IRS and Treasury To Delay Foreign Currency Tax Rules
The IRS recently released Notice 2022-34, stating that they plan to defer the effective date of final regulations relating to foreign currency used by multinational companies' business units abroad for one year.
The IRS and the U.S. Treasury Department will amend regulations under Section 987 of the Tax Code to defer the applicability date of final regulations by an additional year. Under an earlier notice, the final regs from 2016 for qualified business units (QBUs) and related regs from 2019 were delayed until tax years beginning after Dec. 7, 2022. Under the new notice, the regs will not take effect until taxable years beginning after Dec. 7, 2023. Until then, taxpayers can rely on associated proposed regs that cross-reference temporary rules that have expired.
Under Section 987, the income or loss of a QBU is typically calculated separately in the QBU's functional currency and translated into the owner's functional currency at the applicable exchange rate. If the QBU transfers money or other property back to its owner or another QBU of the owner, those transfers could establish a "remittance." A remittance by the QBU can require the owner to recognize foreign currency gain or loss under Section 987.
According to the notice, a business taxpayer can elect to apply the 2016 final regulations, related temporary regs and related 2019 final regs to tax years beginning after Dec. 7, 2016, and before the amended effective date as long as the company consistently applies the rules to tax years with respect to all Section 987 QBUs 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.