Branch Tax Accounting

The IRS has struggled for years, nay decades, to come up with a rational set of rules under which companies can determine recognized gain or loss from the operation of a non-U.S. branch operation. Little wonder then, that U.S. companies affected by these rules make their calculations using a variety of conventions. This is not to mention the hundreds and likely thousands of U.S. companies that operate oblivious to the need to track this often material accumulation of unrecognized gain or loss.

With the mid 1990’s advent of “check the box” entity classification elections, coupled with broad expansion of international trade, the number of branch operations has exploded, far outpacing the “retail” level of understanding of all the associated tax complications. That is to say that understanding of these issues is largely limited to the most sophisticated multinational corporations. However, every foreign entity which has “checked the box” to be treated as a pass-through entity for U.S. tax purposes has joined the ranks of branch operations, whether the entity is wholly owned by a single U.S. person (or company), or owned by more than one person (regardless of tax residence).

Generally a non-U.S. branch will conduct much of its operations in the currency of its host country. As such, its operating currency, or functional currency, is one other than the U.S. dollar. Additionally, the value of the foreign currency in U.S. dollars, with few exceptions, varies from day to day, year to year, so the current U.S. dollar value of branch balance sheet will vary, often materially, from the value reported for U.S. tax purposes.

Let NEOITG, LLC help you understand the disguised tax asset or liability represented by this foreign currency exchange fluctuation.