Election to Translate Foreign Taxes at Payment Date

§ 986. Determination of foreign taxes and foreign corporation’s earnings and profits(a) Foreign income taxes(1) Translation of accrued taxes(A) In generalFor purposes of determining the amount of the foreign tax credit, in the case of a taxpayer who takes foreign income taxes into account when accrued, the amount of any foreign income taxes (and any adjustment thereto) shall be translated into dollars by using the average exchange rate for the taxable year to which such taxes relate. (B) Exception for certain taxesSubparagraph (A) shall not apply to any foreign income taxes—(i) paid after the date 2 years after the close of the taxable year to which such taxes relate, or (ii) paid before the beginning of the taxable year to which such taxes relate. (C) Exception for inflationary currenciesSubparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any inflationary currency (as determined under regulations). (D) Elective exception for taxes paid other than in functional currency(i) In generalAt the election of the taxpayer, subparagraph (A) shall not apply to any foreign income taxes the liability for which is denominated in any currency other than in the taxpayer’s functional currency. (ii) Application to qualified business unitsAn election under this subparagraph may apply to foreign income taxes attributable to a qualified business unit in accordance with regulations prescribed by the Secretary. (iii) ElectionAny such election shall apply to the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. (E) Special rule for regulated investment companiesIn the case of a regulated investment company which takes into account income on an accrual basis, subparagraphs (A) through (D) shall not apply and foreign income taxes paid or accrued with respect to such income shall be translated into dollars using the exchange rate as of the date the income accrues. (F) Cross referenceFor adjustments where tax is not paid within 2 years, see section 905(c). (2) Translation of taxes to which paragraph (1) does not applyFor purposes of determining the amount of the foreign tax credit, in the case of any foreign income taxes to which subparagraph (A) or (E) of paragraph (1) does not apply—(A) such taxes shall be translated into dollars using the exchange rates as of the time such taxes were paid to the foreign country or possession of the United States, and (B) any adjustment to the amount of such taxes shall be translated into dollars using—(i) except as provided in clause (ii), the exchange rate as of the time when such adjustment is paid to the foreign country or possession, or (ii) in the case of any refund or credit of foreign income taxes, using the exchange rate as of the time of the original payment of such foreign income taxes.