Posted tagged ‘euro’

Silence Is Golden: Can Treasury Offer Guidance About The Tax Consequences Of A Euro Breakup?

January 23, 2012

By Jonathan Prokup

In this morning’s Tax Notes (subscription required), Jeremiah Coder addresses a topic that we at the Tax Blawg have discussed a couple of times over the past two years: the tax consequences of a potential breakup of the euro.  For our prior coverage, see here and here.  As the currency lurches towards and away from a potential dissolution (in part or in whole), the tax fallout of such an event lurks in the background.

The Tax Notes article generally covers the major tax issue (e.g., currency gain/loss recognition) associated with a potential breakup of the euro.  As the article seemed to suggest, though, the uncertainty about how Treasury would respond to a breakup is probably just as great as the uncertainty about whether the currency itself will survive, at least with its current composition. (more…)

Businesses Prepare For The End Of The Euro; Will Treasury Do The Same?

November 29, 2011

By Jonathan Prokup

According to the Financial Times, companies around the world are preparing for the possibility of a breakup of the euro.  Given the currency devaluation that would likely occur in countries coming out of the euro, these companies are preparing for the impact that such an event would have on balance sheets (e.g., asset prices) and income statements (e.g., import costs).   (For additional FT coverage of the issue, see here.)

As we noted in the TaxBlawg a while back when the euro crisis was still focused primarily on Greece, a partial or complete breakup of the eurozone would give rise to a host of tax issues for U.S.-based multinationals.  Would a conversion from the euro to the drachma or the lira or another currency, as the case may be, create a realization event under Code section 1001?  Would the exchange give rise to currency exchange gain or loss under Code section 988?  Finally, if a taxpayer’s qualified business unit (“QBU”) were forced to switch its functional currency from the euro to a legacy currency, should that switch be considered a change in the taxpayer’s method of accounting for purposes of Code section 481?

The Treasury Department tackled these questions when the euro was first introduced.  It seems reasonable to think that they would follow a similar pattern but in reverse, essentially treating the conversion as a non-taxable event, while deferring any currency gain or loss until a subsequent disposition of the legacy currency.  Nevertheless, until taxpayers receive guidance from Treasury, the potential tax consequences of a eurozone breakup will remain one more area of uncertainty.

It’s April 29th; Do You Know Where Your Euros Are?

April 29, 2010

By David Shakow and Jonathan Prokup

By now, most observers of, and participants in, the European economy are familiar with the drama playing out in Greece.  Swamped by large debts and a seemingly uncontrollable fiscal deficit, the Greek government is facing the possibility of defaulting on its sovereign debt obligations.  Even if Greece’s monetary partners (and the IMF) come to its rescue, questions will remain about the ability of the Greek government to reorganize its fiscal affairs to avoid a repeat of this scenario one, two, or more years in the future.

Adding a new wrinkle to this fiscal crisis is Greece’s inability to use monetary policy to resolve the problem.  Historically, nations faced with unmanageable sovereign debt have often simply printed more money, thereby creating inflation, which reduces the real value of the government’s typically fixed-rate debt.  As a member of the European Monetary Union, however, Greece does not have this option.  As a result, an increasing chorus of commentators and public officials have been asking whether Greece might be forced to take a “holiday” from the Monetary Union or, even worse, whether the “Greek Tragedy” presages the eventual collapse of the entire Monetary Union.   (For recent coverage of this possibility, see here.)

As a blawg dedicated to “tax talk for tax pros,” the situation naturally causes us to ask: what federal tax consequences would result if Greece took a “holiday” from the euro or if the monetary union itself were to dissolve.  Assuming that holders of euros received legacy currencies in exchange for their euros, would that exchange be a realization event under Code section 1001?  On a more limited basis, would the exchange give rise to currency exchange gain or loss under Code section 988?  Finally, if the qualified business unit (“QBU”) of a taxpayer were forced to switch its functional currency from the euro to a legacy currency, should that switch be considered a change in the taxpayer’s method of accounting for purposes of Code section 481?

Of course, the Treasury Department previously addressed these issues in 1998 and 2001 when it issued temporary and final regulations, respectively, regarding the transition from the various legacy currencies to the euro.  The regulations generally treated the conversion as a non-taxable event, deferring any gain that would otherwise have been recognized under section 988.  In the event that the euro were abandoned, should these rules simply be applied in reverse, allowing taxpayers to switch back to a legacy currency while deferring the recognition of any currency exchange gains or losses?

While we have not yet formed any opinions about the potential impact of these prospective events, we raise the question in the hopes of spurring discussion within the tax community.  We don’t know if our colleagues at the Treasury Department have given any consideration to this issue; but it seems to us that they probably should.  After all, a withdrawal of one or more members from the European Monetary Union, or a dissolution of the Monetary Union altogether, is not going to be as easily anticipated or as well planned as the its original formation.

<!–[if !mso]> <! st1\:*{behavior:url(#ieooui) } –> By now, most observers of, and participants in, the European economy are familiar with the drama playing out in Greece.  Swamped by large debts and a seemingly uncontrollable fiscal deficit, the Greek government is facing the possibility of defaulting on its sovereign debt obligations.  Even if Greece’s monetary partners come to its rescue, questions will remain as to the ability of the Greek government to reorganize its fiscal affairs to avoid a repeat of this scenario one, two, or more years in the future.  Further clouding Greece’s economic prospects is the increasing possibility that Greece might be forced to withdraw from the European monetary union or, even worse, that the entire monetary union itself might collapse.  (See ___________.)

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