Читать книгу International Taxation - Adnan Islam - Страница 47

The value of one currency in terms of another varies over time; consequently, so will the dollar value of foreign property, foreign debts, and gains and losses from property dispositions. Therefore, foreign currency exchange issues must be considered in any transaction involving two different currencies, such as the USD and the GBP (British pound). Generally, a transaction must be recorded at the agreed-upon rate, but any gain or loss in a foreign exchange will be recognized when the payment is actually made.

A currency exchange calculation may be necessary for the following types of transactions if it involves a foreign currency:

 Purchase or sale of goods, services, or property

 Collection of foreign receivables

 Payment of foreign payables

 Foreign tax credits

 Recognition of gain or loss from foreign branches of domestic businesses

However, foreign exchange rates do not need to be considered if all of the transactions are in USD, even if the transaction is with a foreign company or occurs in a foreign country.

Three important notes to remember when dealing with foreign currency: (a) gain or loss is recognized only when the transaction is closed; (b) foreign currency is treated as property rather than money (that is, foreign currency is not U.S. legal tender); and (c) the sale and or disposition of goods is recorded at the sale price, but the gain or loss on the foreign currency transaction is recognized on the payment date.

When a taxable item involves foreign currency exchange, then the following issues must be analyzed regarding the gain or loss: (a) ordinary or capital; (b) recognition date; and (c) the country in which the transaction occurred.

To reduce the number of currency conversions required, the tax code uses the standard of FAS 52, which is the FASB standard for foreign currency conversions (now codified as FASB Accounting Standards Codification 830, Foreign Currency Matters). This allows the business to record most of its transactions in terms of its functional currency, which is the currency that is generally used by businesses in the locale of the foreign unit or entity. Generally, under FAS 52, fluctuations in currency rates do not have to be accounted for unless the fluctuations change the cash flow for the business. In most transactions of a foreign business unit in a foreign country, cash flows are not affected by currency fluctuations. However, transactions between the parent company and its foreign subsidiary will result in a change of cash flow. As a consequence, gain or loss on the currency exchange will have to be included when calculating net income.

Section 985 requires that all tax determinations be made in the taxpayer’s functional currency, which, for most businesses, is the U.S. dollar. However, a QBU, what Section 989(a) refers to as a separate and clearly identifiable unit of the taxpayer’s business that operates in a foreign country and maintains its own books and records, must adapt the foreign currency as the functional currency. Note, however, that an individual cannot be a QBU, although a business unit operated by an individual, such as a sole proprietorship, can be a QBU.

A QBU that uses foreign currency as its functional currency must calculate its profit or loss in the foreign currency for each tax year, then translate it to U.S. dollars, so that the U.S. owner can include the income on its tax return. The profit or loss without accounting for remittances is converted to U.S. dollars by using the average exchange rate for the taxable year, which simplifies the currency translation. However, the gain or loss on remittances is calculated on the remittance date. U.S. tax liabilities are calculated and paid in U.S. dollars. When U.S. taxpayers transact in a foreign currency, foreign currency amounts must be translated into U.S. dollars. In addition, for tax purposes, a U.S. business must account for gain or loss resulting from changes in relative values of the dollar and a foreign transactional currency while the U.S. business owns or has a position in a foreign transactional currency.

Generally, transactions are reported for tax purposes in the taxpayer’s functional currency. The functional currency of a U.S. citizen or resident or a domestic corporation is usually the U.S. dollar. A foreign currency is the functional currency if the economic environment of the business’ QBU is in a foreign currency.

A U.S. entity arranging all international transactions so that payments and receipts are made entirely in U.S. currency will have no currency exchange gains or losses. When the taxpayer has operations conducted through a foreign branch or owns stock in a CFC, the results of those operations usually are denominated in a foreign currency, called the functional currency. Economic gains and losses may be realized because of changes in the relative value of that functional currency, the U.S. dollar between the date income from such operations is recognized for U.S. tax purposes, and the date remittances are converted into U.S. currency.

In addition to taxable income or loss from normal business receipts and payments, ordinary income or loss may be realized from certain transactions on amounts the taxpayer is entitled to receive (or is required to pay), denominated in terms of a nonfunctional currency, or determined by reference to the value of one or more nonfunctional currencies. The transactions to which this treatment applies are the acquisition of a debt instrument or becoming an obligor under a debt instrument, accruing any item of expense or gross income or receipts that is to be paid or received after the date accrued, or entering into or acquiring any forward contract, futures contract, option, or similar financial instrument if such instrument is not marked to market at the close of the taxable year. Translation gains or losses may arise if foreign currency is held as an investment or if a foreign exchange contract is entered into (a) hedging foreign currency-denominated financial assets, anticipated income, liabilities, or expenses; (b) hedging the taxpayer’s stock in a CFC; or (c) hedging an accounting exposure arising under generally accepted accounting practices on a consolidated financial statement.