Regulations on the recognition and deferral of currency gains and losses are being deferred for the fifth time until 2023 for calendar year taxpayers. Is this going to be like the interest apportionment rule of Section 864(f) that never goes into effect? Probably not, because these rules must be addressed by taxpayers, and in fact, they may elect to apply the 2016 final regulations, related temporary regulations (either revoked on May 13, 2019, or expired Dec. 6, 2019, as applicable) and final 2019 regulations currently.
Click here to get the history of recent deferrals for these regulations and keep reading to learn what it means for you.
US taxpayers with branches or foreign companies they own that have elected to treat them as branches (they have “checked-the-box” for the foreign entities to be foreign disregarded entities) are impacted by these rules on foreign currency gains and losses. They are generally required to make all federal income tax determinations in their “functional currency.” A US taxpayer’s functional currency is generally the US dollar, unless it has a qualified business unit (QBU) that uses the currency of the economic environment in which a significant part of its activities are conducted and which is used to keep its books and records.
A QBU is any separate and clearly identified unit (or activity) of a trade or business of a taxpayer that maintains separate books and records. A QBU may elect to use the US dollar instead of its functional currency if it meets certain requirements.
When the foreign entity operates in an environment where a foreign currency is used, it will naturally have gains and losses as that functional currency is translated into US dollars for various US tax reporting purposes.
The final regulations addressed the following:
- The determination of the taxable income or loss of a QBU taxpayer; and
- The timing, amount, character and source of any Section 987 gain or loss.
The temporary regulations addressed the following:
- Rules relating to the recognition and deferral of foreign currency gain or loss under Section 987 in connection with certain QBU terminations and certain other transactions;
- An annual deemed termination election for a QBU;
- An elective method, available to taxpayers making the annual deemed termination election, for translating all items of income or loss with respect to a QBU at the yearly average exchange rate;
- Rules regarding the treatment of Section 988 transactions of a QBU;
- Rules regarding QBUs with the US dollar as their functional currency;
- Rules regarding combinations and separations of QBUs (mergers and spin offs);
- Rules regarding the translation of income used to pay creditable foreign income taxes for FTC purposes; and
- Rules regarding the allocation of assets and liabilities of aggregate parentship for purposes of Section 987.
There were also temporary regulations under Section 988 requiring the deferral of certain losses that arise with respect to related-party loans.
Any taxpayer who is involved with a branch (which is probably a QBU) or otherwise deals with foreign currencies should be aware of the ramifications of these regulations. This is a complex area where guidance has been deferred several times because of the complexity of the issues and to allow taxpayers time to determine its impact on their particular situation. To discuss how this might impact your unique circumstances, contact a Moore Doeren Mayhew international tax advisor today.