BIR Issuances – RMC 12-2024

The BIR clarifies the Tax Treatment of Foreign Currency Transactions for Financial Reporting and Internal Revenue Tax Purposes.

 

Revenue Memorandum Circular (RMC) No. 12-2024

22 January 2024

 

HOW ARE FOREIGN CURRENCY DENOMINATED TRANSACTIONS MEASURED?

For tax purposes, foreign currency transactions shall be converted into functional currency using the exchange rate at the time an asset, liability, income and expense are recognized and measured/remeasured.

 

EXCHANGE RATE AT INITIAL REOGNITION OF FOREIGN CURRENCY DENOMINATED TRANSACTIONS

The SPOT RATE on the DATE OF TRANSACTION shall be used.

 

The taxpayer has the preference to adopt which spot rate to be used in the beginning of the taxable year as long as the spot rates adopted must be used consistently both in recording for financial accounting purposes and reporting for tax purposes for at least one taxable year.

 

EXCHANGE RATE TO BE USED IN CONVERTING FOREIGN CURRENCT DENOMINATED TRANSACTIONS INCURRED ON DATES WHERE THERE ARE NO PUBLISHED FOREX RATES AVAILABLE

Use the LATEST CLOSING SPOT RATE available on the business date immediately preceding the date of transaction.

 

SOURCE OF FOREX RATES TO BE USED IN CONVERTING FOREIGN CURRENCY DENOMINATED TRANSACTIONS

To standardize the forex rates to be used for tax purposes, the following rules are hereby prescribed to govern the conversion of foreign currency denominated transactions to Philippine Peso:

1. The spot rate of exchange on the day of the transaction based on the Banker’s Association of the Philippines (BAP) and published rates; or
2. In the event that the forex rate is impractical or not feasible, the spot rate on the day of the transaction based on other available exchange rates shall be used subject to the following conditions:
   1. A taxpayer electing to use forex rates other than BAP published rates must submit to the Revenue District Office (RDO) or Large Taxpayer District Office (LTDO) or Large Taxpayers Service (LTS) whichever has jurisdiction over the taxpayer, a notarized sworn statement stating the source of the forex rates to be used, the reason for using such forex rates other than BAP published rates and a statement allowing the BIR to have an access on the day-to-day forex rates used during BIR audit for the taxable year, within 30 days prior to the start of the taxable year.
   2. The source of forex rates used in converting foreign currency denominated transactions, such as the URL/source where the forex rates are published or listed or a summary of the day-to-day exchange rates used for the taxable year must be available for presentation and submission, together with other supporting documents during BIR audit.

 

Election of forex rates are irrevocable and must be used consistently both in recording for financial accounting purposes and reporting for tax purposes for at least one taxable year.

 

The notarized sworn statement informing the concerned BIR offices of electing the use of forex rates other than BAP published rates shall be submitted. In case of subsequent change in forex rates used, a new notice shall be submitted to the concerned BIR office, which shall be applied from the start of the succeeding taxable year.

 

HOW MANY DECIMAL PLACES ON FOREX RATES SHOULD BE USED WHEN CONVERTING FOREIGN CURRENCY DENOMINATED TRANSACTIONS?

Use the actual forex rates as published or listed based on the reference exchange rates opted by the taxpayer.

 

In case the taxpayer’s accounting system is not capable of adopting the exact number of decimal places as of those in the forex published rates, the taxpayer may use the maximum number of decimal places as designed in their respective system subject to written notification to the BIR office whichever has jurisdiction over the taxpayer for the system limitation.

 

WHAT SHOULD BE THE SOURCE OF FOREX RATES TO BE USED IF THE FOREIGN CURRENCY TRANSACTION INVOLVED IS DENOMINATED IN A CURRENCY OTHER THAN USD?

Given that BAP published USD/PhP spot rates only, taxpayer with foreign currency transactions other than USD are allowed to directly convert the foreign currency other than USD to PHP using the forex rates other than BAP published rates following the conditions enumerated above.

 

IN CASE THE TAXPAYER INCURRED A FOREIGN CURRENCY DENOMINATED TRANSACTION OTHER THAN USD IN THE MIDDLE OF THE TAXABLE YEAR BUT INITIALLY ELECTED TO USE BAP PUBLISHED RATES

The taxpayer is allowed to use the BSP spot rates for foreign currency transaction other than USD subject to the following conditions:

1. The taxpayer shall summarize its foreign currency transactions other than USD with the following information:
   1. Date of transaction;
   2. Amount of foreign currency transactions other than USD;
   3. Nature of transaction;
   4. Forex rate used in converting to PhP; and
   5. PhP converted amount of the foreign currency transaction.
2. The requirement on item (1) must be available for presentation and submission, together with the supporting documents on the said foreign currency transactions during BIR audit.

 

IN CASE OF FAILURE TO NOTIFY THE BIR

If the taxpayer used forex rates other than BAP published rates but failed to notify the BIR, the taxpayer will still be required to prove the reliability of exchange rate used during a tax audit. Moreover, corresponding administrative penalties under Section 255 of the Tax Code, as amended, would be imposed for first and second offenses. Subsequent offenses shall be considered as willful failure, and thus not subject to compromise.

