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Abstract
Foreign exchange and inflation rate fluctuations have a significant impact on the tax position of companies operating in the region. As a general rule, with certain exceptions exchange losses are recognized on an accrual basis in Latin America. Although practically all Latin American countries allow a deduction for exchange losses on an accrual basis, the effects of inflation are not recognized in the region on a consistent basis. Inflation accounting adjustments are required for tax purposes in certain Latin American countries. There are some techniques to minimize the inflation effect and exchange volatility. A simple, albeit sometimes inefficient, way to ensure an interest expense deduction is to denominate the loan in local currency with a fluctuating interest rate. In most Latin American countries, interest rates are generally not quoted on a long-term, fixed basis and fluctuate depending on the economic outlook. This approach, although ensuring a deduction for income tax purposes, would create other problems, such as higher withholding tax and a decrease in the real value of the principal. Derivatives can be used to hedge the effects of inflation and devaluation on a loan.