Читать книгу International Taxation - Adnan Islam - Страница 61

Sharp, Ltd., a foreign corporation organized in country X, is wholly owned by Palico, Inc., a domestic corporation. Sharp, Ltd. conducts all of its operations through two branches. Branch A is located in country A and branch B is located in country B. Sharp, Ltd., branch A and branch B are QBUs. The currency of country A is the Q and the currency of country B is the R. The functional currencies of Sharp, Ltd, branch A, and branch B are determined using a two-step process:

1 The functional currency of branches A and B. Branch A and branch B both conduct all of their activities in their respective local currencies. The Q is the currency of branch A and the R is the currency of branch B under GAAP. After applying the principles in the regulations, it is determined that the functional currency of branch A is the Q and the functional currency of branch B is the R.

2 The functional currency of Sharp, Ltd. Sharp, Ltd.’s functional currency is determined by disregarding the fact that A and B are branches. When A’s activities and B’s activities are viewed as a whole, Sharp, Ltd. determines that it conducts only significant activities in the R. Therefore, Sharp, Ltd.’s functional currency is the R.

During the current year, branch A had income of Q3,000 and branch B had income of R50,000 as determined under Section 987. The weighted average exchange rate for the year is Q1 = R20. Branch A’s income is translated into R60,000 for purposes of computing Sharp, Ltd.’s income and earnings and profits for the year. Therefore, the total earnings and profits of Sharp, Ltd. from branch A and branch B is R110,000 (Treasury Regulation 1.985-1(f), examples (7) and (9)).

The use of a functional currency is treated as a method of accounting. Therefore, any change in the functional currency is treated as a change in the taxpayer’s method of accounting. Permission to change functional currencies generally will not be granted unless significant changes in the facts and circumstances of the QBU’s economic environment occur. If the principles used to determine the functional currency for GAAP are substantially similar to those required for income tax purposes, permission to change functional currencies will ordinarily not be granted unless the taxpayer also changes to the new functional currency for GAAP.