The IRS recently released Notice 2022-34, deferring the applicability date of the final, proposed and temporary regulations published in 2016 on foreign currency gains or losses for foreign branches under Section 987 and certain related final regulations.
Previously, in December 2016, the IRS released final, proposed and temporary regulations, providing rules for computing income from branch operations in a qualified business unit (QBU). The regulations include provisions for translating from the foreign country’s functional currency to the owner’s functional currency, calculating foreign currency gain or loss with respect to the QBU’s assets and liabilities, and recognizing such gain or loss when the QBU makes a transfer to its owner. The applicability date of these regulations, which previously had been deferred under prior notices, is now revised to be applicable on the first day of the taxable year after Dec. 7, 2023.
For calendar year taxpayers, this means the applicability date is revised to apply to the tax year beginning on Jan. 1, 2024. The delayed applicability dates also apply to final regulations released in 2019 dealing with QBU combinations and separations, but the applicability dates of the 2019 regulations dealing with outbound loss and deferral events are not affected.
As the U.S. — along with many other jurisdictions — deals with the effects of rising inflation, taxpayers applying the foreign currency guidelines under Section 987 may start to see inflated gains or losses, depending on pertinent currencies. Taxpayers should discuss how the delay of these foreign currency guidelines can impact their business with their tax advisor.