Title: Foreign exchange and cross-border hedged tax strategies

Authors: Elli Kraizberg

Addresses: School of Business, Bar Ilan University, Ramat Gan, 52520, Israel

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.

Keywords: tax strategies; expected exchange rates; realisation and accrual-based taxation; uncovered interest rates parity; UIP; covered interest rates parity; CIP; tax treaty.

DOI: 10.1504/IJAF.2021.120605

International Journal of Accounting and Finance, 2021 Vol.11 No.1, pp.64 - 81

Received: 04 Jan 2021
Accepted: 18 Nov 2021
Published online: 27 Jan 2022 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article