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.