United States

IRS delays effective date of key foreign currency rules by one year

TAX ALERT  | 

In Notice 2017-57, the IRS and Treasury announced that they intend to delay by one year the effective date of final and temporary regulations (The Final and Temporary Regulations) addressing the calculation of foreign currency gain or loss (see TD 9794; TD 9795; our alert IRS issues key foreign currency tax regulations). The notice also indicates that the IRS and Treasury are contemplating changes to the final regulations that would allow taxpayers the option to elect to apply alternative rules for transitioning to the final regulations and for determining foreign currency gain or loss.

Issued in Dec. 2016, The Final and Temporary Regulations provide rules for determining the amount of income a taxpayer must recognize from foreign branch operations, as well as rules for determining the amount of foreign currency gain or loss associated with a foreign branch operations balance sheet. These highly complex regulations were originally set to take effect one year from the taxpayer’s first taxable year beginning after Dec. 7, 2016. Thus, calendar year taxpayers were required to apply the regulations for the 2018 taxable year, but could elect to apply the rules for the 2017 year. However, Notice 2017-57 extends this effective date by one additional year. Accordingly, calendar year taxpayers will be required to apply The Final and Temporary Regulations beginning Jan. 1, 2019.

According to the Notice, this delay to the effective date is the result of the Treasury’s review of regulations that may cause undue burden or complexity. Earlier this year, Treasury identified eight regulations in Notice 2017-38 pursuant to this review, including The Final and Temporary Regulations. As we understand it, Treasury submitted a final report to the President regarding how best to address the burdens imposed by these eight regulations, and such report should be made available to the public shortly. While some may have expected Treasury to withdraw The Final and Temporary Regulations, this delay in the effective date suggests that Treasury intends to keep the overall framework and modify them in a way that will minimize the compliance burdens associated with these rules.

Taxpayers with foreign operations will likely find the delay in the effective date of these complex rules to come as a welcome relief. However, this delay in the effective date does not eliminate the need for taxpayers to comply with the relevant statutory rules governing the translation of gain or loss from foreign operations. Taxpayers must still use a reasonable method to comply with the requirements of the statute, which is an ongoing requirement that has been in effect since 1986. However, they need not apply the specific rules contained in The Final and Temporary Regulations and in fact may be well advised to avoid early adoption of these rules since Treasury is likely to change them in potentially significant ways.

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