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International Taxation National Exporters

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1. National Exporters, Inc is a US corporation that sells throughout Europe but has no branches in any country. National Exporters uses the accrual method of tax accounting. During year 1, the corporation began to export to Japan. It opened a bank account with a Tokyo bank into which sales proceeds in Japanese yean were deposited. During year 1, there were three major transactions with Japanese customers. In January (when $1=130 yen), the corporation accrued sales income of 1.3 million yen. In June (when $1=140 yen), the corporation accrued sales income of 1.4 million yen. In September (when $1=150 yen), the corporation accrued sales income of 1.5 million yen. Payment in respect of January and June sales was received almost immediately and was deposited in the Tokyo account before any change in the exchange rate. When payment was received for the September sales, the exchange rate was $1=135 yen. The only expenditures from the account were 360,000 yen paid in November (when $1=120 yen) to cover cost of a trip to Japan by the president of the corporation to meet with prospective customers. On December 31 of the year 1, $1=100 yen. Determine the US income tax consequences for National Exporters as a result of the foregoing events.

2. In year 1(when $1=200 Russian rubles) Emilio, a US citizen, borrowed two million rubles. He repaid the loan in year 5, when $1=100 rubles. How much foreign currency gain or loss has Emilio realized?

3. Assume that Emilio used the two million rubles to purchase a house in year 1. The loan was secured by a mortgage on the house. In year 5, Emilio sold the house for four million rubles and repaid the loan when $1=100 rubles. He kept the remaining two million rubles in a Russian bank. Assuming that Emilio held the house as rental property, what are the USA income tax consequences of all of the events? How would your answer change if Emilio used the house as his principle residence? (Ignore the impact of any depreciation deduction taken in respect of the house.)

4. How would your answers in Problem 2 and 3 would be affected if the exchange rate in year 5 were $1=400 rubles.

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Solution Summary

International taxation for national exporters are examined.

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Anna Liza Gaspar


Problem 1
For its January and June sales, National Exporters, Inc. will not be recognizing any foreign exchange gains or losses; hence there is no tax consequence for these transactions. However, for its sale in September it recognizes a foreign exchange gain. This foreign exchange gain increases National Exporters, Inc.'s taxable profits for the year. Based on the table below, National Exporters, Inc. has to pay additional income tax for its realized foreign exchange ...

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