The taxation of foreign exchange

Mandipa Soni and Edward Brown consider the tax liabilities arising from foreign exchange movements and ways to manage foreign exchange volatility on tax cashflows

The current economic climate and market conditions have presented increasing uncertainty in currency markets over recent times. This can be an issue, as foreign exchange movements create significant volatility for companies, not least from a tax perspective. In our experience, it is also common that many groups only identify these matters when drawing up entity accounts, as most projections are undertaken at a group level, where amounts may net to nil.

As a result, companies are seeking to adopt strategies to manage foreign exchange risk and corresponding volatility on tax cashflows. Many of the options require careful and upfront coordination with Finance and/or Treasury functions to ensure that the relevant steps are implemented in time and documented appropriately.