IRB official tax guideline on foreign exchange gain and loss

IRB official tax guideline on foreign exchange gain and loss

IRB official tax guideline on foreign exchange gain and loss

Overview

On 13.12.2019, IRB issues a Public Ruling (PR) 12/2019 Tax treatment of foreign exchange gains and losses, to explain the tax treatment for businesses in Malaysia in respect of foreign exchange gains and losses, which arise from cross border transactions denominated in foreign currency.

Key takeaway

You will understand tax treatment for foreign currency exchange gains and losses arise from:

  1. Trade or non-trade transaction

  2. Revenue or capital transaction

  3. Realised or unrealised transaction

Summary of learning on Public Ruling 12/2019 - Foreign Exchange Gain & Loss

The foreign exchange gains or losses are taxable or deductible, if:

i.      It is a trade transaction

-          Transaction arise from ordinary course of business operation.

-          For example, buying and selling of goods.

ii.    It is incurred as revenue in nature

-          For example, receipt of revenue, payment of expenses, settlement of trade debts.

iii.   The foreign exchange differences are realised

-          Realised means settlement of payment when the equivalent amount in RM is determined.

The foreign exchange gains or losses are non-taxable or non-deductible, if:

i.        It is a non-trade transaction

-          A transaction involves assets of enduring value and speculations outside the normal business operation.

ii.       It is incurred as capital in nature

-          For example, purchase of fixed assets, investment.

-          The foreign exchange differences arise from the repayment of the borrowings used to purchase the capital asset is capital in nature.

iii.     The foreign exchanges differences are unrealised

-          It means no settlement of debts during the year.

-          The foreign exchange differences arising from translation of functional currency to presentation currency at the reporting date.

-          However, non-trade transaction is not taxable or deductible regardless if it is realised or unrealised.

Foreign exchange gains or losses arise from purchase of fixed assets

-       We need to considered the following principles if assets purchase in non-RM currency:

i.      The qualifying expenditure is based on actual cost of assets in RM for capital allowance purpose.

ii.     Any realised foreign exchange gain or loss is to be adjusted to the qualifying expenditure.

Tips to taxpayer on accounting for foreign exchange

The taxpayer is advised to keep proper record or documentation on:

1.     Foreign exchange rate used at the date of transaction, at the date of settlement and at the reporting date.

2.     Realised or unrealised foreign exchange gains or losses incurred during the year.

3.     Nature of the foreign exchange transaction.

Sources

PR 12/2019: Tax treatment of foreign exchange gains and losses

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