Foreign currency instruments
There are a number of instruments that can be used to hedge against foreign currency exposure. These hedges are often utilised by parties who, out of necessity, are required to settle, or receive, foreign currency. The volatility of the rand makes it optimal to try to hedge one’s exposure.
The range of instruments used includes cross-currency swaps, forward exchange contracts and foreign currency option contracts. These derivative instruments are complicated to construct, trade, manage and account for.
In addition, there are several regulatory frameworks governing these instruments, such as tax and exchange control, that make their use even more complex.
The tax on these types of instruments is not well understood and, in our experience, the rules are often misapplied by taxpayers. This is not through any attempt to optimise tax, but rather through an incomplete understanding of the application of the relevant rules.
We have significant experience in this field and can assist parties who have large foreign currency exposures, or hedges in place, ensuring that they understand the tax rules to be applied and optimise the tax, accounting and financial outcome from using such instruments.
Often, even advisors to taxpayers are unsure of how these rules should be applied, and there are invariably inputs that can be added to either make a tax calculation more robust and correct, or to enhance the tax outcome.
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