BIR Ruling

November 2, 1972 Mr. Gilberto M. Duavit Suite 602 Ermita Center Bldg. Roxas Boulevard, Manila S i r : This refers to your letter dated October 2, 1972 requesting information as to whether Marcopper Mining Corporation (hereinafter referred to as Marcopper) can deduct foreign exchange losses which were allegedly sustained at the time actual payments were made on its dollar obligations. cdta It is represented that Marcopper obtained fixed term dollar loans from a consortium of US banks abroad, and from two other foreign creditors prior to the promulgation of Central Bank Circular No. 289, dated February 21, 1970, otherwise known as the "Floating Exchange Rate"; that the proceeds of the loan were used for exploration and development expenses, acquisition of machinery and equipment from suppliers from North America, Europe and Japan, payment for local labor, construction of plant and other contractual services, purchase of land and rights thereto, working capital and other expenses to bring the mining property in Marinduque into commercial production; that as of the effectivity of Republic Act. No. 6125, otherwise known as the "Stabilization Tax", the balance of the dollar liabilities of Marcopper originally obtained and booked at P3.90 to $1.00 was revalued in the books at the floating exchange rate of P6.40 to $1.00; and that subsequently; the loss of foreign exchange resulting from this revaluation was booked as a deferred charge and amortized during the life of the loan. In reply thereto, I have the honor to inform you that authorities are agreed that "When foreign currency acquired in connection with transactions in the regular course of business is disposed of, ordinary gain or loss results from the fluctuation". (Prentice-Hall Federal Taxes, Vol. 1, par. 6261). "If the conversion is made in connection with the taxpayer's trade or business, the gain or loss is an ordinary gain or loss." (Prentice-Hall, Federal Taxes, Vol. 1, par. 5061). "Difference between debt in dollars and amount of dollars used in payment of a business debt was ordinary income and not capital gain." (Church's English Shoes, Ltd., 24 TC 56, aff'd, 229 F 2d 957; America-Southeast Asia Co., Inc. 26 TC 198; Beumore Corp., par. 56, 101 F-H Memo TC). In the light of the aforecited authorities, it is clear that the loss resulting from the devaluation of the peso is an ordinary loss, deductible in the year the loss is incurred. Thus, if a portion of the dollar loan is paid this year, the excess of the peso value of that portion of the dollar indebtedness at the time of payment over its peso value at the time of its acquisition is a deductible loss from Marcopper's gross income for 1972. In this connection, please be further advised that since the loss resulting from the transaction in question, is an ordinary loss, deductible in the year it is incurred, such loss may not be amortized. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue