Principal Issues: Conversion of a foreign affiliate's surplus accounts to functional currency for tax return purposes.
Position: Not a taxable event, maintain surplus accounts in functional currency.
Reasons: Similar to adoption of euro from national currency.
International Fiscal Association
May 2004
Q.2 Denomination of Foreign Affiliate Surplus Accounts
Recently a number of countries have amended their tax legislation to allow taxpayers to choose a functional currency for tax return purposes that differs from the local currency. This is the case notably in Australia and the Netherlands. Assume that in the past, the surplus accounts of a foreign affiliate (FA) resident and carrying on business in Australia were kept in Australian dollars and that the FA decides to use the US Dollar as its functional currency for financial statement and tax return purposes. From an economic and policy perspective, keeping the surplus accounts in US dollars would be appropriate on a go-forward basis. Applying such an approach is not fundamentally different from the one that was used for European companies which moved from their respective legacy currencies to the Euro. Due to the requirement in Regulation 5907(6) that consistency be maintained, it is not clear that the functional currency of FA can be changed from the Australian dollar to the US dollar.
Response
Where the business of FA is transacted in a foreign currency other than the currency of the country in which FA is resident and in which the business is carried on, and such foreign currency is used by FA for financial statement and tax return purposes in that foreign country, it would in our view be reasonable in those circumstances that FA's surplus accounts be maintained in that same foreign currency. Therefore, provided that the adoption of the new foreign currency for financial statement and tax return purposes is carried out when such option first becomes available under the foreign tax law, the CRA would generally consider a conversion of FA's surplus accounts to the new foreign currency to be in compliance with Regulation 5907(6). Conversions carried out at another time would be considered on a case-by-case basis.
Prepared by: Suzanie Chua Date: April 27, 2004.