come. Deemed distributions under Subpart F are translated at the weighted average
exchange rate for the foreign corporation’s taxable year. Investments in U.S. property
are translated at the rate in effect on the last day of the taxable year. Deemed-paid
foreign taxes are translated into U.S. dollars using the exchange rate on the date the
tax was paid.
(d) Hyperinflationary Economies. A QBU, whose functional currency is a hyperin-
flationary currency, must use the U.S. dollar as its functional currency. The taxpayer
uses the “dollar approximate separate transactions” method of accounting. Under this
method, profit and loss or earnings and profits are computed under the following
four-step approach:
1.Prepare a profit-and-loss statement in the QBU’s hyperinflationary currency.
2.Make the adjustments necessary to conform this profit-and-loss statement to
U.S. accounting and tax principles.
3.Translate the amount of hyperinflationary currency into U.S. dollars in accor-
dance with prescribed regulations.
4.Adjust the result in dollar profit and loss or earnings and profits to reflect the
amount of the currency gain or loss determined under the regulations.In general, the amounts shown on a profit-and-loss statement are translated into
dollars at the average exchange rate for each month of the taxable year, with special
rules provided for translating items of inventory, cost of goods sold, depreciation, de-
pletion, amortization, and prepaid items. Amounts representing allowance for depre-
ciation, depletion, and amortization are translated at the average exchange rate for the
translation period in which the cost of the underlying asset was incurred, with pre-
paid expenses and income translated at the average rate for the translation period dur-
ing which they were paid or received.
These rules, which are complex, are similar to generally accepted accounting prin-
ciples but are not identical. In general, the accounting rules provide greater flexibil-
ity than permitted by the tax rules. Consequently, preparers of the tax return cannot
rely on accounting department calculations but must refine these calculations to take
into consideration these special tax rules.
30.7 U.S. TAXATION OF A FOREIGN CORPORATION
(a) Overview. Foreign corporations are subject to U.S. taxation on certain invest-
ment income from U.S. sources and on business income that is “effectively con-
nected” with a U.S. trade or business.
(i) Investment Income. U.S.-source investment income is subject to a 30% gross re-
ceipts tax if it is not effectively connected with the conduct of a U.S. trade or business.
Income subject to this 30% flat-rate tax includes:
1.Fixed or determinable annual or periodic income
2.Timber, coal, or iron ore royalties
3.Original issue discount
4.Gains from the sale or exchange of intangible property, such as patents and30 • 18 INTERNATIONAL TAXATION