatment (Treas. Reg. §988(c)(1)(D)(ii))

► Taxpayer may elect to treat gain/loss on a particular forward

contract, futures contract, or option as capital gain or loss by

identifying the contract on the day it is entered into (Treas. Reg.

§1.988-3(b))

► Election not applicable to contract that is part of a straddle


Foreign currency transactions – source rule

► Gain or loss generally is sourced to residence of taxpayer

on whose books item is properly reflected (Treas. Reg.

§1.988-4(a))

► U.S.-source for U.S. taxpayers

► U.S.-source for ECI

► Important for FTC calculation purposes


Section 988 hedging transactions

► Statute grants regulatory authority for IRS to treat all

transactions that are part of a ―§988 hedging transaction‖

as a single integrated transaction (§988(d)(1))

► Regulations apply only to debt instruments, executory contracts

and purchases of publicly traded stock

► Example: Treat FX hedge of FX debt collectively as a single

synthetic debt instrument denominated in the currency into which

the debt instrument is hedged


Hedging foreign currency debt instruments

► Treas. Reg. §1.988-5(a)(1) provides that a Qualified

Hedging Transaction (QHT) is defined as an ―integrated

economic transaction‖ consisting of:

► Qualifying debt instrument (any debt instrument denominated or

determined by reference to a nonfunctional currency), and

► Treas. Reg. §1.988-5(a) hedge


Qualified hedging transactions

► Qualifying debt instrument (Treas. Reg. §1.988-5(a)(3))► Debt instrument regardless of whether denominated in (or

determined by reference to) nonfunctional currency

► Does not include accounts payable, accounts receivable, or similar items of expense or income

► Treas. Reg. §1.988-5(a) hedge (Treas. Reg. §1.988-5(a)(4):► Spot contract

► Futures contract

► Forward contract

► Option contract

► Swap contract

► Similar financial instrument

► All payments must be hedged (Treas. Reg. §1.988-5(a)(5)


Qualified hedging transactions

► Identification Requirements (Treas. Reg. §1.988-5(a)(8))► Taxpayer must identify:

► The date the qualifying debt instrument and hedge were entered into;

► The date the qualifying debt instrument and hedge are identified as integrated;

► Any amount of gain or loss deferred because of ―legging in‖;

► A description of the qualifying debt instrument and the hedge; and

► A summary of the cash flow resulting from integration.


Qualified hedging transactions (cont.)

► Neither hedge nor debt instrument subject to mark-to-market

or straddle rules (unless QHT is part of a straddle)

► Synthetic debt instrument created (subject to the OID rules,

where applicable)

► Denomination of synthetic debt instrument

► Same as currency paid under hedge

► Source subject to rules of §§861 and 862

► Interest expense on synthetic borrowings allocated as interest for

FTC purpose

► QHT and debt instrument treated separately if U.S.-source and non-

effectively connected for purposes of §§871(a), 881, 1441, 1442, and

6049


Example of integrated borrowing

Fixed

LIBOR

LIBOR

€ 100M

10

Yrs.

€ 100M (inception)

US$ 120M (maturity)

US$ 120M (inception)

€100M (maturity)

FORCO

USCO Bank


Hedged executory contracts

► Integration of an executory contract and a hedge

► Executory Contract (Treas. Reg. §1.988-5(b)(2)(ii))

► An agreement entered into before the accrual date to pay/receive nonfunctional currency in the future with respect to the purchase/sale of business property used in the ordinary course of the taxpayer’s business or the acquisition/performance of services

► On accrual date, agreement is no longer an executory contract and is considered an account payable or receivable


Hedged executory contracts (cont.)

► Hedge is defined as (Treas. Reg. §1.988-5(b)(2)(iii)):

► Deposit of nonfunctional currency

► Forwards and futures

► Options (that expire on or before accrual date)

► Series of hedges

► Historical rate rollovers

► Identification Requirements (Treas. Reg. §1.988-5(b)(3)):

► Executory contract and hedge must be identified before the close of

the date the hedge is entered into

► Record must be established that provides a clear description of

executory contract and hedge



► Amounts paid/received under the hedge treated as

paid/received under the executory contract

► No exchange gain or loss recognized on the hedge



► If the executory contract is disposed of (or terminated) prior to accrual date, the hedge is treated as sold for its fair market value on the date executory contract is disposed of.► Gain or loss is realized and recognized on the disposition date.

