RMC No. 12-2024 — Clarifies the treatment of foreign currency transactions for financial reporting and internal revenue tax purposes Digest | Full Text | Annex A

REPUBLIC OF THE PHILIPPINES BUREAU OF INTERNAL REVENUE NNGTY7C

I VISION BUREAU OF INTERNAL REVENUE DEPARTMENT OF FINANCE Quezon City JAN 22 2024

June 28, 2023

REVENUE MEMORANDUM CIRCULAR No./&- &20&

SUBJECT: Clarifies the Treatment of Foreign Currency Transactions for Financial

Reporting and Internal Revenue Tax Purposes

TO: All Internal Revenue Officials, Employees, and Others Concerned

This Circular is hereby issued to clarify the differences between the foreign exchange (forex) gains/losses recognized in the financial statements prepared under the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and the forex gains/losses as income or allowable deduction for income tax purposes pursuant to the

1997, as amended, Sec. 96 of Revenue Regulations (RR) No. 02-40, RR No. 06-2006, and provisions under Sections 32 and 34 (D) of the National Internal Revenue Code (NIRC) of

other related revenue issuances.

This is also issued to clarify and prescribe the guidelines on the use of appropriate forex rates in recording and reporting foreign currency transactions for tax purposes.

currency and other currencies are considered as foreign currency. This Circular does not cover For purposes of this Circular, the Philippine Peso (PhP) is considered as the functional

Banks and other Financial Institutions and those using functional currency other than Philippine Peso in the financial statements.

DEFINITION OF TERMS T

The following terminologies as defined below. shall only be applicable to the references made to such terms under this Circular.

Foreign Currency - is a currency other than the functional currency of the reporting entity (e.g., currency other than PhP).

Functional Currency - is the currency of the primary economic environment in which the reporting entity operates; that is the currency of'the environment in which an entity primarily generates and expends cash. 's Foreign Currency Transactions - are transactions denominated in any currency other than functional currency for a particular entity.

United States Dollar (USD) in PhP equivalent (e.g., US$1 = P50.00). currency. For example, the exchange rate is conventionally expressed as the value of one Foreign Exchange Rate - is the price of a unit of foreign currency in terms of the domestic

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Forex Spot Rate -- is the current exchange rate at which a currency can be bought or sold.

Interbank Reference Rate - is the exchange rate that banks pay when they engage in currency trades with other banks.

Closing Rate - is the final price at which a currency is traded at the end of the forex trading day.

Foreign Currency..Conversion - is the conversion of one currency into another at a specific rate known as the foreign exchange rate.

in which a company presents its financial statements, of all assets, liabilities, revenues and expenses that are denominated in foreign currencies. Foreign Currency Translation - is an accounting method of restatement, in the currency

Remeasurement - is the process of re-establishing the value of an asset or foreign currency to provide a more accurate financial record of its value on a company's financial statements. Remeasurement is often used by companies that conduct business in multiple currencies.

Other Comprehensive Income (OCI) - this includes revenues, expenses, gains and losses that are yet to be realized for accounting purposes and are excluded from net income (e.g.. foreign currency translation gains or loss, unrealized gain or loss on investment that are available for sale, etc.)

Closed and Completed Transaction - is a taxable event that has been consummated as fixed by identifiable events occurring in a particular year (e.g., actual sale or disposition of asset, etc.).

H. TABULAR LIST OF DIFFERENCES

PARTICULARS PFRS Current Tax Treatment

BUREAU OF INTERNALREVENUE 1. Initial measurement of RECORD'SF wT OV&ION foreign currency transactions NAILYTN JAN 22 2224 CRaNo 4 Q"O transactions are recorded in the entity's functional currency using the spot rate of exchange at transaction date. All foreign currency are translated into Philippine Peso using the prevailing reportable transactions for Foreign currency transactions the date of transaction. taxes other than income tax Excise, DST, etc.) interbank reference rate on (e.g.. This is the basis of the VAT, GRT, OPT,

2. Unrealized gain or loss on Recognized in profit or loss. Results to a temporary

remeasurement of monetary assets and tax accounting should be difference for which deferred

foreign currency liabilities denominated in applied accounting taxable net income. net to income reconcile to

