CIT POLICY ON CLOSING RATE DIFFERENCES BY REVALUATION OF MONETARY ITEMS DERIVED FROM FOREIGN CURRENCIES

In Clause 2, Article 1 of Circular No. 179/2012/TT-BTC dated October 24, 2012 of the Ministry of Finance stipulating:

“2. Scope of regulation:

This Circular guide the recognition, assessment and handling of exchange differences and the conversion of financial statements of enterprises’ overseas operations and overseas establishments into the Vietnamese corporate accounting currency.

The determination of deductible income when determining corporate taxable income for exchange differences in an enterprise shall comply with the provisions of legal documents on corporate income tax.”

In Clauses 9 and 23, Article 7 of Circular No. 78/2014/TT-BTC dated June 18, 2014 of the Ministry of Finance guiding other incomes as follows:

“Article 7. Other incomes

Other incomes are taxable incomes in the tax period that do not belong to the business lines and fields stated in the enterprise’s business registration. Other income includes the following income:..

9. Income from exchange rate differences, specifically determined as follows:

In the tax year, if enterprises have exchange rate differences arising in the period and exchange rate differences due to revaluation of payables derived from foreign currencies at the end of the fiscal year, then:

– The exchange rate difference arising in the period directly related to the revenue and expenses of the enterprise’s main production and business activities shall be included in the expenses or income of the enterprise’s main production and business activities. As for the exchange rate difference arising in the period that is not directly related to the revenue and expenses of the enterprise’s main production and business activities, if there is a loss on exchange rate difference, it will be included in the main production and business expenses, if there is gain from exchange rate difference, it will be included in other income.

– Gains from exchange rate differences due to revaluation of liabilities in foreign currencies at the end of the fiscal year are offset against losses on exchange rate differences due to revaluation of liabilities in foreign currencies at the end of the fiscal year. After offsetting the gain or loss from the exchange rate difference directly related to the revenue, the expenses of the enterprise’s main production and business activities shall be included in the income or expenses of the main production and business activities of the enterprise. As for the gains or losses on exchange rate differences that are not directly related to the revenue, the expenses of the enterprise’s main production and business activities shall be included in other incomes or main production and business expenses when determining taxable income.

For receivables and loans derived from foreign currencies arising during the period, the exchange rate difference shall be included in deductible expenses or income as the difference between the exchange rate at the time of debt collection or loan recovery at the rate at which the receivable or initial loan was recognized.

The above-mentioned exchange rate differences do not include exchange rate differences due to revaluation of year-end balances: cash, deposits, money in transit, and receivables derived from foreign currencies.

23. Other incomes as prescribed by law.”

At Clause 2.22, Point 2, Article 6 of Circular No. 78/2014/TT-BTC dated June 18, 2014 of the Ministry of Finance, guiding expenses not to be deducted when determining taxable income:

“2.22. Loss on exchange differences due to revaluation of monetary items derived from foreign currencies at the end of the tax period includes exchange rate differences due to revaluation of year-end balance: cash, deposits, money in transit, receivables derived from foreign currencies (except for losses on exchange rate differences due to revaluation of payables derived from foreign currencies at the end of the tax period).”

Based on the above provisions, the principles are as follows:

Loss on exchange rate differences due to revaluation of monetary items derived from foreign currencies at the end of the tax period includes exchange rate differences due to revaluation of year-end balance: cash, deposits, money in transit, receivables derived from foreign currencies are not included in deductible expenses when determining corporate taxable income.

Gain on exchange rate differences due to revaluation of monetary items derived from foreign currencies at the end of the tax period includes exchange rate differences due to revaluation of year-end balance: cash, deposits, money in transit, receivables derived from foreign currencies are not included in corporate taxable income.

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  • Note: Principles of determining monetary items derived from foreign currencies: These are assets recovered in foreign currencies or liabilities in foreign currencies. Monetary items derived from foreign currencies may include:

1) Cash, cash equivalents, term deposits in foreign currencies;

2) Receivables and payables derived from foreign currencies, except for:

– Prepayments to sellers and prepaid expenses in foreign currencies. Where at the time of making the report there is solid evidence that the seller is unable to provide the goods or services and the enterprise will have to receive back the prepayments in foreign currency, these amounts are considered as monetary items  derived from foreign currencies.

– Prepayments from buyers and revenue received in foreign currencies in advance. Where at the time of making the report there is solid evidence that the enterprise cannot provide goods or services and will have to return the advance payments in foreign currency to the buyer, these amounts are considered as monetary items  derived from foreign currencies.

3) Borrowing and loans in any form are entitled to recover or have the obligation to repay in foreign currencies.

4) Deposits, call bets and escrows are entitled to receive back in foreign currency; Call bets and escrows must be returned in foreign currencies.