Guidelines on the Use of Foreign Currency in Financial Statements

June 3, 2003 BIR RULING NO. 004-03 Sec. 232; 235 000-00 The Joint Foreign Chambers of Commerce of the Philippines Through Joaquin Cunanan & Co. 29/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Ms. Tomasa H. Lipana Managing Partner Gentlemen : This refers to your letter dated October 26, 2001 requesting on behalf of the Joint Foreign Chambers of Commerce of the Philippines for an authority to use US Dollar or such other functional foreign currency, as an alternative to using Philippine Peso, in financial statements that will be submitted for tax purposes. It is represented that the different foreign chambers of commerce and industry in the Philippines are non-stock, non-profit organizations registered with the Securities and Exchange Commission (SEC); that among others, each organization is founded to promote and develop trade, commerce and industry between the Philippines and the country represented by the organization, cultivate friendly relations and mutual cooperation between Filipinos and the nationals of the said country, facilitate exchange of opinion, information and ideas between private sectors of the two countries; that the exporter-members are subsidiaries of foreign companies; that they are manufacturers and exports of different types of products; that at the outset, their foreign parent companies respectively put in US Dollar or foreign currency denominated investments as initial capital; that save for a small portion, all revenue generated by exporters are in US Dollars or such other foreign currency; that their equipment, raw materials and supplies are almost entirely imported and thus required to be paid in US Dollar/foreign exchange; that the funds borrowed to finance their working capital requirements are normally sourced offshore or FCDU loans and hence, US Dollar or foreign currency loans; that considering that there are no foreign exchange rules which require conversion of the foreign currency earnings into pesos, these funds are maintained in US Dollar/foreign currency accounts and used to pay foreign loans and importation; that because the members' transactions are denominated either in US Dollars or such other functional foreign currency ( i.e. , sources and used of funds are US Dollar/foreign currency denominated), they do not incur losses or gains from foreign currency devaluation, except for those instances when peso expenditures are required ( e.g. , payment of salaries) which necessitate conversion of US Dollars/foreign currency into pesos; that since financial statements are traditionally reported using the Philippine currency, entities report paper or artificial foreign exchange losses or gains arising from peso devaluation or appreciation; that in view of the depreciation of the Philippine peso, before and after the peak of the regional crisis, members have reported losses in Philippine operations, because financial statements reflect the peso value of the transactions entered into in foreign exchange and that the same traditional peso reporting for tax purposes result to foreign exchange gains or losses even if there is no real gain or loss on the part of the taxpayer whose transactions are denominated and implemented in foreign currency. 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 Philippine taxpayers. What the Tax Code requires is that the books be kept in a native language, English or Spanish (Section 234, Tax Code). Besides, the prohibition against transactions 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. TAaIDH IN VIEW OF THE FOREGOING, this Office, on the basis of Section 6 in relation to Section 43 both of the Tax Code, hereby agrees to grant authority to use foreign currency in financial statements subject to the following conditions: 1. The foreign currency to be used in the books shall be limited to the United States Dollars (U.S. 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. 26-85; and 4. Tax returns shall be prepared in Philippine pesos and taxes due shall be paid in Philippine pesos using the exchange rate provided in RMC No. 26-85. Very truly yours, (SGD.) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue