BIR shares guidelines on Foreign Currency Transactions for Financial Reporting and Internal Revenue Tax in the Philippines

The BIR prescribed these new guidelines regarding Foreign Currency Transactions in the Philippines through their Revenue Memorandum Circular (RMC) 12-2024, issued on January 22, 2024.  

Differences between Forex in Financial Statements vs Forex in Income Tax Purposes  

The circular aims to clarify the differences between Forex gains/losses recognised 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.   

The circular added the table below to better showcase these differences:  

Updated Guidelines on Philippine Financial Reporting Standards  

PAS 21 states that business entities must identify their primary economic environment to determine their functional currency. Upon choosing, all other currencies become foreign currencies to the entity for accounting purposes. 

Foreign currency transactions are recorded using the exchange rate on the transaction date. Using an Average rate is allowed, but it must be a close approximation of the actual rate (PAS 21.21-22). According to PAS 21.23: 

Foreign currency amounts are reported using the closing exchange rate. Unrealized gains or losses from translating monetary assets and liabilities at the end of the reporting period are recognized in profit or loss. 

Non-monetary items have the following conditions: 

Items carried at historical costs are measured using the historical exchange rate at the date of the transaction. Thus, they are remeasured on the reporting date. 

Items carried at “fair value” are translated using the exchange rate when the fair value was measured. Any unrealized gains or losses from said translation will be treated the same way as the change in the fair value is recognized in financial statements. 

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. 

Clarified issues and guidelines on Tax treatment of Foreign Currency Transaction policies in the Philippines  

The Circular also explained how foreign transactions in the Philippines are to be handled and what procedures need to be followed, the guidelines also include how to convert Foreign Currency into functional currency. These guidelines state that:  

• All foreign currency transactions are converted into main operating currency (functional currency) using the exchange rate in effect on the following dates:  
  • Transaction date 
  • Reporting date, or; 
  • Settlement date.
• When converting foreign currency transactions into main operating currency (functional currency), the exchange rate used should be the spot rate on the date of the transaction.  Multiple rates are published daily (opening, closing, high, low, etc.) due to fluctuating forex rates.  
• Taxpayers can choose which spot rate to use when starting the taxable year, provided that 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.  
• The exchange rate used when converting foreign currency-denominated transactions incurred on dates where there are no published forex rates available(weekends, holidays, etc), shall be the latest closing spot rate available on the business date immediately preceding the date of the transaction. 
• To clarify the source of forex rates used when converting the foreign currency-denominated transactions to Philippine Peso, the circular prescribed the rules to standardize forex rates to be used for tax purposes: 
  • (a) The spot rate of exchange on the day of the transaction based on the Banker’s Association of the Philippines (BAP) published rates; or 
  • (b) If Forex rates as stated in item (a) are impractical or not feasible, the spot rate on the day of the 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: 
    • Taxpayers who wish to use forex rates other than BAP published rates must submit a notarized sworn statement to the Revenue District Office (RDO) Large Taxpayer District Office (LTDO) or Large Taxpayers Service (LTS), whichever has jurisdiction over the taxpayer, 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 before the start of the taxable year. 
    • Taxpayers must keep records of forex rate sources (e.g., URL, list) or daily rates used during the year. These records must be available for presentation and submission together with other supporting documents During the BIR audit. 
• Note that the election of forex rates is irrevocable and must be used consistently both in recording for financial accounting purposes and reporting for tax purposes for at least one taxable year. 
• Taxpayers will be required to submit a notarized sworn statement informing the concerned BIR offices of electing the use of forex rates other than BAP published rates. 
  If there is a change in the forex rates used, a new notice must be submitted to the concerned BIR office. It will then be applied from the start of the succeeding taxable year.  
• If a taxpayer's accounting system can't handle the same number of decimal places as the published forex rates, they can use the maximum number of decimal places their system allows. However, they must notify the BIR office with jurisdiction over them in writing to explain this system limitation. 
• Taxpayers with foreign currency transactions other than USD can directly convert foreign currency other than USD to PHP using the forex rates other than BAP published rates as stated in allowable Forex Rates used for converting foreign currency and their conditions.  
• The Circular clarifies that taxpayers can use the BSP spot rates for foreign currency transactions other than USD if they adhere to the following conditions: 
  • The taxpayer shall summarize its foreign currency transactions other than USD with the following information: 
    • Date of transaction 
    • Amount of foreign currency transactions other than USD 
    • Nature of transaction 
    • Forex rate used in converting to PhP; and 
    • PhP converted amount of the foreign currency transaction 
  • The requirement above must be available for presentation and submission, together with the supporting documents on the said foreign currency transactions during the BIR audit. 
• Taxpayers are required to prove the reliability of the exchange rate used during a tax audit. The administrative penalties under Section 255 of the Tax Code, as amended, are imposed for the first and second offences. Subsequent offences will be considered as willful failure, and thus not subject to compromise. 
• If there is no proof, the forex rates other than BAP published rates used by the taxpayer shall be disregarded during the BIR audit. If foreign currency transactions are 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. 
• The Circular states that converting first to USD the foreign currency other than the USD is now superseded. Foreign currency transactions are converted into Philippine pesos for tax purposes using the spot rate of exchange on the date of transaction. 
• The Circular clarifies Foreign Exchange rate differences in the Philippines:  
  • A forex difference (i.e., gains/losses) occurs during a change in the exchange rate between the transaction date, balance sheet date and the date of settlement of any monetary items due to a foreign currency transaction.  
  • Unrealized forex gains/losses come from fluctuations in exchange rates when remeasuring 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 result from changes in the exchange rates between the transaction date and the date of settlement. This represents the actual gains/losses incurred from closed and completed foreign currency transactions.
• The circular explains that only the realized gain or loss from foreign exchange transactions is subject to Income Tax. Under the principle of “Realization” adopted from Revenue Regulation (RR) No. 02-40, income is only recognized when:  
  • The earning process is complete or virtually complete; 
  • an exchange has taken place 
    
