With differences in financial reporting under Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and tax treatment purposes under the National Internal Revenue Code (NIRC) that arise due to the forex rates applied in foreign currency transactions, BIR recently issued RMC No. 12-2024 which aims to clarify the treatment of foreign currency transactions for financial reporting and internal revenue tax purposes, as well as define and specify the rules for recording and disclosing foreign exchange transactions for tax purposes, including the use of appropriate foreign exchange rates.

What are the new rules for converting foreign currency denominated transactions for tax reporting?

Previously, taxpayers commonly used monthly average rates and/or translated foreign currency-denominated transactions to USD and then to PHP for tax reporting purposes. Under the new RMC, however, foreign currency transactions shall be converted into Philippine Peso (PHP) using the exchange rate at the time an asset, liability, income, and expense are recognized and measured/remeasured. The spot rate on the date of transaction is used for the initial recognition of foreign currency-denominated transactions.

Following the new rules, the conversion of foreign currency-denominated transactions to PHP shall be translated using the spot rate of exchange on the day of transaction based on the Banker’s Association of the Philippines (BAP) published rates. Take note that BAP rates only convert USD to PHP transactions. As such, in the event that the use of BAP published rates is impractical, the spot rate on the day of transaction based on other available exchange rates (e.g., Bangko Sentral ng Pilipinas (BSP), Bloomberg, Reuters exchange rates, etc.) shall be used subject to the following conditions:

  • A notarized sworn statement shall be submitted by the taxpayer electing to use forex rates other than BAP published rates to the Revenue District Office (RDO), Large Taxpayer District Office (LTDO), or Large Taxpayers Service (LTS), whichever has jurisdiction over the taxpayer, within 30 days prior to the start of the taxable year. The source of the forex rates used, the reason for using such forex rates other than BAP published rates, and a statement allowing the BIR to have access to the day-to-day forex rates used during BIR audit for the taxable year shall be included in the sworn statement.
  • The source of the forex rates used (URL/source where the forex rates are published) must be available for presentation and submission during BIR audit, together with other supporting documents.

If taxpayers have a direct source of spot rates from their accounting systems or if they prefer adopting foreign exchange spot rates using sources other than the BAP, they may do so, provided that the same must be used consistently for both financial accounting and tax reporting purposes for at least one taxable year.

In case of a subsequent change in the forex rates used, a new notice shall be submitted by the taxpayer to the BIR, which shall be applied from the start of the succeeding taxable year. For transactions incurred on dates where there are no published forex rates available, the exchange rate to be used is the latest closing spot rate available on the business date immediately preceding the date of transaction.

In cases where the accounting system is not capable of adopting the exact number of decimal places as those in the forex published rates, the maximum number of decimal places as designed in their respective systems may be used by the taxpayer. However, this is subject to a written notification to the BIR office, which has jurisdiction over the taxpayer.

When a taxpayer who initially elected to use BAP rates for conversion of forex transactions incurs a forex transaction other than USD, such taxpayers are allowed to use the BSP spot rates for foreign currency transactions other than USD, provided that a summary containing the date of transaction, amount of forex transactions other than USD, nature of transaction, forex rate used in converting to PHP, and PHP-converted amount of the foreign currency transaction must be available for presentation and submission during the BIR audit, together with necessary supporting documents, on the said foreign currency transactions.

The reliability of the exchange rate used must be proven by the taxpayer. In the absence of any proof, any other exchange rate used other than BAP rates shall be disregarded during BIR audit. BAP rates shall be used in converting transactions in USD, while BSP rates shall be utilized for transactions in currencies other than USD.

Further, failure to notify the BIR of the forex rates used is subject to corresponding administrative penalties under Section 255 of the Tax Code, as amended, for first and second offenses. Subsequent offenses shall be considered willful failure, and thus not subject to compromise.

The use of the foreign exchange spot rates at the date of the transaction, as described above, shall also be the basis of the reportable transactions for other taxes such as value-added tax, gross receipts and other percentage taxes, documentary stamp tax, and excise taxes, among others.

Reporting Realized and Unrealized Forex Gains and Losses

For tax purposes, foreign currency transactions are converted into Philippine Peso using the spot rate of exchange on the date of transaction. Forex gains/forex losses may result from changes in exchange rates between the transaction date, the balance sheet date, and the date of settlement.

Consequently, the forex gains/losses arising from changes in exchange rates will be “realized,” and under the principle adopted in R.R. No. 02-40, only the realized gains/losses will be subject to income tax. Unrealized forex gains/losses are potential gain/loss; no real flow of wealth is generated from the remeasurement. Realized forex gains/losses are actual gains/losses incurred, which are subject to income tax when the earning process is complete or virtually complete and if an exchange has taken place. This shall be substantiated with sufficient evidence. Moreover, automatic reversal of unrealized forex differences to realized forex gains/losses in the succeeding year not arising from closed and completed transactions is strictly prohibited for Income Tax purposes. The case is the same with offsetting transactions by taxpayers and, consequently, accounting and recording the same in the books of the parties.

In addition, only the realized amounts of gains and losses shall be presented in the Income Tax Return. Forex gains shall be presented as part of “Other Taxable Income,” while forex losses form part of “Ordinary Allowable Itemized Deductions”.

Please be guided accordingly.



P&A Grant Thornton

Certified Public Accountants

P&A Grant Thornton is the Philippine member firm of Grant Thornton International Ltd


As published in SunStar Cebu, dated 11 February 2024