New rules for tax treatment of foreign currency transactions

It is common for taxpayers dealing with foreign entities, whether for purchases or sales, to have transactions in foreign currency. Therefore, it is important for taxpayers to be guided by the rules governing the use of forex rates in business transactions.

Recently, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 12-2024 setting new guidelines on the tax treatment of foreign currency transactions. This circular serves as an insightful guide for taxpayers to navigate the distinction between accounting rules and tax rules. Note, however, that the scope of RMC excludes banks and other financial institutions and those using functional currencies other than the Philippine peso.

To highlight the key points and consequences of the new rules, taxpayers should evaluate and consider the following:

Exchange rate required to be used at the initial recognition of the transaction.

The taxpayers must use the spot rate on the transaction date at the initial recognition of the foreign currency-denominated transactions.

When using the spot rate, taxpayers have the flexibility of deciding which spot rate to use, such as open, close, high, low, weighted average, etc. It is crucial, however, to adopt the spot rate consistently, both for financial and tax reporting purposes.

Kindly note that the use of the spot rate at the date of the transaction, as prescribed in the RMC, aligns with the provisions outlined in the accounting rules, Philippine Accounting Standard (PAS) 21. 

It is worth noting that the standard also allows the use of a rate that approximates the actual rate at the transaction date, such as employing an average rate for a week or a month for all transactions within that period. However, the RMC, under Q&A No. 10, explicitly does not permit the use of average monthly exchange rates for tax purposes. 

Hence, taxpayers using average weekly or monthly rates, or any rates other than the required spot rates by the RMC, will need to convert all foreign currency transactions based on the specifications under the RMC. This might necessitate a potential reconfiguration for those taxpayers using the accounting system to align with the requirements of the RMC, which may entail significant costs. For that reason, they are hoping that the BIR reconsiders its position and allows taxpayers to still use average weekly or monthly.

Source of forex rates for the transaction.

The RMC also prescribed that the source of the published spot rates is the Banker’s Association of the Philippines (BAP).

Should the BAP published rates prove impractical or not feasible, taxpayers have the option to use the other published rates, such as rates from the Bangko Sentral ng Pilipinas (BSP), Bloomberg, and Reuters, among others. However, it is important to note that these alternatives would be subject to the following conditions:

i. Submission of the notarized sworn statement indicating the source of the forex rate, the reason for using the said source, and allowing access to the BIR of the day-to-day forex rates during their audit for the taxable year, within 30 days prior to the start of the taxable year.

ii. The source of the forex rates used, such as the URL/source of day-to-day forex rates used for the taxable year, together with other supporting documents, must be available during the BIR audit.

Note that the selection of the forex rate is irrevocable and must be used consistently both in recording for financial accounting and tax reporting purposes for at least one taxable year.

PAS 21, on the other hand, does not prescribe the source of the forex rate to be used by entities for financial reporting purposes. Currently, the prevailing practice among taxpayers is to commonly use the BSP rate on the foreign currency translation of their transactions.

Moving forward, the taxpayers must determine whether to shift to BAP forex rates or continue their existing source of forex rates, as long as it is acceptable to the BIR. Should there be a transition, this may necessitate modifications to the current accounting system used by taxpayers. 

Taxpayers opting to retain their current source of forex rates are obligated to notify the BIR 30 days before the commencement of the taxable year.

Netting or offsetting of forex gains or losses is not allowed.

The practice of offsetting or netting forex transactions is explicitly prohibited. It is mandatory to present the gross amounts of gain and loss separately in the income tax return. 

Nevertheless, for tax calculation, the deduction of forex losses is still allowed as a deduction.

Please note that the presentation of forex gains and losses required under the RMC is not consistent with the presentation under PFRS wherein forex gains or losses could be presented on a net basis.

Under the RMC, it would require the taxpayers to maintain separate GL accounts for both forex gain and forex loss, covering both realized and unrealized transactions. However, it has been observed that it is a common practice for some taxpayers to consolidate these transactions into a single account for forex gain or loss and opt for offsetting them.

Therefore, the taxpayers would need to modify their chart of accounts and, for some, adjust their accounting system to align with the requirements of the RMC.

With the release of RMC No. 12-2024, the BIR has established uniform guidelines regarding the forex rates to be used in recording and reporting foreign currency transactions for tax purposes. However, some taxpayers are still hoping that the BIR considers providing a transitory provision and clarifies whether such rules under this RMC apply to the taxable year 2023, which is due for filing in April of this year. Moreover, the RMC mandates that a sworn statement be submitted within 30 days prior to the start of the taxable year by the taxpayer who will use forex rates other than the BAP rate. Without this transitory provision, it seems that for taxpayers using the calendar year as their taxable year, the notification for the year 2024 has lapsed.

In formulating the transitory provision, the BIR should further assess the impact of the RMC on the added cost to the taxpayer as well as on their completed transactions to prevent potential confusion in the future BIR audit.

The release of this RMC is a welcome development to clarify the distinction between the PFRS and tax treatment. BIR’s clear guidance on transactions involving foreign currency translation for taxpayers is a major step forward in encouraging their adherence to the guidelines and will greatly reduce their potential exposure in the future.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

As published in BusinessWorld, dated 20 February 2024