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As Tax-Efficient Repatriation Gets Tougher, the Tough Take Proactive Measures

26 Nov 2009

Given the current economic conditions, tax directors are under increased pressure to repatriate earnings from their foreign operations in a tax-efficient manner. One reason why this is difficult is that foreign businesses are often organised as disregarded branches and pass-through entities for tax purposes. Alvarez & Marsal Taxand LLC, our US member, identify the steps multinationals should be taking.

Cash-flows through these kinds of structures cause foreign exchange recognition -- that is, taxable gains and losses in the US -- under Internal Revenue Code Section 987.

As the US dollar has been deteriorating against other currencies lately, and may continue to do so, significant pools of built-in foreign exchange gains may be embedded in your foreign earnings, and it is likely that repatriating cash-flows have already triggered (or will trigger) foreign exchange gains, and hence taxable income in the US. The good news is that you can probably mitigate or eliminate this tax cost by taking a proactive measure: early adoption of a new set of foreign exchange proposed regulations.

Taxand's Take

Now is the best time to:
  • Assess your current foreign exchange tax pool calculations;
  • Consider the impact of current and anticipated cash flows;
  • Run a sensitivity analysis on the possibility of adopting the 2006 regulations early; and
  • Communicate the impending foreign exchange tax impact of repatriation to your treasury and accounting departments.

You Taxand contact for further queries is:
Albert Liguori
T. +1 212 763 1638

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Taxand's Take Author