BIR Updates March 18, 2024

THE BIR CLARIFIES THE TREATMENT OF FOREIGN CURRENCY TRANSACTIONS FOR FINANCIAL REPORTING AND INTERNAL REVENUE TAX PURPOSES. RMC No. 12-2024, January 22, 2024

• PFRS Treatment:
  • Initial Measurement – rate of exchange at the date of transaction. Average rate is also permitted as long as they are reasonable approximation of the actual.
  • Subsequent Measurement. At each reporting date:
    • Monetary item – closing rate; unrealized gain/loss to be recognized in profit or loss
    • Non-monetary item
      • If carried at historical cost – historical exchange rate (no re-measured at reporting date);
      • If carried at fair value – exchange rate at the date the fair value is measured; unrealized gain or loss to be recognized in OCI.
  • Settlement: recognized in profit or loss (consideration received/paid less carrying amount of monetary asset or liability)
• Tax purposes:
  • Forex currency denominated transaction = to be converted into functional currency  using exchange rate at the time asset, liability, income and expense are recognized and measured/remeasured (i.e. date of transaction, reporting date, settlement date)
  • Spot rate to be used on the date of transaction – taxpayer has the prerogative to use either open, close, high, low, weighted average as long as used consistently. Taxpayers may adopt it at the beginning of the taxable year; for transactions on holiday, weekends etc., the latest closing spot rate available on the business date immediately preceding the date of transaction shall be used.
• Source of forex rates to be used in converting foreign currency denominated transaction for tax purposes:
  • Banker’s Association of the Philippines (BAP) published rate;
  • Other available sources (if BAP’s rate is impractical or not feasible), such as BSP, Bloomberg, Reuters etc.
    • Conditions: Submit notarized sworn statement stating the source, reason for using the rate, and statement allowing BIR to access rates used during BIR audit;
    • Election of forex are irrevocable for at least one taxable year; if forex rates used are subsequently changed, a new notice shall be submitted to the BIR.
• Number of decimal places  – actual number. Exception, maximum number as designated in the accounting system of the taxpayer; condition: notify the BIR of the system limitation.
• Forex transaction that is non-USD currency – taxpayers may directly convert the foreign currency, other than BAP published rates, following the conditions set forth.
• Treatment if the taxpayer initially used BAP rates but has non-USD transaction in the middle of the year – Taxpayer shall summarize the non-USD foreign transaction which must be available for presentation and submission during BIR audit.
• Effect of failure to notify the BIR for using rates other than BAP:
  • Taxpayer is still required to prove the reliability of the exchange rate; administrative penalties will be imposed too; BAP published rates will be used BSP rate will be used in case of non-USD foreign currency denominated transaction
• No need to convert non-USD forex transaction to USD forex.
• Use of monthly average exchange rates is not permitted in converting foreign currency transactions to Philippine peso
• Treatment of unrealized gains or losses on forex fluctuation during periodic re-measurement – not considered income/loss; considered temporary difference for which deferred tax accounting should be applied which must be disclosed in the Notes to the AFS.
• Only realized forex gains/losses, or those arising from closed and completed transactions are considered as taxable income or deductible expenses for income tax purposes
• Automatic reversal of unrealized forex differences to realized forex gains/losses in the succeeding year not arising from closed and completed transactions are strictly prohibited for income tax purposes.
• Examples of events giving raise to actual gain/loss reportable for tax purposes:
  • Exchange rate at the time of receipt of advance payment and time income is earned;
  • Exchange rate at the time of recording of receivable and receipt of payment;
  • Exchange rate at the time when advance payment is made to subcontractors and expenses are incurred;
  • Exchange rate at the time of recording of payable and payment; and
  • Exchange rate at the time of down payment of construction materials and full settlement of the balance of the purchase price.
• Rules in offsetting of forex gains and loss – prohibited. Gross amounts of gains and loss must be presented in the income tax return but for tax calculation purposes, forex loss is deductible.
• Presentation of forex gains and losses – Other taxable Income; included in the computation of “Total Taxable Income” or “Gross Taxable Income”
• Forex loss – “Ordinary Allowable Itemized Deductions”

THE BIR CLARIFIES ON THE TREATMENT OF RETIREMENT BENEFITS EXPENSE FOR FINANCIAL REPORTING AND TAX PURPOSES. RMC No.13-2024, January 22, 2024

Circular not applicable to entities classified as small and medium enterprises (SMEs) which are covered by PFRS for SMEs

