Tax Compliance under Functional Currency in Philippines

functional currency tax compliance PhilippinesBy: Tax and Accounting Center Philippines

Under Revenue Regulations No. 6 – 2006 dated March 16, 2006, the use of functional currency other than Philippine Peso in Financial Statements in the Philippines that will be submitted and in the books of accounts that will be maintained for tax compliance purposes with the Bureau of Internal Revenue (BIR) had been defined and regulated. This has been issued in relation to Securities and Exchange Commission (SEC) Memorandum Circular No. 1 – 2006 dated January 11, 2006 providing for guidelines on the filing of functional currency financial statements in the Philippines.

Functional Currency in the Philippines is the currency of the primary economic environment in which the reporting entity operates; that is the currency of the environment in which an entity primarily generates and expends cash. Examples of functional currencies normally adopted in the Philippines are as follows:

  • US Dollars
  • Japanese Yen
  • Australian Dollar
  • Chinese Yuan
  • UK Pound or Euro
  • Singaporean Dollar
  • Canadian Dollar
  • Korean Won
  • Bahrain Dinar
  • Malaysian Ringgit

The above are merely samples and other currencies of other countries could also be allowed.

Determination of Functional Currency in the Philippines

A corporate or individual taxpayer does not have a free choice of functional currency. Determination of functional currency for tax purposes is based on the following considerations:

  • The functional currency that mainly influences sales price of goods and services;
  • Functional currency of the country whose competitive forces and regulations mainly determine sales price of its goods and services;
  • The functional currency that mainly influences labor, materials and other costs of providing goods or services – currency in which costs are settled;
  • The functional currency in which funds from financing activities are generated;
  • The functional currency in which receipts from operating activities are usually retained.

In case of mixed indicators above and functional currency is not obvious, the taxpayer can use its professional judgement on which is dominant. Once functional currency is determined, it shall not be changed unless upon a substantial change in underlying circumstances.

Notice to BIR on adoption of functional currency

A corporate taxpayer intending to adopt functional currency is first required to notify SEC based on SEC Memorandum Circular No. 1 – 2006. Within thirty (30) days from SEC notification, it shall notify BIR about its election to use functional currency.

For individual taxpayers, an application / notification under oath is required to be filed with the BIR within thirty (30) days after the taxable year the use of functional currency took effect along with the justification of its determination of functional currency.

Books of Accounts under Functional Currency

Books of accounts registered with the BIR are required to be maintained in functional currency.  Subsidiary ledgers shall be maintained for transactions subject to other taxes (aside from income tax) which will be recorded both in functional currency and in Philippine Peso using historical peso amounts or actual conversion / prevailing PDS rate on transaction day, whichever is applicable.

Audited Financial Statements under Functional Currency

Only audited financial statements in functional currency shall be filed with the BIR as an attachment to the annual income tax return. A supplementary schedule showing the quarterly amounts of functional currency income and expenses with translation to Philippine Peso discussed above.

Income Tax under Functional Currency in Philippines

While recording on books of accounts and financial statements are denominated under functional currency, income tax returns are still required to be in Philippine Peso (PhP).  Translation of functional currency to Philippine Peso for income tax purposes involves the following:

  • Income and expenses are translated on a monthly basis using the monthly average exchange rate under the Philippine Dealing System or PDS;
  • Monthly translated income and expenses are added to determine quarterly and annual income tax liability;
  • Total figures in the income tax return for the year to be reconciled with the total of the equivalent peso figures as converted from functional currency figures in the subsidiary ledgers maintained as source of figures on income tax return;
  • Annual reconciliation of figures and the reconciling items shall be reflected in the income tax returns that should tally with the figures in the other tax  returns – value added tax Philippines, percentage tax Philippines, Withholding Tax Philippines, Documentary Stamp Tax Philippines;
  • Tax credits applied against income tax due shall be equal to the actual amounts on supporting documents;
  • Net Operating Loss Carry Over (NOLCO) and Minimum Corporate Income Tax (MCIT) credits shall be determined using the historical peso amounts shown in the income tax returns of prior years;

Other tax returns under functional currency

All tax returns other than the income tax shall likewise be filed in Philippine Peso using historical peso amounts or actual conversion / prevailing PDS rate on transaction day, whichever is applicable.

Payment of taxes using functional currency

Payment of taxes could be made using the functional currency computed using the functional currency buying rate of the collecting bank vis-à-vis the Philippine Peso at the time of payment but the collecting bank shall report the collection to BIR in Peso as converted / translated.


Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info@taxacctgcenter.orgor you may post a question at Tax and Accounting Center Forum and participate therein.


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