Jeremias N. Paul, Jr.

December 23, 2009 BIR RULING [DA-(C-350) 840-09] November 25, 2009 Jeremias N. Paul, Jr. Undersecretary Department of Finance Roxas Boulevard cor. Pablo Ocampo, Sr., Sts. Manila Sir : This refers to your letter dated September 29, 2009 requesting for confirmation that BIR Ruling No. 144-85 dated August 26, 1985, as reiterated by BIR Ruling Nos. DA-166-04 dated April 05, 2004 and DA-175-03 dated May 04, 2003, are still in full force. It appears that the Philippine Ports Authority (PPA) in its letter dated February 16, 2009, informed the Department of Finance (DOF) that it will not be able to remit dividends to the National Government (NG) this year because the Authority incurred a Net Loss of Php1,562.60M largely due to the Loss in Revaluation of Foreign Currency amounting to Php3,111.29M in 2008. The loss is the net effect of PPA's loss on foreign exchange (forex) as a result of the increase in value of its outstanding foreign debts by Php3,115.19M as against its gain of Php3.90M in the peso value of its dollars kept in bank savings deposit. The foreign currency monetary units are translated/revaluated using the closing rate as end of the year, specifically using the Bangko Sentral ng Pilipinas (BSP) guiding rates of exchange. ECaHSI It is your opinion that if DOF will consider BIR Ruling No. 144-85 and Sec. 2 (d) of Republic Act No. 7656, PPA should remit dividend to the NG in view of the following: 1. BIR Ruling No. 144-85 dated August 26, 1985 as reiterated by BIR Ruling DA-166-04 dated April 05, 2004 and BIR Ruling No. DA-175-03 dated May 04, 2003 on the Realization of Forex Gain and Losses for Income Tax purposes. You understand that the foreign exchange loss is deductible only for the year it is actually sustained as evidenced by closed and completed transaction and as fixed by identifiable events during that year. (par. 6570, 34 Am Jur 2d 1976). Following this tax treatment by BIR for dividend purposes as per R.A. No. 7656, the net loss on forex should only be Php221.64M and not Php3,111.29M in 2008. 2. Section 2 (d) of R.A. No. 7656 states that "Net Earnings" shall mean income derived from whatever source, whether exempt or subject to tax, net of deductions allowed under Section 29 of the National Internal Revenue Code, as amended, and income tax and other taxes paid thereon, but in no case shall any reserve for whatever purpose be allowed as deduction from net earnings. In reply, please be informed that Section 34 (A) (1) (a) and (D) of the 1997 Tax Code provides as follows: HaTAEc "SEC. 34. Deductions from Gross Income. . . . there shall be allowed the following deductions from gross income: (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses. (a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business . . . (D) Losses. (1) In General. Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: . . ." In the case of The Coca-Cola Export Corporation vs. CIR (CTA Case No. 5238, December 19, 1997), the Court of Tax Appeals held that: "We find nothing ambiguous nor obscure in the language of Section 29 (d) (2) [now Section 34 (A) (1) (a) and (D)] of the Tax Code, insofar as the same is brought to bear upon the circumstances of the petitioner in the case at bar. The provision itself furnishes the best means of its own exposition that all losses actually sustained during the taxable year not compensated by insurance or otherwise are deductible from gross income. It does not specify that the loss must be the result of transactions in the taxable year only. What the law requires is that the loss must be actually sustained in the taxable year and not compensated by insurance or otherwise. In other words, what is needed to be entitled to a loss deduction, is for the taxpayer to prove that a closed and completed transaction sets the loss in the taxable year or in the year claimed and it is not compensated by insurance or otherwise. A closed and completed transaction is one in which the facts indicate the transaction sufficiently final to ascertain that a loss has occurred (Mertens, Law of Federal Income Taxation, Chapter 28, Page 3). Thus, applying the latin maxim " Ubi lex non distinguit nec nos distinguere debemos ", where the law does not distinguish, we should not distinguish, the loss which is the result of a foreign exchange fluctuation ascertained and realized during the taxable period and not compensated by insurance or otherwise, . . . , is deductible from gross income of said taxable period, albeit it may relate to transactions of prior years. " (Emphasis supplied) Further, in Milwaukee Industries, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6202 dated January 16, 2008, provides, to wit: xxx xxx xxx "A loss which is the result of a foreign exchange fluctuation ascertained and realized during the taxable period and not compensated by insurance or otherwise, except those provided in Sec. 29 (d) of the 1977 Tax Code is deductible from gross income of the said taxable period, albeit it may relate to transaction of prior years. DTIcSH Based on all the foregoing and considering that PPA incurred foreign exchange loss as a result of the increase in value of its outstanding foreign debts, such losses are ordinary and necessary business expenses that are deductible from ordinary income pursuant to Section 34 (A) (1) (a) and (D) of the Tax Code of 1997, as amended. Moreover, losses actually sustained during a taxable year and not compensated for by insurance or other forms of indemnity are allowed as deductions from gross income. As mentioned above, such losses include, among others, foreign exchange loss incurred from the increase in value of its outstanding foreign debts. 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service