The General Rules Governing Currency Conversations for Computing Foreign Tax Credits and the Section 986 Election
By Anthony Diosdi During this extended tax season we received a significant number of questions regarding computing the proper exchange rate for purposes of claiming foreign tax credits. Many international tax practitioners are perplexed by the rules governing currency conversions and foreign taxes.This article is designed to provide guidance regarding translating foreign taxes into U.S. dollars.Under Internal Revenue Code Section 986, a taxpayer that uses the accrual method to account for foreign taxes for purposes of the foreign tax credit generally translates foreign income taxes accrued into U.S. dollars at the average exchange rate for the tax year to which the taxes relate (rather than at the exchange rate for the date of payment). See IRC Section 986(a)(1)(A). This rule does not apply to 1) any foreign income taxes paid…