Income Tax treatment-exemption on Gratuity | SIMPLE TAX INDIA

Thus, foreign currency exchange issues must be considered in any transaction involving 2 different currencies. Generally, a transaction must be recorded at the agreed-upon rate, but any gain or loss in a foreign exchange will be recognized when the payment is actually made. A currency exchange calculation may be necessary for the following types of transactions if it involves a foreign currency:.

Tax Consequences of Foreign Currency Transactions

However, foreign exchange rates do not need to be considered if all of the transactions are in United States US dollars, even if the transaction is with a foreign company or occurs in a foreign country. When a taxable item involves foreign currency exchange, then the following must be noted of the gain or loss:.

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To reduce the number of currency conversions required, the tax code uses the standard of FAS 52 , which is the Financial Accounting Standards Board standard for foreign currency conversions. This allows the business to record most of its transactions in terms of its functional currency FC , which is the currency that is generally used by businesses in the locale of the foreign unit or entity.

Generally, under FAS 52, fluctuations in currency rates do not have to be accounted for unless the fluctuations change the cash flow for the business. In most transactions of a foreign business unit in a foreign country, cash flows are not affected by currency fluctuations.

However, transactions between the parent company and its foreign subsidiary will result in a change of cash flow.

As a consequence, gain or loss on the currency exchange will have to be included when calculating net income. Note, however, that an individual cannot be a QBU, although a business unit operated by an individual, such as a sole proprietorship, can be. A QBU that uses foreign currency as its functional currency must calculate its profit or loss in the foreign currency for each tax year, then translate it to US dollars, so that the US owner can include the income on its tax return.

The profit or loss without accounting for remittances is converted to US dollars by using the average exchange rate for the taxable year, which simplifies the currency translation.

However, the gain or loss on remittances is calculated on the remittance date. The basis pool is the tax basis , in United States US dollars USD , of the taxpayer's initial investment in the QBU, increased by taxable income plus the USD value of contributed property on the transfer date, and is decreased by branch losses and branch remittances, which are translated to USD at the spot rate on the remittance date.

In the following equation, all terms are expressed in USD:. The equity pool is the owner's interest in the branch in terms of the functional currency of the QBU. Like the basis pool, the equity pool is adjusted by the income or loss of the branch and by any transfers or remittances denominated in the QBU's functional currency.

In the following equation, all terms are expressed in the QBU's functional currency:. As can be seen from the above 2 equations, the basis pool is the owner's interest as expressed in US dollars, while the equity pool is that same owner's interest, expressed in the QBU's functional currency. Any exchanged gain or loss is ordinary and sourced according to the remittance. The USD amount of the remittance at the exchange rate in effect on the remittance date is compared with the USD value of the basis pool multiplied by the equity of the remittance in the functional currency divided by the equity pool.

Any gain or loss is a foreign exchange gain or loss that is taxed as ordinary income and sourced accordingly. However, deemed dividend distributions , which are considered taxable income under Subpart F even though they are not actually distributed, are translated at the average exchange rate for the corporation's tax year, since there is no actual distribution to fix the exchange rate.

However, when a distribution is actually made from income that has already been taxed as Subpart F income, then a gain or loss is recognized as the difference between the distribution actually received and the distribution amount subject to tax.

To determine the foreign tax credit , foreign taxes are calculated based on the average exchange rate for the taxable year. However, any paid foreign taxes must be translated at the exchange rate when paid. If foreign taxes accrue but are paid in a later tax year, then the foreign currency exchange rate may be different when the taxes are paid from when the tax amount was calculated to determine the foreign tax credit.

Forex Trading UK - FXCM

If the taxes are paid within 2 years of being accrued, then any foreign exchange fluctuation between the accrual rate and the paid rate is disregarded. If more than 2 years have elapsed, then the difference between the accrual rate and the paid rate must be recognized.

Any foreign exchange gain or loss from a functional currency transaction is separate from the gain or loss in the underlying transaction, and is treated as an ordinary gain or loss; it is not characterized as interest income or expenses. A personal transaction is defined as one in which there are no deductible expenses in regard to the transaction. The gain or loss of the transaction is sourced according to the taxpayer's residence.

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