Tax Alert No. 8 [Revenue Memorandum Circular (RMC) No. 12-2024 dated 28 June 2023] (2024)

Clarifies the Treatment of Foreign Currency Transactions for Financial Reporting and Internal Revenue Tax Purposes

Please be informed that RMC No. 12-2024 was 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 provisions under Sections 32 and 34 (D) of the National Internal Revenue Code (NIRC) of 1997, as amended, Sec. 96 of Revenue Regulations (RR) No. 02-40, RR No. 06-2006, and other related revenue issuances. This was 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.

The overview of the PFRS and tax treatment of this matter is presented in the table below.

Particulars	PFRS	Current Tax Treatment
Initial measurement of foreign currency transactions	All foreign currency transactions are recorded in the entity's functional currency using the spot rate of exchange at transaction date.	Foreign currency transactions are translated into Philippine Peso using the prevailing interbank reference 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.)
Unrealized gain or loss on remeasurement of monetary assets and liabilities denominated in foreign currency	Recognized in profit or loss.	Results to a temporary difference for which deferred tax accounting should be applied to reconcile accounting net income to taxable net income.
Unrealized gain or loss on remeasurement of non-monetary items carried at fair value currency transaction	Recognized in profit or loss or OCI depending on the treatment of the changes in the fair value of the item itself.	Not considered in the determination of the taxable income.
Realized gain or loss on settlement of a foreign currency transaction	Recognized in profit or loss.	Forex gains/losses arising from closed and completed transactions are considered as taxable income or deductible expense for income tax purposes.

The RMC also discussed the accounting treatment under PAS 21 of foreign currency transactions (i.e., initial measurement, subsequent measurement, and settlement). Meanwhile, the following are the salients points of the tax treatment laid down in this RMC for various foreign currency transactions:

The spot rate of exchange on the day of the transaction based on the Banker’s Association of the Philippines (BAP) published rates shall be used. If using this 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 certain conditions. Election of forex rates are irrevocable and must be used consistently for both financial accounting and tax purposes for at least one taxable year. A notarized sworn statement must be submitted to the BIR in this latter case.
In case the taxpayer fails to notify the BIR of the election of forex rates other than BAP published rates, corresponding administrative penalties would be imposed for first and second offenses. Subsequent offenses shall be considered as willful failure, and thus not subject to compromise.
The taxpayers should separately record and report unrealized forex gains/losses from the realized forex gains/losses arising from foreign currency transactions. Only realized forex gains/losses, or those arising from closed and completed transactions, are considered taxable income or deductible expense.
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.
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.
For taxes other than income tax (e.g., VAT, GRT, OPT, Excise, DST, etc.), the reportable foreign currency transactions shall be based on their conversion into Philippine Peso using the prevailing spot rate on the date of the transaction.

You may access the full version of this issuance through the BIR website.

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