► Gain or loss will be an adjustment to the amount received/expended with respect to disposition or termination.

► If the hedge is disposed of prior to the accrual date, any gain or loss realized will not be recognized. ► Gain or loss will be an adjustment to the income from (or expense

of) the services performed/received under the executory contract or to the amount realized or basis of the property sold/purchased under the executory contract.


CFC foreign currency issues

► §954(c)(1)(D) Defines Foreign Currency Exchange

Gains as Foreign Personal Holding Company Income


Foreign exchange gains

► General Rule - §954(c)(1)(D)

► Net of FX gains over losses on Section 988 transactions are

Subpart F

► Steps to determine net amount for CFC:

► Apply Section 988 to each QBU

► Net FX gains and losses within each QBU

► Translate each different QBU net FX gain or loss to CFC functional

currency

► Aggregate all net QBU FX gains or losses to determine overall

CFC FX gain or loss


Business needs exception

► FPHCI does not include FX gains and losses directly

related to the business needs of the CFC

► Transaction in the normal course of the CFC’s trade or business

► A bona fide hedging transaction with respect to an otherwise

qualifying transaction

► FX gain and loss must be clearly determinable/traceable

to ―Business Needs‖ transaction or hedge


FX transactions related to business activities

► Payables/Receivables generated in ordinary course from

purchases/sales

► Accrual of Gross Income

► Accrual of Expense

► Transaction or Property not giving rise to Subpart F

income


Bona fide hedging transaction

► Arises in connection with ―Business Needs‖ transaction

► Does not need to tie to individual transactions

► Must Satisfy Reg. Sec. 1.1221-2(a) thru (c) hedging

requirements


FX losses

FPHCI

► Dividends, interest, rents,

royalties

► Gain from certain property

transactions

► Gain from commodities

transaction

► FX gain

► Interest equivalents

► No carryover of loss

FBCI

► Sales income

► Services income

► Shipping income

► Oil related income

► Full inclusion FBCI


Net FX loss example

CFC Facts: $100 royalty income

$10 FX gain non-business needs

$60 FX gain business needs

$(50) FX loss

► $60 FX gain relating to business needs is excluded

from netting process

► Remaining Net FX is loss of $(40) (10 + (50))

► Net FX loss of $(40) cannot reduce Subpart F

royalty income


Net FX gains and losses

► Two Elections available to try to offset ―injustice‖ of net

loss

► Section 1.954-2(g)(3) Election

► Moves FX gain and loss from FX category to other category of

FPHCI or category of FBCI

► Section 1.954-2(g)(4) Election

► All FX gains and losses, including those meeting ―Business

Needs‖ exception are netted AND treated as FPHCI


(g)(3) Election – Reallocation of FX

► Individual items of FX gain and loss aligned with

► Categories of FPHCI

► Categories of FBCI

► ―Normal‖ netting rules apply to derive:

► Net FX gain or loss (non-allocated portion)

► Net categories of FPHCI

► Net categories of FBCI

► Net FX gain = Subpart F

► Net FX loss = Oh well


(g)(3) Election – Example 1

► CFC1 makes (g)(3) election

► Sub F Royalty Income = $110

► Sub F FX Loss = ($50)

US

CFC1

$

CFC2

£

- FX Related to Royalty = $10

- FX Related to Other = ($50)

- Royalty Income = $100Accrued

Royalty


(g)(3) Election – Example 2

CFC1 makes (g)(3) electionSub F Royalty Income = $50Sub F FX Gain = $10

Total $60

US

CFC1$

CFC2£

- FX Related to Royalty = ($50)

- FX Related to Other = $10


Royalty


(g)(4) Election – Net It ALL

► Brings business needs FX gains and losses into FPHCI

► Allocation of individual FX gains and losses to categories

of income not necessary


(g)(4) Election – Example

CFC1 makes (g)(4) electionSub F Passive Income = $120

US

CFC2£

- “Business Needs” FX = $60

- FX Related to Royalty = $10

- FX Related to Other = ($50)


Royalty

CFC1$


(g)(3) and (g)(4) Election mechanics

► Made by Sec. 964 Controlling US Shareholder

► Applicable to All US Shareholders

► Made on Original tax return of US Shareholder for year

within which CFC year ends

► Revoked only with permission

foreign currency transactionsa123.g.akamai.net/7/123/121311/abc123/yorkmedia... · 7/24/2013 ·...

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