Hedging Transactions Excluded from Pennsylvania Sales Factor

Pennsylvania clarifies that hedging transaction receipts are excluded from corporate apportionment fraction. The exclusion applies to the numerator and denominator of the taxpayer’s fraction.

What is a Hedging Transaction?

A “hedge” is a transaction a taxpayer conducts to manage risk. The risk is generally from interest rate, price or currency fluctuations. Pennsylvania uses the definition provided in IRC Sec. 475 and IRC Sec. 1221.

Why are Hedging Transactions not Sales?

Pennsylvania excludes gross receipts from the sale, redemption, maturity or exchange of securities from sales. Hedging transactions are similar in nature to securities. Taxpayers do not hold the hedges primarily for sale to customers in the ordinary course of trade or business. Thus, taxpayers should exclude these transactions from the sales factor.

The Exclusion Applies to Which Receipts?

The general rule applies to receipts from:

– gain or loss from a transaction identified as a hedge under federal law;

– accrued interest income or expense, gain or loss on a debt instrument, a payable, a receivable or a forward contract payable in a foreign currency for foreign currency gain or loss under federal law; and

– a foreign exchange gain or loss on distributions of already taxed income.

The bulletin is effective to tax years beginning after 2018.

Corporation Tax Bulletin 2019-01, Pennsylvania Department of Revenue, January 4, 2019, ¶204-687

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