26 U.S.C. § 986 : US Code - Section 986: Determination of foreign taxes and foreign corporation's earnings and profits

Search 26 U.S.C. § 986 : US Code - Section 986: Determination of foreign taxes and foreign corporation's earnings and profits

(a) Foreign income taxes
(1) Translation of accrued taxes
(A) In general
For purposes of determining the amount of the foreign tax
credit, in the case of a taxpayer who takes foreign income
taxes into account when accrued, the amount of any foreign
income taxes (and any adjustment thereto) shall be translated
into dollars by using the average exchange rate for the taxable
year to which such taxes relate.
(B) Exception for certain taxes
Subparagraph (A) shall not apply to any foreign income taxes -

(i) paid after the date 2 years after the close of the
taxable year to which such taxes relate, or
(ii) paid before the beginning of the taxable year to which
such taxes relate.
(C) Exception for inflationary currencies
Subparagraph (A) shall not apply to any foreign income taxes
the liability for which is denominated in any inflationary
currency (as determined under regulations).
(D) Elective exception for taxes paid other than in functional
currency
(i) In general
At the election of the taxpayer, subparagraph (A) shall not
apply to any foreign income taxes the liability for which is
denominated in any currency other than in the taxpayer's
functional currency.
(ii) Application to qualified business units
An election under this subparagraph may apply to foreign
income taxes attributable to a qualified business unit in
accordance with regulations prescribed by the Secretary.
(iii) Election
Any such election shall apply to the taxable year for which
made and all subsequent taxable years unless revoked with the
consent of the Secretary.
(E) Special rule for regulated investment companies
In the case of a regulated investment company which takes
into account income on an accrual basis, subparagraphs (A)
through (D) shall not apply and foreign income taxes paid or
accrued with respect to such income shall be translated into
dollars using the exchange rate as of the date the income
accrues.
(F) Cross reference
For adjustments where tax is not paid within 2 years, see
section 905(c).
(2) Translation of taxes to which paragraph (1) does not apply
For purposes of determining the amount of the foreign tax
credit, in the case of any foreign income taxes to which
subparagraph (A) or (E) of paragraph (1) does not apply -
(A) such taxes shall be translated into dollars using the
exchange rates as of the time such taxes were paid to the
foreign country or possession of the United States, and
(B) any adjustment to the amount of such taxes shall be
translated into dollars using -
(i) except as provided in clause (ii), the exchange rate as
of the time when such adjustment is paid to the foreign
country or possession, or
(ii) in the case of any refund or credit of foreign income
taxes, using the exchange rate as of the time of the original
payment of such foreign income taxes.
(3) Authority to permit use of average rates
To the extent prescribed in regulations, the average exchange
rate for the period (specified in such regulations) during which
the taxes or adjustment is paid may be used instead of the
exchange rate as of the time of such payment.
(4) Foreign income taxes
For purposes of this subsection, the term "foreign income
taxes" means any income, war profits, or excess profits taxes
paid or accrued to any foreign country or to any possession of
the United States.
(b) Earnings and profits and distributions
For purposes of determining the tax under this subtitle -
(1) of any shareholder of any foreign corporation, the earnings
and profits of such corporation shall be determined in the
corporation's functional currency, and
(2) in the case of any United States person, the earnings and
profits determined under paragraph (1) (when distributed, deemed
distributed, or otherwise taken into account under this subtitle)
shall (if necessary) be translated into dollars using the
appropriate exchange rate.
(c) Previously taxed earnings and profits
(1) In general
Foreign currency gain or loss with respect to distributions of
previously taxed earnings and profits (as described in section
959 or 1293(c)) attributable to movements in exchange rates
between the times of deemed and actual distribution shall be
recognized and treated as ordinary income or loss from the same
source as the associated income inclusion.
(2) Distributions through tiers
The Secretary shall prescribe regulations with respect to the
treatment of distributions of previously taxed earnings and
profits through tiers of foreign corporations.