Singapore: Updated guidance, FAQs on income tax treatment of foreign exchange gains, losses

Income tax treatment of foreign exchanges gains and losses for business taxpayers

Income tax treatment of foreign exchanges gains and losses for business taxpayers

The Inland Revenue Authority of Singapore (IRAS) updated its guidance regarding the income tax treatment of foreign exchanges gains and losses for business taxpayers.

The updated guidance includes a revised definition of “translation foreign exchange differences” and a set of “frequently asked questions” (FAQs) that are intended to clarify the designated bank account treatment and application of a de-minimis limit. 

Summary

Foreign exchange gains or losses arising on revenue accounts are taxable or deductible regardless whether such differences are realised or not, unless an election is made by the taxpayer to opt out of this tax treatment.

Whether foreign exchange differences arose from a capital or revenue account is, however, a question of fact and is typically determined based on the specific facts and circumstances of a case. As a general rule, cash balances maintained by businesses are treated as being held on capital account. Correspondingly, any foreign exchange gains or losses arising from foreign currency bank balances are generally not taxable/not deductible, being regarded as capital in nature.

When businesses maintain specific foreign currency bank account(s) solely for the purposes of receiving trade receipts and paying revenue expenses, the IRAS is prepared to regard such designated bank account(s) as revenue in nature. Consequently, any foreign exchange gains or losses arising from such designated bank account(s) would be subject to tax (or allowed a tax deduction). When this designated bank account is not used solely for designated revenue purposes (even though most of their transactions in that currency is revenue in nature), any foreign exchange differences arising from such bank accounts were to be treated as capital in nature, and not taxable nor tax deductible.

Taking into account feedback from the business community that this would require taxpayers to maintain at least two different bank accounts in the same currency to qualify for the designated bank account treatment, the IRAS in August 2020 introduced a de-minimis limit to ease the administrative burden and compliance costs associated with maintaining two different bank accounts. Under the de-minimis limit, the IRAS is prepared to allow businesses to treat foreign exchange differences arising from the revaluation of designated bank accounts as revenue in nature provided that (1) the total number of capital transactions is not more than 12 transactions a year; and (2) the total value of capital transactions is not more than S$500,000 a year.

Businesses adopting the de-minimis limit treatment have been required to maintain proper controls and retain relevant documentation in support of the nature of the transactions through the designated bank account(s). In addition, such businesses would need to reflect the total number and value of capital transactions in their income tax computations to demonstrate that the de-minimis threshold has been met.

In addition to the introduction of the designated bank account treatment in March 2019 and the de-minimis limit, the IRAS recently provided further clarifications on the designated bank account treatment and the application of the de-minimis limit by way of the FAQs.

KPMG observation

This updated guidance reflects the tax authority’s continued commitment to refine and clarify the tax policies by taking into account public feedback. The FAQs are intended to provide clarity on the designated bank account treatment and the application of the de-minimis limit.

Tax professionals have observed that while the FAQs in fact provide more clarity on the application of the de-minimis limit, it remains to be seen whether the de-minimis limit provides practical solutions to ease the administrative burden and compliance costs associated with businesses having to maintain two different bank accounts. Taxpayers opting for the application of the designated bank account treatment and the de-minimis limit need to determine that the stipulated conditions have been met and continue to be met over time.

Read a June 2021 report [PDF 464 KB] prepared by the KPMG member firm in Singapore

 

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