A practice unit published by the US Internal Revenue Service on July 26 describes the rules applicable to US multinational enterprises that enter into foreign currency transactions through certain branches or disregarded entities referred to as “qualified business units.”
US companies doing business through foreign branches generally recognize under Internal Revenue Code Section 988 transactional foreign currency gains and losses that result from fluctuations in the value of the applicable foreign currency to the US dollar.
However, such companies may avoid recognizing IRC 988 gain or loss by entering into foreign currency transactions through a qualified business unit under IRC 989. A qualified business unit is a branch or disregarded entity that maintains separate books and records and has activities that rise to the level of a trade or business.
Qualified business units are subject to IRC 987, under which income or loss is generally computed separately in the qualified business unit’s functional currency and is translated into the owner’s functional currency at the appropriate exchange rate. Certain transfers from the qualified business unit to the owner may constitute remittances requiring the owner to recognize foreign currency gain or loss under IRC 987.
The practice unit explains the rules under IRC 987 for determining the qualified business unit’s taxable income and earnings and profits and translating them into the owner’s functional currency. It also addresses the rules on computing foreign currency gain or loss on remittances. As noted in the practice unit, there are several possible methodologies for complying with IRC 987, which have been issued through different sets of regulations.
IRS practice units are internal training materials developed for agency employees.
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