1 Revenue.Memorandum Circular (RMC) No. 26-85, dated July 15, 1985.

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3. Unrealized gain or loss on monetary items carried at fair value currency remeasurement of non- transaction PARTICULARS treatment of the changes in or OCI depending on the itself. Recognized in profit or loss the fair value of the item PFRS Not considered income. determination of the taxable Current Tax Treatment in the

4. Realized gain or loss on settlement of a foreign currency transaction Recognized in profit or loss. [ Forex gains/losses arising taxable income or deductible transactions are considered as from closed and completed

expense for income tax purposes.2

H. PFRS TREATMENT

PAs 21 requires an entity to determine its functional currency taking into account the primary economic environment in which an entity operates. Once the entity has determined its functional currency, all other currencies are treated as foreign currencies.

Initial Measurement A foreign currency transaction is recorded initially using the rate of exchange on the date

approximation of the actual. (PA'S 21.21-22) of the transaction. The use of average rate is permitted as long as they are a reasonable

At each reporting date (PAS 21.23): Subsequent Measurement

Foreign currency monetary amounts are reported using the closing rate. Any unrealized gain or loss arising from the translation of monetary assets and liabilities at the end of the reporting period is generally recognized in profit or loss.

Non-monetary items carried at historical costs are measured using the historical exchange rate at the date of the transaction. This means that they are not remeasured at reporting date.

: Non-monetary items that are carried at fair value are translated using the exchange rates at the date the fair value is measured. Any unrealized gain or loss arising from

the translation is recognized in the same way the change in fair value is recognized

non-monetary item is recognized in OCI, then unrealized gain or loss arising from the translation shall also be recognized in OCI. in the financial statements. For example, when the change in the fair value of a

2 RR No. 2 -- Income Tax Regulations. BureAu OF TnternAl revenue TOETIYN CeN JAN 22. 2t24 Y]a pP Page 3 of 10

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Settlement When monetary items are settled, the difference between the carrying amount of the monetary asset or liability and the consideration received/paid is recognized immediately in profit or loss.

INV CLARIFICATION ON ISSUES INCLUDING GUIDELINES RELATIVE TO THE

TAX TREATMENT OF FOREIGN CURRENCY TRANSACTIONS

Q1: For tax reporting purposes, how are foreign currency denominated transactions measured?

A1: 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 (i.e., the date of transaction, reporting date, settlement date).

Q2: In relation to Q&A No. 1, what is the exchange rate to be used at initial

recognition of foreign currency denominated transactions?

A2: The spot rate on the date of transaction shall be used.

Since the forex spot rates change from time to time within a particular day depending on the market trading activities, different forex spot rates are being published every trading day (e.g., open, close, high, low, weighted average, etc.) as a reference rate to be adopted for proper valuation reflecting the true income of foreign currency denominated transactions.

Then, for purposes of this Circular, the taxpayer has the preference to adopt which spot rate to be used (e.g., open, close, high, low, weighted average, etc.) in the beginning of the taxable year as long as the spot rates adopted must be

reporting for tax purposes for at least one taxable year. used consistently both in recording for financial accounting purposes and

Q3: forex rates available (e.g., weekends, holidays, etc.)? What exchange rate shall be used in converting foreign currency denominated transactions incurred on dates where there are no published

A3: Use the latest closing spot rate available on the business date immediately

preceding the date of transaction.

For example, Company A sold goods at $100 on November 30, 2022. Nc available forex data available on the said date since it falls on a holiday. The most recent closing spot rate available is that of November 29, 2022.

Company A should convert its foreign currency transaction of $100 using the closing spot rate on November 29, 2022. BUREAU C TETERNALREVENUE

t tx JAN 22 224

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Q4: What should be the source of forex rates to be used in converting foreign currency denominated transactions for tax purposes?

A4: are hereby prescribed to govern the conversion of foreign currency denominated To standardize the forex rates to be used for tax purposes, the following rules

transactions to Philippine Peso:

a. The spot rate of exchange on the day of the transaction based on the

Banker's Association of the Philippines (BAP)3 published rates;4 or

b. In the event that the forex rate as stated in item (a) is impractical or not exchange rates (e.g., Bangko Sentral ng Pilipinas (BSP), Bloomberg, feasible, the spot rate on the day of the transaction based on other available Reuters exchange rates, etc.) 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

BUREAU CF INTERNALREVENUE (e.g., access to subscription with Bloomberg, etc.) for the taxable year, 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 within 30 days prior to the start of the taxable year.

