The International Monetary Fund (IMF) published inflation data confirming that Turkey met the general factors that indicate an economy is hyperinflationary, which may require taxpayers with operations in Turkey to use the “dollar approximate separate transactions method” (DASTM) to convert to the U.S. dollar for purposes of computing taxable income.
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, the U.S. federal income tax code imposes special rules when a currency becomes hyperinflationary. Taxpayers with operations in countries 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.
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. For additional background on the DASTM rules, please see our prior publication regarding Argentina.
Affected taxpayers must generally start using 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 IMF determined that the cumulative inflation rate for the Turkish Lira exceeded 100% for the 36 calendar months ending Dec. 31, 2022, meeting the required threshold to be considered hyperinflationary.
Multinationals may need to begin accounting for their Turkish operations in U.S. dollars under DASTM for calendar years beginning on or after Jan. 1, 2023. It is important for multinationals with operations in Turkey 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 Turkish operations, are likely to produce a loss upon the adoption of the DASTM method.
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