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Seller UK is a British subsidiary of an American parent. It sells components to Buyer UK, also owned by a US parent. To fit with each of their group accounting practices, both companies prefer to agree prices in US$. Both Seller UK and Buyer UK report to their respective parents in US$ but must produce UK accounts in sterling for the UK authorities. Their accountants have advised that the US$ prices should be bifurcated into GBP prices with a series of GBP/USD forward contracts attached. These forward contracts must be marked to market, like other derivatives, under IFRS.
Which of the following most closely describes the tax treatment of the above situation?