ECORDSMT.DV}SION JAN 22 2124 COAnNQ F j&OA submission, together with other supporting documents during BIR audit. 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

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

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

concerned BIR office, which shall be applied from the start of the succeeding taxable vear. of subsequent change in forex rates used, a new notice shall be submitted to the

Q5: How many decimal places on forex rates should be used when converting foreign currency denominated transactions?

3 The Philippine Dealing System (PDS) rates used as interbank reference rate per RR No. 06-2006 already ceased publishing the FX spot summary rates pursuant to BAP advisory dated March 16, 2018. 4 www.bap.org.ph/markets/

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A5: Use the actual forex rates as published or listed based on the reference exchange

rates opted in O&A No. 4.

jurisdiction over the taxpayer for the system limitation. 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 system subject to written notification to the BIR office whichever has may use the maximum number of decimal places as designed in their respective

Q6: In relation to Q&A No. 4, 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?

A6: 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 Given that BAP publishes USD/PhP spot rates only, taxpayers with foreign

rates as stated in Q&A (4)(b) above following the conditions enumerated.

Q7: What if the taxpayer incurred a foreign currency denominated transaction other than USD in the middie of the taxable year but initially elected to use BAP published rates?

A7: transaction other than USD subject to the following conditions: The taxpayer is allowed to use the BSP spot rates for foreign currency

A The taxpayer shall summarize its foreign currency transactions other than

USD with the following information: BUREAU OF TTERNALREVENUE

JAN 22-224 W A Nature of transaction Date of transaction Amount of foreign currency transactions other than USp PhP converted amount of the foreign currency transaction Forex rate used in converting to PhP; and

LECORDS MGT DIVISION

b. The requirement on item (@) must be available for presentation and submission, together with the supporting documents on the said foreign currency transactions during BIR audit.

Q8: failed to notify the BIR as required under Q&A No. 4 (b)(1)? What if the taxpayer used forex rates other than BAP published rates but

A8: 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. The taxpayer will still be required to prove the reliability of exchange rate used

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

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the BAP"published rates, whereas for foreign currency transactions

W denominated in a currency other than USD, the BSP rates shall be used.

Q9: Is the conversion prescribed under RMC 26-1985 for currencies other than the USD mandating to convert first the foreign currencies to USD using the

prevailing exchange rate between the two currencies, now superseded?

A9: currency other than the USD is now superseded by Q&A No. 4(b) and Q&A No. 6 of this Circular. other than USD to PhP, the practice of converting first to USD the foreign Yes. With the availability of wide range of forex between foreign currencies

Q10: Is the use of monthly average exchange rates permitted in converting foreign currency transactions to Philippine peso for tax purposes?

Al0: No. Foreign currency transactions are converted into Philippine peso for tax purposes using the spot rate of exchange on the date of transaction.

Q11: What is a foreign exchange difference?

Al1: exchange rate between the transaction date, balance sheet date and the date of A forex difference (i.e., gains/losses) results when there is a change in the

settlement of any monetary items arising from a foreign currency transaction.

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. Unrealized forex gains/losses results from fluctuations in exchange rates upon

Realized forex gains/Iosses 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.

Q12: 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?

A12: The "Realization" principle adopted under RR No. 02-405 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

(ii) an exchange has taken place. recognized when: (i) the earning process is complete or virtually complete, and

5 RR No. 2 - Income Tax Regulations. the periodic remeasurement of assets and liabilities denominated in foreign Unrealized gains or losses on forex fluctuations recognized in connection with currency to functional currency are not considered as income/loss for purposes BUREAU G SNTERNAL REVENUE F G. Ia

JAN 22 2024 K M Page 7 of 10

W

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

Financial Statements (AFS). tax assets/liabilities are required to be disclosed in the Notes of Audited

Q13: realized forex gains/losses for income tax purposes? Are taxpayers required to separately record and report unrealized and

A13: from the realized forex gains/losses arising from foreign currency transactions. The taxpayers should separately record and report unrealized forex gains/losses

tax purposes. Realized forex gains/losses shall be substantiated with sufficient evidence that the same arose from a closed and completed transaction (e.g. reference to the bank statements on actual collection of receivables and payment transactions, are considered as taxable income or deductible expense for income schedule of foreign currency transactions resulting to forex gains/losses with of payables, etc.). Only realized forex gains/losses, or those arising from closed and completed

transactions are strictly prohibited for income tax purposes. Moreover, automatic reversal of unrealized forex differences to realized forex gains/losses in the succeeding year not arising from closed and completed

Q14: What are examples of events that will give rise to an actual gain or loss reportable for tax purposes?

