Taxing FX of Branches: the new Section 987 regulations
Doug McHoney (PwC’s International Tax Services Global Leader) is joined by Rebecca Lee (WNTS ITS Partner) in PwC’s Washington, DC studio for the 140th (and Rebecca’s) episode of the Cross-Border Tax Talks podcast. Rebecca, a frequent guest on the podcast, specializes in financial transactions and digital assets. Doug and Rebecca discuss the history and intent of Section 987, which is generally to address the taxation of foreign exchange gains/losses from a foreign branch operating in a different functional currency than its home office. The rules started out relatively simply at three sentences, but since enactment we’ve received 100s of pages of regulations. Doug and Rebecca discuss how the layers of complication led to confusion and concerns over policy and administrability. This background is critical to understanding the challenges companies are facing today with the November 2023 proposed regulations. Doug and Rebecca dissect and analyze the 250-page package, what new elements and limitations they introduce, and what this means for affected companies, including industries like banking and insurance. They close the discussion with how the effective dates work and why the operation of these rules may have surprising results.
Timestamps:
- 2:52 - What is code section 987? Rebecca gives an overview of the foreign currency rules under the statute and their general purpose
- 4:10 - Doug and Rebecca discuss the wide-ranging definition of ‘qualified business unit’ (QBU) under the Section 987 statute and regulations
- 5:53 - The background of the first set of Section 987 regulations from 1991
- 8:17 - In 2000, the rules are changed again, and Rebecca explains what prompted the IRS and Treasury issue a Notice
- 9:24 - In 2006, proposed regulations bifurcated the treatment of the assets based on their generation of foreign currency losses
- 10:40 - Rebecca highlights the stakeholder comments to the 2006 regulations, including concerns around administrability, policy, and jurisdictional accounting differences
- 12:02 - The regulations were finalized in 2016 (ten years later) with most of the proposed rules and methodologies intact
- 12:50 - 2016 is still just the beginning, and Rebecca explains why the regulations were serially deferred and more modifications were added to address timing issues associated with transactions generating foreign currency losses
- 13:50 - Doug takes a step back to recap this ‘tortured’ history of Section 987 and understand what Congress and the regulatory authorities were trying to accomplish
- 15:59 - November 9. 2023 regulations cover 250 pages of dense, complicated material that challenges even the sharpest specialist minds
- 16:36 - What are these regulations and what do they say generally?
- 17:22 - Rebecca explains the baseline policy of the proposed 2023 regulation and the new elements and limitations it introduces, with examples
- 21:30 - How does Section 987 affect banks and insurance companies?
- 22:05 - How do these rules interact with partnership interests and stock? Changes to the definition of active trade or business
- 23:47 - Doug and Rebecca discuss the loss deferral rules
- 28:55 - Doug and Rebecca discuss the sourcing of Section 987 income and interest expense allocation issues
- 32:30 - Briefly touching on consolidated rules and deemed transactions; Rebecca covers an example of issues companies need to consider
- 35:26 - Closing with the effective dates, the possible knock-on effects that Treasury and the IRS addressed through a recent correction, and the actions companies should consider now, even while the regulations are proposed.
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