Foreign Currency Hazards
Has the collapse of Mexico's peso made you wonder about the steps you should be taking to protect your company's international accounts receivable against the dangers that accompany currency fluctuations?
William Zink, an international tax partner at the Chicago office of accounting firm Grant Thornton, offers some guidelines. "The first rule of thumb is to get your international receivables denominated in dollars. That way, your foreign customers assume the currency risk," he says. "Many U.S. companies are afraid to ask their customers to agree to this, but it pays to try. They're often much more willing to agree than you might expect."
Should customers refuse to accept the risk, Zink urges U.S. corporations to "enter into simple hedging contracts that will protect you against currency swings that occur during your typical collection period, whether that is 30, 60, or 90 days." For a fee that is usually about 1%, "hedging builds in stability while allowing you to eliminate the prospect of currency-generated losses -- or taxable profits." Since 1986 the IRS has been authorized to assess taxes on the "fictional income" that results from foreign-currency swings.
To companies that neither denominate their receivables in dollars nor, for whatever the reason, enter hedging contracts, Zink offers a final recommendation: "Collect foreign receivables as quickly as possible. It's the only way you have left to minimize your currency risks."