• Classification  of Post-employment or retirement benefit:
  • Defined Contribution Plan
    • Fixed contribution is paid into a fund
    • No obligation to pay further contribution if fund does not hold sufficient assets to pay all employee benefits
    • Accounting treatment: contribution payable is recognized in exchange for that service as an expense
  • Defined Benefit Plan (Plan other than defined contribution plan)
    • Requires valuation by an actuary using projected unit credit method (attributing benefit to periods of service and making actuarial assumptions)
    • Requires booking employee benefit costs and accrue employee benefits
• Employee benefit cost –
  • Employee benefit expense (profit or loss)
  • Remeasurement gains and losses (other comprehensive income)
• Changes in assumption. Comprises of:
  • Actuarial gains and losses;
  • Difference between actual return or plan assets and the interest income; and
  • The effect of asset ceiling
• Employee benefit expense – composed of:
  • Service cost:
    • Current service cost – increase in PV of the obligation due to employee service for the current period;
    • Past service cost – change in the PV of the obligation due to plan amendment or curtailment; and
    • Settlement Gains/loss – transaction eliminating all further obligations for part or all of the benefits; differences between PV of the defined obligation and settlement price.
  •  Net interest cost – Increase in the liability/asset due to passage of time (asset x discounted rate)
• Condition for the amount of retirement benefits expenses claimable as deduction from gross income for income tax purposes
• The retirement benefit plan must be registered with the BIR (Tax Qualified Plan), evidenced by certificate of tax qualification, under RA No. 4917
• Deductible:
  • Normal Cost
  • Amount in excess of normal cost if amount is not allowed as deduction and apportioned over 10 years.
• Excess: not allowed as deduction; in case of amount reverted to employer, such amount is taxable income.
• Retirement benefit expenses deductible if there is no Tax Qualified Plan – RA 7641 applies or only the actual amount of retirement benefits paid to employees can be claimed as deduction from the gross income
• Tax exemption of the employee retirement benefit plan:
  • Certificate of Qualification as a Reasonable Private Benefit Plan  must be filed with Law and Legislative Division
  • Within 30 days from the date of effectivity of the retirement benefit plan.
• Tax treatment of income earned from investing the employee retirement fund under RA No. 4917 – Exempt from income tax provided:
  • The requirements for reasonable private benefit plan are met
  • Funds are actually used for the exclusive benefit of the employees or their beneficiaries
• Instances when income derived by Fund/Trust is taxable:
  • Lending of income or corpus without adequate security and a reasonable rate of interest
  • Excess/unreasonable payment of compensation
  • Making service available on a preferential basis
  • Substantial purchase of security/property for more than adequate consideration
  • Sale of substantial par of security or other property for less than adequate consideration
  • Transaction resulting in a substantial diversion of the income/corpus

‘to or from the employer or if the employer is an individual, to or from a member of the family of the employer, or to or from a corporation controlled by the employer  (50% of more)

• Employer cannot use the retirement fund to invest/deposit in any of the employer’s business venture.
• Retirement benefit received by employee pursuant to Tax Qualified Plan under RA 4917 is subject to withholding tax as a rule; exempt when employee must be at least 50 years old and served his/her employer for at least 10 years; and has not previously availed of the privilege under a benefit plan of the same or another employee.
• Retirement benefit under RA 7641 is exempt from withholding tax if the employee is at least 60 years of age to 65 and has served for at least 5 years. No certificate of tax exemption is required.
  • If 70 years old, retirement benefits are still exempt from income tax and withholding tax; but all income and other benefits received beyond 65 is considered compensation subject to income tax.
• Tax Treatment during interim period of filing and issuance of Certificate of Qualification:
• On the benefit received:
  • Exempt from income tax and withholding tax
  • If application is denied, the employer/trust will be directly and solely liable for the deficiency income taxes due on the retirement benefits
• On the investment income:
  • Exempt from income tax
  • If application is denied, the employer/trust will be directly and solely liable for the deficiency income taxes
• On deductibility of contributions:
  • Deductible from gross income.
  • If application is denied, the employer/trust will be directly and solely liable for the deficiency income taxes
• 10-year requirement to be computed only in 1 company, except for merger (aggregate of service to be considered)
• Amendment to be submitted to the BIR for certification.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. If you have clarification or concern or no longer wish to receive updates, please feel free to reach out to us.

Best regards,

Ron Dumlao