What are the key differences in the recognition and reporting of Foreign Currency Transactions between the Philippine Financial Reporting Standard (PFRS) and its current tax treatment?
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How are foreign currency transactions measured for tax reporting, and what exchange rate is used?
Foreign currency transactions are converted into functional currency³ using the spot rate at the transaction time, with taxpayers consistently applying their chosen rate (e.g. open, close, high, low, weighted average) for at least one taxable year. If no published forex rate is available, use the latest closing spot rate from the previous business day.
For tax purposes, the rate should be based on Bankers Association of the Philippines (BAP) rates. In the event that the forex is not impractical or not feasible, other rates shall be used (e.g. BSP, Bloomberg, Reuters, etc.) subject to the submission of a notarized sworn statement and source of forex rates to the BIR.
³Functional currency – is the currency of the primary economic environment in which the reporting entity operates. (e.g. Philippine Peso as the functional currency of the Philippines).
What source of forex rates should be used for foreign currency transactions other than US dollars, and can a taxpayer switch to other available spot rates after initially using BAP rates?
Taxpayers can use non-BAP rates for foreign currencies other than US dollars. If a taxpayer initially elected to use BAP rates but later incurs non-US dollar transactions, they are allowed to use BSP spot rates, provided they submit a summary of the transactions (including date, amount, nature, forex rate, and PHP equivalent) and supporting documents for BIR audit.
The taxpayer must prove the reliability of the exchange rate during an audit; otherwise, forex rates other than BAP published rates will be disregarded by the BIR.
How are forex gains and losses reported? Are taxpayers required to separately record realized and unrealized forex/gains losses for income tax purposes?
Both realized and unrealized forex gains and losses should be reported separately. 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 loss shall be presented as part of the “Ordinary Allowable Itemized Deductions” in the income tax return.
Moreover, the practice of offsetting/netting transactions of taxpayers and consequently the accounting and recording is strictly prohibited in the taxation process.
Other than income tax, what are the other basis of reportable amounts that should be considered for foreign currency transactions?
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The information provided in the article above is for general knowledge and information. We’re always happy to hear from you! If you want to know how these regulations affect your business, CONSULT ACG or email us at consult@acg.ph.