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Asymmetric foreign currency gains and losses

Applies
FY2024 onwards
Reviewed
Rule
P2-AFX-2024.1
By

What are asymmetric foreign currency gains under Pillar Two?

Where accounts and tax use different functional currencies, currency gains and losses are restated so GloBE Income follows the tax functional currency.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.1(f), Asymmetric Foreign Currency Gains or Losses

A Constituent Entity's Financial Accounting Net Income or Loss is adjusted for Asymmetric Foreign Currency Gains or Losses: foreign currency gains or losses of an entity whose accounting and tax functional currencies are different, that are included in taxable income and attributable to fluctuations between its accounting and tax functional currencies; included in Financial Accounting Net Income or Loss and attributable to fluctuations between its tax and accounting functional currencies; included in Financial Accounting Net Income or Loss and attributable to fluctuations between a third foreign currency and its accounting functional currency; or attributable to fluctuations between a third foreign currency and its tax functional currency, whether or not included in taxable income.

It removes a mismatch that would otherwise move the Effective Tax Rate for reasons that have nothing to do with how much tax is paid. Where the two currencies are the same, nothing is adjusted.

Four items: two brought in, two taken out

Only where the two functional currencies differ

Where they are the same, foreign currency gains and losses in the accounts stay in GloBE Income or Loss whether or not local law taxes them. An exemption is a permanent difference that is meant to affect the rate.

The four items

  • (a) In taxable income, accounting currency against tax currency — BROUGHT IN: a gain is positive, a loss negative
  • (b) In the accounts, tax currency against accounting currency — TAKEN OUT: a gain is negative, a loss positive
  • (c) In the accounts, a third currency against the accounting currency — TAKEN OUT
  • (d) A third currency against the tax currency, taxed or not — BROUGHT IN

(d) does not depend on local tax

Where the gain or loss is not taxed, it is the amount that would have arisen for tax purposes had it been, using the method the financial accounts use for foreign currency gains and losses.

Then translated

The adjustment is worked out between the two functional currencies and then translated into the presentation currency of the Consolidated Financial Statements.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    Whether the accounting and tax functional currencies differ

    If they are the same, no adjustment is made.

  3. 3

    The net of the four items

    (a) less (b) less (c) plus (d).

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

A bond in the accounting currency

The OECD's Example 3.2.1(f)-1: a tax loss of 250 on a dollar bond held by an entity that pays tax in euro.

Computed

An adjustment of (USD 250) is made to Financial Accounting Net Income or Loss as computed (Article 3.2.1(f)): the foreign currency gains and losses measured against the tax functional currency — (USD 250) and USD 0 — are brought in, and those the accounts measured against the accounting functional currency — USD 0 and USD 0 — are taken out. The amount is then translated into the presentation currency of the Consolidated Financial Statements. Based on the figures you supplied.

Workings

(a) Tax gain or (loss), accounting against tax functional currencyBrought in — included in taxable income but not in the accounts
(USD 250)
(b) Accounting gain or (loss), tax against accounting functional currencyTaken out — in the accounts, with no counterpart in the tax functional currency
USD 0
(c) Accounting gain or (loss), third currency against accounting functional currencyTaken out — the exclusionary arm for a third currency
USD 0
(d) Gain or (loss), third currency against tax functional currencyBrought in — the inclusionary arm, whether or not taxed locally
USD 0
Adjustment to Financial Accounting Net Income or LossArticle 3.2.1(f) — (a) less (b) less (c) plus (d)
(USD 250)

Decided by the net of the four items

Interest payable in the tax currency

The OECD's Example 3.2.1(f)-2: an accounting loss of 125 on euro interest in dollar accounts.

Computed

An adjustment of USD 125 is made to Financial Accounting Net Income or Loss as computed (Article 3.2.1(f)): the foreign currency gains and losses measured against the tax functional currency — USD 0 and USD 0 — are brought in, and those the accounts measured against the accounting functional currency — (USD 125) and USD 0 — are taken out. The amount is then translated into the presentation currency of the Consolidated Financial Statements. Based on the figures you supplied.

Workings

(a) Tax gain or (loss), accounting against tax functional currencyBrought in — included in taxable income but not in the accounts
USD 0
(b) Accounting gain or (loss), tax against accounting functional currencyTaken out — in the accounts, with no counterpart in the tax functional currency
USD 125
(c) Accounting gain or (loss), third currency against accounting functional currencyTaken out — the exclusionary arm for a third currency
USD 0
(d) Gain or (loss), third currency against tax functional currencyBrought in — the inclusionary arm, whether or not taxed locally
USD 0
Adjustment to Financial Accounting Net Income or LossArticle 3.2.1(f) — (a) less (b) less (c) plus (d)
USD 125

Decided by the net of the four items

One currency for both

An entity whose accounts and tax return are both in euro.

Computed

No adjustment is made under Article 3.2.1(f) as computed: the Constituent Entity's accounting and tax functional currencies are the same, and the definition reaches only an entity whose two currencies differ. The foreign currency gains and losses in its accounts stay in GloBE Income or Loss whether or not local tax law taxes them. Based on what you supplied.

Decided by the whether the accounting and tax functional currencies differ

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Is the Constituent Entity's accounting functional currency different from its tax functional currency — the functional currency used to determine its taxable income for a Covered Tax where it is located?

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

Share this rule

Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader