13.3 Taxes on foreign currency transaction gains and losses (2024)

For transactions denominated in a currency other than the functional currency, changes in exchange rates will generally result in gains or losses recognized in the income statement.

Gains and losses from foreign currency transactions will generally be taxable (or deductible) in the US or in a foreign country based on the applicable tax law. If these gains and losses are included in taxable income in a period that differs from the one in which they are included for financial reporting purposes, ASC 830-20-05-3 requires deferred tax accounting in accordance with ASC 740.

Foreign withholding taxes related to the reversal of outside basis differences are technically a liability of the parent and therefore the parent’s foreign currency transactions. As a result, to the extent foreign withholding taxes are being provided on the outside basis difference in a foreign subsidiary, the related transaction gains and losses caused by changes in the exchange rate should be recognized in the income statement in accordance with ASC 830-20-35-1. These transaction gains and losses can be recognized in either pre-tax income or as part of the income tax provision consistent with ASC 830-740-45-1.Once made, this classification decision should be consistently applied to all foreign withholding tax transaction gain and losses.