Foreign Banks Complain to IRS about Tax Policy on Hedging

Article excerpt

NEW YORK - U.S. tax policy on currency and rate hedging may discourage foreign banks from participating in capital markets activity here, said an association that represents those banks.

IRS treatment of interbranch transactions result in severe tax distortions for international banks with U.S. trading operations, according to a recently released position paper from the New York-based Institute of International Bankers.

The institute represents foreign banks in the United States.

"If left unaddressed, this approach would seriously impede further participation of international banks in the U.S. financial markets and adversely affect the depth and competitive strength of U.S. markets," the position paper said.

The position paper, which focuses on what it terms "the adverse economic impact of these distortions on the banks and U.S. financial markets," follows a technical memorandum submitted by the institute to the Treasury Department and the Internal Revenue Service in February.

The paper was drafted and released in response to an IRS ruling that, according to the institute, does not "properly measure the income derived by an international bank's U.S. branches from cross-border trading in certain financial instruments."

The IRS ruling mainly affects foreign currency and interest rate hedge transactions between the U.S. branches of foreign banks and their home offices:

The IRS does not recognize the branch as a separate entity from the parent company and therefore excludes any gains or losses on trading transactions with the bank's home office when calculating tax due on income derived in the United States. …