Supplemental comments on Form 5471: deviations from GAAP.

Supplemental Comments on Form 5471: Deviations from GAAP

Background

In our November 16 letter, we observed that Treas. Reg. [section] 1.6038-2(g) requires a foreign corporation to submit certain information concerning its income, balance sheet, and surplus "prepared in conformity with generally accepted accounting principles [GAAP] and in such form and detail as is customary for the corporation's accounting records." We stated that the instructions to the revised Form 5471 had deleted a statement essentially mirroring this regulatory requirement. The Institute expressed concern that the revised form requires the submission of information that may be inconsistent with GAAP principles. Your office requested additional information on how the information required on Schedules C through G differs from GAAP. We are also including several additional comments on the revised Form 5471.

General Comments

Although we continue to question the need for the information required on the schedules, the most significant problem involves the translation of foreign currency for purposes of Schedules C, D, F, and G. The instructions require the taxpayer to compute the relevant information in the foreign corporation's functional currency and then translate all amounts into U.S. dollars at the weighted average exchange rate set forth in Temp. Reg. [section] 1.989(b)-1T. That regulation defines "weighted average exchange rate" as the "simple average of the daily exchange rates . . . excluding weekends, holidays and any other nonbusiness days for the taxable year."

The use of a simple weighted average exchange rate deviates from GAAP which requires the translation of transactions at the exchange rate in effect for the date of the transaction. It also conflict with Treas. Reg. [section] 1.6038-2(g) which, when read in conjunction with Treas. Reg. [section] 1.6038-2(h), requires the financial information to be translated in accordance with GAAP.

Moreover, the requirement of a simple weighted average exchange rate imposes substantial administrative burden on taxpayers. Taxpayers will not be able to rely on financial statements prepared by their foreign affiliates (under GAAP) as required for the calculation of U.S. tax-basis earnings and profits, but instead will be required to unravel entire transactions to comply with the requirement. Such an horrendous chore is a costly duplication of effort, will not raise additional revenue, and is totally unnecessary with respect...