Foreign exchange and cross-border hedged tax strategies
by Elli Kraizberg
International Journal of Accounting and Finance (IJAF), Vol. 11, No. 1, 2021

Abstract: If the expected exchange rate is not equal to the forward rate, it revives the issue of whether the tax code calls for an accrual basis for certain types of foreign exchange denominated incomes. We prove that the forward exchange rate may not be an unbiased estimate for the expected exchange rate, in which case it would create a new set of tax strategies regarding the realisation of gains and losses. We then demonstrate that the payoffs of the strategies in an accrual-based scenario may mimic the payoffs of the strategies in a realisation-based scenario, depending on the relationship between the expected exchange rate and the forward rate. Furthermore, contrary to the common view, a taxpayer in an accrual-based scenario may realise gains sooner than otherwise and delay losses in some cases. This conclusion may have an important implication for policy makers, as these accrual-based taxation strategies may circumvent their intentions.

Online publication date: Thu, 27-Jan-2022

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