    It should also be noted that 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 income/loss for purposes of computing taxable income. 
• Taxpayers must separately record and report unrealized forex gains/losses from the realized forex gains/losses arising from foreign currency transactions. Only the realized forex gains/losses, or those arising from closed and completed transactions, are considered taxable income or deductible expense for Income Tax purposes. Realized forex gains/losses will be substantiated with sufficient evidence that the same arose from a closed and completed transaction.  
• It’s stated that the automatic reversal of unrealized foreign exchange differences to realized foreign exchange gains or losses arising in the subsequent year, excluding those about closed and completed transactions, is strictly prohibited. 
• The RMC explains the difference in foreign exchange rates will give rise to actual gain/loss when certain events occur, such as, but not limited to the following; with the Exchange rate at the time: 
  • Receipt of advance payments on contracts is different from the rate at the time income is earned and debited against advance payments; 
  • Recording/recognizing accounts receivables is different from the rate at the time of actual collection of the account receivables; 
  • Advance payments made to subcontractors are different from the rate at the time expenses on the sub-contract are incurred/recorded; 
  • Recording/recognizing accounts payables is different from the rate at the time accounts payables are paid; 
  • Down payments for construction materials are made different from the range at the time of full payment/settlement of the balance on the purchase price of the materials; 
• 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. 
  The gross amounts of gain and loss must be presented in the Income Tax Return. However, for tax calculation purposes, forex loss is still allowed as a deduction following the rules on Income Tax deductibility. 
• Forex gains are presented as part of "Other Taxable Income" and included in the computation of "Total Taxable Income" or "Gross Taxable Income" in the Income Tax Return. Forex losses are instead presented as part of the "Ordinary Allowable Itemized Deductions" in the Income Tax Return.  
• Foreign currency transactions are converted to Philippine Pesos (PHP) at the exchange rate on the transaction date. This rate is used for most tax reports, except Income Tax. (e.g., VAT, GRT, OPT, Excise, DST, etc.) 
• The circular clarified what would be the basis for the reportable amount of transactions denominated in foreign currency taxes when calculating the VAT for: 
  • The sale of goods or properties – Use the gross selling price or the gross value in money, as shown on a corresponding sales invoice. 
  • For the sale or exchange of services (including the use or lease of property) – Utilising the gross receipts, as shown on a corresponding official receipt. 

For GRT and OPT, the reportable amount shall be 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 on weight or volume capacity or any other physical unit of measurement (Specific Tax) and imposed and based on selling price or other specified value of the goods (Ad Valorem Tax) generally before the removal/release of the excisable products. 
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. 

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