Choice Of Exchange Rate Research Articles

EXCHANGE RATE ASPECTS IN THE TAXATION OF FOREIGN INCOME

The methods for translating foreign income into dollars for tax purposes and the tax treatment of exchange-rate gains and losses on foreign capital have become matters of considerable importance in view of the large volume of United States' investment abroad combined with the increasing flexibility of exchange rates. This paper is occasioned by a recent book, Taxation and Foreign Currency by Donald R. Ravenscroft , which has brought to light the legal rules applicable to this hitherto neglected corner of the income tax. Problems discussed relate to (1) the choice of exchange rate, (2) the timing of translation and (3) the treatment of exchange-rate gains and losses. A proposal that adjustments be made for deviations from purchasing-power parity is rejected, but more consistency in the timing of translation of income items is advocated. Greater consistency is also recommended for the treatment of exchange-rate gains and losses with realization being the test as in the domestic context. While present practices are found to be ill-defined, the major shortcoming is the degree of choice left to the taxpayer which places an inordinate share of the exchange risk on the United States Treasury.