Exchange Gains And Losses

(Tax News Reporter - Week Ended 4 February 1997)

We have received oral confirmation from the tax authorities that exchange gains and losses will be treated as before 5 December 1994, i.e. as non-realisational income or expenditure which adds up to or decreases the gross profit and is taxed accordingly. Doubt could have arisen from the fact that Government Regulation No. 552 no longer contains the provision (which was repealed by Government Regulation No. 661 of 1 July 1995) that exchange gains are considered as non-realisational income and exchange losses as non-realisational expenditure, but the tax authorities have indicated that the new profits tax instruction will include some explicit wording on this issue. Exchange gains and losses may occur in two situations. "Realised" exchange gains or losses arise if there is a time lag between recording a sale or a purchase and the moment of receipt or payment of the foreign currency and the exchange rate of the currency has changed in the meantime. This de facto only applies to taxpayers which use the accrual basis for tax accounting purposes. "Unrealised" exchange gains or losses arise if a revaluation is carried out of foreign currency liabilities, receivables or deposits at the end of an accounting period. Taxpayers have some freedom in choosing the moment of revaluation and can also limit their tax liabilities by hedging foreign currency deposits or receivables against liabilities.

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