BIR Ruling [DA-526-98]

November 25, 1998 BIR RULING [DA-526-98] Mr. Jose Q. Elises Business Adviser and Certified Public Accountant Unit 6 Dakudao Building Gov. Duterte Street Davao City S i r : This refers to your letter dated August 27, 1998 addressed to the Regional Director, Davao City and requesting confirmation of your opinion that the loss on foreign exchange transactions (that is the difference between the recorded US dollar loan against the prevailing foreign currency exchange at the time of the settlement of the US dollar loan) is deductible in full for income tax purposes. LLphil It is represented that your client obtained from a local bank a dollar denominated loan which was released on February 28, 1997 and May 30, 1997 for total value of $1,130,000.00 and which at the time of release was recorded at its peso equivalent of P29,784,850.00; that on December 29, 1997, your client decided to settle or fully pay its loan at its prevailing peso equivalent of P40,412,190.00; that as a result of its decision, your client actually sustained or incurred an aggregate loss on foreign exchange fluctuations during the taxable year in the amount of P10,627,340.00 (P29,784,850.00 less P40,412,190.00). In reply, please be informed that when foreign currency acquired in connection with a transaction in the regular course of business is disposed of, ordinary gain or loss results from the fluctuations. The loss is deductible only for the year it is actually sustained. It is sustained during the year in which the loss occurs as evidenced by the completed transaction and as fixed by identifiable event occurring in that year. (BIR Ruling No. 206-90 dated October 1990). Accordingly, we confirm your opinion that the loss due to foreign exchange fluctuation may be deducted in full for income tax purposes. However, the following conditions must concur: (a) it is a business connected loss; (b) it must be actually sustained in the taxable year for which such deduction is being claimed; and (c) it must not consist of a loan obtained from a related person. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. LibLex Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)