 

In the absence of any proof, the forex rates other than BAP published rates used by the taxpayer shall be disregarded during the BIR audit. In case of foreign currency transactions denominated in USD, the same shall be converted using the BAP published rates, whereas for foreign currency transactions denominated in a currency other than USD, the BSP rates shall be used.

 

CONVERSION PRESCRIBED UNDER RMC 26-1985 FOR CURRENCIES OTHER THAN THE USD MANDATING TO CONVERT FIRST THE FOREIGN CURRENCIES TO USED USING THE PREVAILING EXCHANGE RATE BETWEEN THE TWO CURRENCIES

With the availability of wide range of forex between foreign currencies other than USD to PhP, the practice of converting first to USD the foreign currency other than the USD as prescribed under RMC 26-1985 is now SUPERSEDED.

 

USE OF MINTHLY AVERAGE EXCHANGE RATES IN CONCERTING FOREIGN CURRENCY TRANSACTIONS TO PHIIPPINES PESO FOR TAX PURPOSES IS PROHIBITED

BIR emphasized that the use of monthly average exchange rates is NOT PERMITTED in converting foreign currency transactions to Philippine peso for tax purposes.

 

FOREIGN EXCHANGE DIFFERENCE

A foreign difference results when there is a change in the exchange rate between the transaction date, balance sheet date and the date of settlement of any monetary items arising from a foreign currency transaction.

 

Unrealized forex gains/losses results from fluctuations in exchange rates upon remeasurement between the transaction date and the balance sheet date. It is only a potential gain/loss where there is no real flow of wealth yet generated from the remeasurement for accounting purposes.

 

Realized forex gains/losses results from changes in the exchange rates between the transaction date and the date of settlement. This represents the actual gains/losses incurred from a closed and completed foreign currency transactions.

 

ARE GAINS/LOSSES ARISING FROM FOREX FLUCTUATIONS ON REMEASUREMENTS OF MONETARY AND NON-MONETARY ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY INCLUDED IN THE DETERMINATION OF THE TAXABLE INCOME FOR INCOME TAX PURPOSES?

The “Realization” principle adopted under RR No. 02-40 provides that for purposes of taxation, only the realized gain or loss from foreign exchange transaction will be subject to income tax. Under this principle, income is recognized when: (1) the earning process is complete or virtually complete, and (2) an exchange has taken place.

 

Unrealized gains or losses on forex fluctuations recognized in connection with the periodic remeasurement of assets and liabilities denominated in foreign currency to functional currency are not considered as income/loss for purposes of computing taxable income. Such differences are temporary and should be monitored for which deferred tax accounting should be applied. These temporary differences will reverse when the respective assets and liabilities are disposed of or settled. These temporary differences which give rise to deferred tax assets/liabilities are required to be disclosed in the Notes of Audited Financial Statements (AFS).

 

ARE TAXPAYERS REQUIRED TO SEPARATELY RECORD AND REPORT UNREALIZED AND REALIZED FOREX GAINS/LOSSES FOR INCOME TAX PURPOSES?

The taxpayers should separately record and report unrealized forex gains/losses from the realized forex gains/losses arising from foreign currency transactions.

 

Realized forex gains/losses, or those arising from closed and completed transactions, are considered as taxable income or deductible expense for income tax purposes. Realized forex gains/losses shall be substantiated with sufficient evidence that the same arose from a closed and completed transaction.

 

Automatic reversal of unrealized forex differences to realized forex gains/losses in the succeeding year not arising from close and completed transactions are strictly prohibited for income tax purposes

 

IS NETTING OR OFFSETTIN OF FOREX GAINS OR LOSSES ALLOWED FOR INCOME TAX PURPOSES?

The practice of offsetting transactions of taxpayers and consequently the accounting and recording of the same and its related transactions in the books of the parties is STRICTLY PROHIBITED for taxation purposes.

 

WHERE WILL FOREX GAINS AND LOSSES BE PRESENTED IN THE INCOME TAX RETURNS?

Forex gains shall be presented as part of “Other Taxable Income” and be included in the computation of “Total Taxable Income” or “Gross Taxable Income” in the income tax return.

 

On the other hand, forex losses shall be presented as part of the “Ordinary Allowable Itemized Deductions” in the income tax return.

 

WHAT WILL BE THE BASIS FOR THE REPORTABLE AMOUNT OF TRANSACTIONS DENOMINATED IN FOREIGN CURRENCY FOR TAXES OTHER THAN THE INCOME TAX?

Foreign currency transactions are converted into Philippine Peso using the prevailing spot rate on the date of transaction. This is the basis of the reportable transactions for taxes other than income tax.

 

Copy of the RMC and Illustrative Example and Accounting Entries can be accessed thru these links (RMC No. 12-2024 and RMC No. 12-2024 Annex A – Illustrative Example and Accounting Entries)

 

 

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