Tuesday, October 28, 2008 Tax notes: Tax treatment of foreign exchange gains
AN enterprise registered with the Board of Investments (BOI) under income tax holiday (ITH) was granted the concession to finance, design, rehabilitate, expand, operate, and maintain an expressway. To finance its project, it obtained dollar-denominated loans from various multilateral and export credit agencies.
In light of its enormous exposure to foreign exchange risks, it issued peso-denominated notes to repay and prepay its project’s debts for which it realized foreign exchange gains.
Under the Rules and Regulations Implementing the Omnibus Investments Code, the “income” of a registered firm entitled to ITH shall be confined to income directly derived from registered operations. Thus, the Bureau of Internal Revenue (BIR) held that the tax treatment of foreign exchange gains of BOI-registered enterprises shall depend on the activities from which they arise.
If the foreign exchange gain is derived from an activity with an ITH incentive, the foreign exchange gain shall be covered by the same incentive. On the other hand, if the foreign exchange gain is derived from an activity without income tax incentive, it shall likewise be without income tax incentive, meaning, subject to the normal corporate income tax.
Considering that the foreign exchange gains realized by the company arose from the repayment and prepayment of its loans, which is a transaction directly attributable to the company’s registered activity of upgrading, expanding and operating an expressway, the foreign exchange gains realized by the company are covered by its ITH. (BIR Ruling DA-107-2008, Aug. 5, 2008)
However, since tax rulings are specific to the taxpayer that requested it, it may be prudent to secure a similar ruling from the BIR should a company decide to adopt the aforementioned ruling. (Source: Punongbayan & Araullo)
