Argentina hyperinflation may trigger DASTM rule


The U.S. federal income tax code, like financial reporting requirements, imposes special rules when a currency becomes hyperinflationary, which could impact multinationals operating in countries with hyperinflationary economies. Argentina, for instance, met the general factors that indicate an economy is hyperinflationary in June 2018 and thus must be treated as hyperinflationary for financial reporting purposes no later than July 1, 2018.

In general, for U.S. federal income tax purposes, a taxpayer and each qualified business unit (QBU) must compute gross income, taxable income or loss and earnings and profits in its respective functional currency. However, taxpayers with operations in countries like Argentina, where the local functional currency has been determined to be hyperinflationary, must convert to the use of the U.S. dollar as the functional currency.

A currency generally becomes hyperinflationary when it has a cumulative compounded inflation rate of at least 100% over three consecutive calendar years. For U.S. federal income tax purposes, a taxpayer or QBU whose local functional currency has been determined to be hyperinflationary must start using the dollar approximate separate transactions method (DASTM) for the tax year that begins after the year that the currency becomes hyperinflationary. The determination of whether a currency is hyperinflationary is generally made on a calendar-year basis.

The rules and methodology for converting to the U.S. dollar as the functional currency are set forth in Section 985, and the related regulations under Tres. Regs. Sec. 1.985-3. Under these rules, U.S. taxpayers with controlled foreign corporations, partnerships or branches in a hyperinflationary environment must account for operations using DASTM.  DASTM constitutes a method of accounting and once established, it must be used until the local currency qualifies as non-hyperinflationary for three consecutive years.

Where required, a taxpayer or QBU would apply the general DASTM rules annually under Tres. Regs. Sec. 1.985-3. Under the DASTM rules, the income or loss and earnings and profits of a QBU is measured first in local currency, and then translated into U.S. dollars using the following four-steps:

  • An income or loss statement must first be prepared from the QBU's books and records in the QBU's hyperinflationary currency.
  • Adjustments are made to conform the statement to the U.S.’s generally accepted accounting principles (GAAP) and tax accounting principles (including reversing monetary correction adjustments required by local accounting principles).
  • The adjusted amounts shown in the local hyperinflationary currency on the income or loss statement are translated into U.S. dollars.
  • The resulting dollar income or loss or earnings and profits, and if necessary, items of gross income, expense or other amounts, are adjusted to reflect the amount of DASTM gain or loss.

In general, DASTM gain or loss is determined first in the aggregate, and then is allocated among various categories of income and deduction. DASTM gain or loss is equal to the aggregate of:

  • The amount of the change in the net worth of the QBU for the current taxable year, which is calculated by subtracting the net worth of the QBU at the end of the preceding taxable year from the dollar net worth of the QBU at the end of the current taxable year
  • Plus, the amount of certain items (e.g., nondeductible expenses) that decreased net worth for the year but did not affect taxable income or earnings and profits
  • Minus, the dollar amounts of certain items (e.g., capital contributions) that increased net worth for the year but did not affect income or earnings and profits
  • Minus, the amount of dollar income or earnings and profits (or plus the amount of any dollar loss or deficit in earnings and profits) for the taxable year.

In general, once the DASTM gain or loss has been determined, it then is allocated to specific items of the QBU’s income or expense by using either a simplified elective method, or, in certain circumstances, a more complex nine-step method.

Prior to implementing DASTM, a taxpayer first must apply the transition rules under Treas. Regs. Sec. 1.985-7. The transition rules require taxpayers to make certain adjustments relating to a three-year look-back period that begins three taxable years prior to the taxable year of change and ends on the last day prior to the taxable year of change. These adjustments vary depending on whether the taxpayer is a foreign corporation, QBU or a U.S. shareholder of a controlled foreign corporation.

The DASTM rules are of specific importance to multinational corporations conducting business in countries with hyperinflationary currencies, such as Argentina. Multinationals may need to begin accounting for their Argentinian operations in U.S. dollars under DASTM for tax years beginning on or after Jan. 1, 2019. It is important for multinationals with operations in Argentina to carefully analyze the tax consequences of adopting DASTM. Adjustments resulting from adopting DASTM may impact several computations, including those required under Sections 988 and 987, as well as the computation of Subpart F income, GILTI, E&P, taxable income and foreign tax credits. The rules are complex, but, in the case of Argentinean operations, are likely produce a loss upon the adoption of the DASTM method.



Cory Perry

Washington DC, Washington DC

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