The Taxation of Cross-Border Currency and Hedging Transactions
By Anthony Diosdi The foreign branches and subsidiaries of U.S. companies often conduct business and maintain their books and records in the currency of the host country. This creates a currency translation problem for the domestic parent corporation, which must restate into U.S. dollars the results from its foreign operations. Tax attributes that require translation include the taxable income or loss of a foreign branch, earnings remittances from a foreign branch, actual and deemed distributions from a foreign corporation, and foreign income taxes. Foreign currency translation would be the only issue if currency exchange did not fluctuate. However, the U.S. dollar floats freely against other currencies, and this results in currency exchange gains and losses on assets and liabilities denominated in other currencies. Translational exchange gains and losses arise when…