If Greece Drops Euro, U.S. Multinationals Face Tax Complications
With Greeks heading to the polls tomorrow and the future of Greece’s membership in the euro zone in question, there’s been a lot of talk about taxes—or more precisely, how Greek tax evasion has contributed to the country’s current fiscal woes. It turns out, however, that for tax geeks there’s another issue here: should Greece drop the euro, U.S. multinationals could face tax complications.
Thirteen years ago, a group of European nations formally adopted the euro as their common currency, hoping to foster greater fiscal and monetary coordination and economic growth. Ever since the financial crisis of 2008, many have speculated that Greece (and other countries) may opt out of the common currency in favor of a new currency as a way to address increasingly challenging fiscal conditions.
If Greece were to abandon the euro in favor of a new currency, it could decree by government fiat that all transactions by Greek persons (including the Greek government) must be settled in the new currency at a fixed exchange rate. Under U.S. federal tax principles, taxpayers could be viewed as exchanging their euro-denominated contracts for contracts denominated in the new currency.
However, in the case of non-publicly traded debt, investors could recognize gain without offset for any decline in value attributable to credit deterioration under special U.S. tax rules that would treat the investor as receiving new debt with a value equal to the cost of the old debt. In this case, the investor would recognize gain attributable to positive exchange rate movements but would not recognize any decline in value attributable to other factors.
There are other tax effects arising from a redenomination by Greece, though some of these would not directly result in additional tax liability. For instance, U.S. companies with Greek branches (as opposed to subsidiaries) would likely have to switch from the euro and account for their branch operations using the new currency.
As we approach the upcoming Greek elections, taxpayers should keep in mind that a new government may view abandonment of the euro as an attractive solution to the Greek financial crisis. However, taxpayers should be keenly aware that a redenomination could produce substantial current tax liabilities even where no cash is received and should therefore begin preparing a response plan now.