IRS to delay foreign currency tax rules

The Internal Revenue Service and the Treasury Department plan to defer for one year the effective date of final regulations pertaining to foreign currency used by multinational companies' business units abroad.

In Notice 2022-34, the IRS and the Treasury said they intend to amend regulations under Section 987 of the Tax Code to defer the applicability date of final regulations by an additional year. This isn't the first time they have opted to delay the effective date of the regulations. Under a previous notice, the final regs from 2016 for qualified business units and related regs from 2019 were postponed until tax years starting after Dec. 7, 2022. Now they won't take effect until taxable years beginning after Dec. 7, 2023.  Until then, taxpayers can rely on certain related proposed regs that cross-reference temporary rules that have expired.

A business taxpayer can choose to apply the 2016 final regulations, the related temporary regs, and related 2019 final regs to tax years starting after Dec. 7, 2016, and before the amended applicability date, provided the company consistently applies the rules to tax years with respect to all Section 987 qualified business units directly or indirectly owned by the taxpayer on the transition date, as well as all Section 987 QBUs directly or indirectly owned on the transition date by members that file a consolidated return with the taxpayer or by any controlled foreign corporation, in which a member owns over 50% of the voting power or stock value. 

Samuel Corum/Bloomberg

Instead of directly participating in foreign currency transactions, U.S.-based multinational enterprises can establish a separate branch, division or disregarded entity whose activities rise to the level of a trade or business and for which they maintain separate books and records. This is referred to as a qualified business unit. Under Section 987, the income or loss of a QBU is generally calculated separately in the QBU's functional currency and is translated into the owner's functional currency at the appropriate exchange rate. If the QBU transfers money or other property back to its owner or another QBU of the owner, then those transfers could constitute a "remittance." A remittance by the QBU can require the owner to recognize foreign currency gain or loss under Section 987. 

The notice, which the IRS issued Monday, comes after Congress passed the Inflation Reduction Act on Friday, setting a minimum tax rate of 15% for corporations that earn over $1 billion per year on their book income (see story). President Biden is scheduled to sign the Inflation Reduction Act into law on Tuesday.