BIR Ruling [DA-413-03]

November 17, 2003 BIR RULING [DA-413-03] BIR Ruling No. 004-2003 Sec. 6 & 43, NIRC P.Imes Corporation Cavite Economic Zone Rosario, Cavite Attention: Mr. Tadashi Yamaji President & Ms. Florafe M. Bantayan CFO, Managing Director Gentlemen : This refers to your letters dated June 26, August and September 23, 2003 requesting for reconsideration of BIR Ruling No. 004-2003 dated June 03, 2003 issued to The Joint Foreign Chambers of Commerce of the Philippines granting them the authority to use foreign currency in financial reporting subject to the following conditions: 1. The foreign currency to be used in the books shall be limited to the United States Dollars (US dollars); 2. The authority shall be limited to companies whose functional currency (sources and usage of funds are almost all in US dollars save for local costs) is the US dollars; 3. The financial statements shall also be prepared and maintained in US dollars with a translation in Philippine pesos using the exchange rate provided under Revenue Memorandum Circular (RMC) No. 26-86; and 4. Tax returns shall be prepared in the Philippine pesos and taxes due shall be paid in the Philippine pesos using the exchange rate provided in the RMC No. 26-85. HAaDcS It is represented that P.IMES is a Japanese-owned company with Yen as its major functional currency; that with the continuous depreciation of the Philippine Peso, P.IMES is keenly monitoring the status of the Japanese Chamber of Commerce and Industry of the Philippines' request to use functional currencies in financial statements; that according to the forecasts, Yen will continue to strengthen until year-end; that P.IMES wants to use Yen in its financial reporting otherwise, it will be in a very weak position with deficit rising to P417 million due mainly to forex losses; that while the foregoing BIR Ruling No. 004-2003 limits the use of foreign currency in financial statements to US Dollars, it believes that all the reasons a company with US dollars as functional currency has in reporting its operations in foreign currency shall also apply to P.IMES; and that P.IMES' request to use Yen in its financial statements is premised on the following reasons: 1. The bulk of its transactions are in yen. 2. As cited in the aforesaid BIR Ruling No. 004-2002, there is no statute or regulation that prohibits the use of foreign currency in financial statements, use of foreign currency complies with GAAP and will more clearly reflect results of operations. 3. P.IMES is incurring artificial losses due to foreign exchange fluctuations thereby making its financial statements less attractive to creditors and investors whose support it needs to maintain and further expand operations and, ultimately, generate employment. 4. Japan has invested much in the Philippines which last year stands at 37% of total P46B of foreign direct investments. Granting authority to use yen may further increase the Philippines' attractiveness to Japanese companies as investment site. 5. There are currently more than 400 Japanese companies in the Philippines. Therefore, many companies will benefit if BIR allow the use of yen. In reply thereto, please be informed that this office has found no statute or regulation that prohibits the use of foreign currency in financial statements of the Philippine taxpayers. What the Tax Code requires is that the books be kept in native language, English or Spanish (Section 234, Tax Code). Besides, the prohibition against transaction in foreign currency has been lifted with the repeal of R.A. No. 529, the Uniform Currency Act. The Accounting Standards Council in its letter dated July 18, 2001, confirms that Philippine generally accepted accounting principles (GAAP) allows the use of foreign currency in financial statements. Finally, the use of foreign currency for companies whose functional currency is a foreign currency will more clearly reflect income considering that the use of Philippine pesos results in artificial foreign exchange losses which distort the real financial condition of these companies. The use of foreign currency is also revenue neutral. 1 In the light of the foregoing and on the basis of Section 6 in relation to Section 43 both of the Tax Code, this Office hereby grants your request to authorize P.IMES to use foreign currency in its financial statements reporting subject to the following conditions: 1. The foreign currency to be used in the books shall be limited to the Japanese Currency (Yen currency); 2. The financial statements shall also be prepared and maintained in Yen currency with a translation in Philippine pesos using the exchange rate provided under Revenue Memorandum Circular (RMC) No. 26-86; 3. Tax returns shall be prepared in the Philippine pesos and taxes due shall be paid in the Philippine pesos using the exchange rate provided in the RMC No. 26-85; 4. Or any return, statement or other documents in which a conversion was made, the rate of exchange used shall be indicated thereon. IDSETA This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group