A14: Difference in foreign exchange rates will give rise to actual gain/loss when

certain events occur," such as, but not limited to the following:

different from the rate at the time income is earned and debited against Exchange rate at the time of receipt of advance payments on contracts is advance payments;

receivables; Exchange rate at the time of recording/recognizing accounts receivables is different from the rate at the time of actual collection of the account

Exchange rate at the time advance payments are made to subcontractors is different from the rate at the time expenses on the sub-contract are incurred/recorded:

Exchange rate at the time o different from the rate at the time accounts payables are paid; recording/recognizing accounts payables is

BURCA(OF TTERNALREVENUE W

6 BIR Ruling [DA-359-03], dated October 10, 2003. AN 22.2024 OUNK

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Exchange rate at the time down payments for construction materials are made is different from the rate at the time of full-payment/settlement of the balance on the purchase price of the materials.

Q15: Is netting or offsetting of forex gains and Iosses allowed for income tax

purposes?

A15: of the parties is strictly prohibited for taxation purposes.7 The practice of offsetting transactions of taxpayers and consequently the accounting and recording of the same and its related transactions in the books

following the rules on income tax deductibility. However, for tax calculation purposes, forex loss.is still allowed as a deduction The gross amounts of gain and loss must be presented in the income tax return.

Q16: Where will forex gains and losses be presented in the income tax returns?

A16: Forex gains shall be presented as part of "Other Taxable Income" and be

Income" in the income tax return. included in the computation of "Total Taxable Income" or "Gross Taxable

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

Q17: denominated in foreign currency for taxes other than the income tax (e.g., Value Added Tax (VAT), Gross Receipt Tax (GRT), Other Percentage Taxes (OPT), Excise Tax, Documentary Stamp Tax (DST), etc.)? What will be the basis for the reportable amount of transactions

A17: 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 (e.g., VAT, GRT, OPT, Excise, DST, etc.).

t2 22 OS Ev be the gross selling price or the gross value in money as supported by a corresponding sales invoice; while for sale or exchange of services, including the use or lease of property, it shall be the gross receipts as supported by a corresponding official receipt. For VAT purposes, the reportable amount for sale of goods or properties shall

For GRT and OPT, the reportable amount shall be the gross quarterly sales or receipts depending on the type of transaction subject to the said taxes.

For Excise, the reportable amount shall be the excise taxes imposed and based (specific tax) and imposed and based on selling price or other specified value of on weight or volume capacity or any other physical unit of measurement

Recording Transactions Involving "Netting" or "Offsetting". 7 Revenue Memorandum Circular No. 61-2016 -- Prescribing Policies and Guidelines for Accounting and

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products. the goods (ad valorem tax) generally before the removal/release of the excisable

For DST, the reportable amount shall be based on the value of the documents subject to stamp tax.

For withholding taxes, in general, the reportable amount shall be the value of the taxable income payment at the time it is paid or payable or when it is accrued or recorded as an expense or asset whichever comes first.

Illustrations and Accounting Entries are reflected in the Annex "A" hereof, as guide for recording and reporting foreign currency transactions.

amended, modified or revoked accordingly. Interpretations in BIR rulings and court rulings decisions and new laws enacted affecting the subject matter. cited in this Circular can be subject to change under prevailing circumstances of latest court All revenue issuances and BIR rulings inconsistent herewith are hereby considered

strictly implement the provision of this Circular. All internal revenue officers, employees and others concerned are hereby enjoined to

This Circular takes effect immediately.

UMAGUI, JR. sioner of Internal Revenue

C (pfrs project)

BUREAU OYJNTERNALREVENU

JAN 22 2024 COAAYO f ia DZ

FLSALE ItUVISION

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