Navigating Foreign Currency Transactions: A Guide to BIR Tax Alert No. 8 (RMC NO. 12-2024)

For businesses operating across borders, navigating the varying exchange rates used for financial reporting and income tax purposes can be confusing. To clarify these differences and streamline compliance, the Bureau of Internal Revenue (BIR) issued Tax Alert No. 8 (RMC No. 12-2024). 

Below, we break down the key points of this Revenue Memorandum Circular (RMC) and highlight its key points to help you understand its implications for your business and aid compliance. 

What is Tax Alert No. 8 (RMC No. 12-2024) about?

Essentially, RMC 12-2024 clarifies the differences between how foreign exchange (forex) gains/losses are recognised in financial statements under the Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) and how they are treated for income tax purposes under the National Internal Revenue Code (NIRC).

The alert also defines and specifies the rules for recording and disclosing forex transactions for tax purposes, including the use of appropriate exchange rates. It’s crucial for businesses engaged in international transactions to grasp the implications of this circular to ensure accurate reporting and compliance with regulatory standards.  

What are the key points of RMC No. 12-2024?

Below are the new rules for converting foreign currency denominated transactions for tax reporting:

1. Using the spot rate

Instead of using the monthly average rate, taxpayers must use the exchange rate at the time an asset, liability, income, and expense are recognized. This means using the spot rate on the transaction date for the initial recognition of foreign currency-denominated transactions. 

The spot rate is based on the Banker’s Association of the Philippines (BAP) published rates. If using the BAP rates isn’t feasible (or impractical), taxpayers can use the spot rate based on other available exchange rates, such as Bangko Sentral ng Pilipinas (BSP), Bloomberg, Reuters, and other reliable sources. 

However, using alternative spot rates is subject to the following conditions:

• Notarised sworn statement: Submitted to the Revenue District Office (RDO), Large Taxpayer District Office (LTDO), or Large Taxpayers Service (LTS) (whichever has jurisdiction) within 30 days before the start of the taxable year. This document must include the forex rates source, the reason for using it, and a statement that allows the BIR to access the day-to-day forex rates used.

• Forex rate sources: During the BIR audit, taxpayers must prepare the forex rates source URLs along with other supporting documents. 

• Consistent use of spot rate source: Taxpayers who prefer using forex rates other than the BAP published rates may do so, provided they use it consistently for financial accounting and tax reporting purposes for at least one taxable year. 

Essentially, taxpayers who use rates other than the published BAP forex rates must notify the BIR. For transaction dates with no available published forex rates, taxpayers must use the latest closing spot rate preceding the transaction date.  

Taxpayers must also use BAP spot rates for other taxes such as value-added tax, excise taxes, gross receipts and other percentage taxes, among others. 

2. Using BSP rates for foreign currencies other than USD

Taxpayers who incur a forex transaction other than USD can use the BSP spot rates for foreign currencies. However, they must prepare a summary including the following:

• Transaction date

• Transaction amount

• Forex rate used

• PHP converted amount

This summary and other relevant supporting documents must be available during the BIR audit. In such cases, the burden of proof lies with the taxpayer. In such cases, the burden of proof lies with the taxpayer. In the absence of any proof or justification for using forex rates other than the published BAP forex rates, the transactions in question shall be converted to BAP rates for USD and BSP rates for other foreign currencies. 

3. Administrative penalties

Failure to notify the BIR of any deviation from BAP forex rates is subject to corresponding administrative penalties under Section 255 of the Tax Code for first and second offences. Subsequent offences are considered willful failure. 

4. Unrealised vs. Realised forex gains/losses

Taxpayers must separately record and report unrealised forex gains/losses from realised gains/losses from foreign currency transactions. Here are the basic differences between the two:

• Unrealised gains/losses: In essence, this refers to foreign currency transactions where currency conversion generates no significant flow of wealth. 

• Realised gains/losses: Conversely, this refers to actual gains/losses incurred from closed and completed transactions. These must be substantiated with sufficient evidence. 

Only realised forex gains/losses are considered taxable income or deductible expense. Forex gains shall be presented as part of “Other Taxable Income,” while forex losses fall under “Ordinary Allowable Itemised Deductions.”

5. Offsetting transactions

Offsetting transactions is strictly prohibited. This means taxpayers can’t automatically reverse unrealised forex differences to realised forex gains/losses in the succeeding year.

What this means for your business

RMC No. 12-2024 underscores the need for careful recordkeeping and analysis of foreign currency transactions. By understanding the different tax treatments for various types of transactions and utilising the correct forex rates, you can ensure accurate reporting and compliance with BIR requirements.

To recap, here are a few things to keep in mind:

• Reconciling differences: Taxpayers must reconcile the forex gains/losses reported in your financial statements with those allowed for tax purposes. This may involve maintaining separate records and calculations. 

• Accurate recordkeeping: Be conscientious with recording foreign currency transactions, including transaction dates, amounts, and exchange rates. This information is crucial for proper tax compliance. 

While this article provides a general overview, specific details and calculations may vary depending on your business activities. BDO CMC and its team of seasoned tax experts can offer guidance and support in navigating the nuances of RMC NO. 12-2024 and ensuring your business remains compliant.