REVENUE REGULATIONS NO. 6-2006 issued on May 2, 2006 regulates the use of functional currency other than the Philippine peso in financial statements that will be submitted and in the books of accounts that will be maintained for internal revenue tax purposes. A tax-filer, corporate or otherwise, cannot arbitrarily choose to use a certain currency as its functional currency in its financial statements and books of accounts for tax purposes. The use of functional currency other than the Philippine peso for financial recording and reporting purposes does not mean, however, the use of such functional currency for tax return purposes. This holds true even if the use of functional currency other than the Philippine peso becomes a requirement/is permitted under the Philippineadopted Generally Accepted Accounting Principles, or is mandated by the Securities and Exchange Commission (SEC) or other competent body. In determining its functional currency, the tax-filer should consider the following factors: a. The currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); b. The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services; c. The currency that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled); d. The currency in which funds from financing activities are generated; and e. The currency in which receipts from operating activities are usually retained. In cases when the said indicators are mixed and the functional currency is not obvious, the reporting entity can use its judgment as to which is the dominant currency to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and circumstances. Once determined, the functional currency should not be changed unless there is a substantial change in those underlying transactions, events and circumstances. Functional currency shall not be limited to the U.S. Dollar (USD) but shall include the Japanese Yen, Euro Dollar and other major foreign currencies, the adoption thereof being subject to SEC notification, for corporations and to the procedural requirements, for individuals. A corporate tax-filer who choose to use as functional currency for financial reporting purposes a currency other than the Philippine peso must submit to the Revenue District Office (RDO) or Large Taxpayers District Office (LTDO) or Large Taxpayers Service (LTS), whichever BIR office has jurisdiction over the taxpayer, a copy of the duly received notification sent to the SEC (as provided in SEC Memorandum Circular 1 series of 2006) for the use of such functional currency within 30 days from the filing of the notification to the SEC, but may be subject to extension on meritorious grounds. The copy of the SEC notification duly stamped received by the BIR must also be attached to the Income Tax return (ITR) upon filing of said return. For an individual who choose to adopt functional currency in financial reporting, an application/notification under oath must be filed with the RDO/LTDO/LTS, whichever BIR office has jurisdiction over the taxpayer, within 30 days after the taxable year in which the use of functional currency takes effect. The application/notification shall contain justification that the individual taxpayer has complied with the guidelines stated in the Regulations. In the case of a corporation whose functional currency changes from one currency to another, the taxpayer must submit to the BIR a copy of such SEC duly received notification to change the functional currency (as provided in SEC Memorandum Circular 1 series of 2006) within 30 days from the filing of such notification with the SEC. In the case of an individual, a revised application/notification under oath shall be filed with the RDO/LTDO/LTS within 30 days after the taxable year in which the change of functional currency takes effect. As a rule, a taxpayer shall not be allowed to change its functional currency in the middle of the year or adopt one for a period less than one year. However, in certain exceptional cases like in the case of business combinations such as mergers or consolidations, change in functional currency to cover a period of less than one full year may be permitted. The ITRs of taxpayers who have adopted functional currency (other than Philippine peso) in their financial statements and books of accounts shall still be prepared in Philippine pesos. Thus, all entries in the ITR shall be in Philippine pesos. For purposes of translating the functional currency income and expenses to Philippine pesos, the translation shall be done on a monthly basis using the average exchange rate during the month (under the Philippine Dealing System or PDS). The total translated amounts per month shall be added to arrive at the income and expenses in Philippine pesos for the quarter/year, which shall be the basis in computing the taxpayer’s Income Tax liability. The total figures in the ITR for the year should be reconciled with the total of the equivalent peso figures as converted from the functional currency figures in the subsidiary ledgers maintained to serve as the source of the figures reflected in tax returns other than Income Tax. The reconciliation of the figures shall be done at the end of the year and the reconciling items shall be reflected in the annual or final adjustment ITR. Thus, after such reconciliation, the figures in the annual ITR should tally with the total annual figures in the other tax-type tax returns such as the tax returns for ValueAdded Tax (VAT), Percentage Tax, Withholding Tax, Documentary Stamp Tax, etc. Tax credits applied against the Income Tax due (in Philippine pesos), if any, shall be equal to the actual amounts of such credits in Philippine pesos, as shown in the supporting documents (e.g. withholding tax certificates issued by the other party withholding agents, proof of advance payment of the tax and prior year’s ITR). All tax returns other than the ITR shall likewise be filed in Philippine peso currency using historical peso amounts or actual conversion/prevailing PDS rate on transaction day, whichever is applicable. Only the audited financial statements in the qualified functional currency shall be submitted to the BIR. For purposes of the annual ITR, the taxpayer, however, shall submit, together with the duly audited financial statements in qualified functional currency, a supplementary schedule showing the quarterly amounts of functional currency income and expenses with translation to Philippine pesos. Taxpayers who are qualified shall maintain their books in functional currency (if other than the Philippine peso). However, said taxpayers shall also maintain subsidiary ledgers for transactions subject to the other taxes (i.e. aside from Income Tax), which will be recorded both in functional currency and in Philippine peso using the historical peso amounts or actual conversion/prevailing rate on transaction day, whichever is applicable. Said functional currency books/records must be registered with the BIR in accordance with existing rules on registration of books and may be subject to BIR audit in connection with the audit of tax liabilities. A qualified entity who will present a functional currency (other than the Philippine Peso) financial statements should: a. Restate its prior year financial statements as if the company had been booking its transactions in prior years using such functional currency; b. Treat the transactions in the Philippine peso and other currencies as foreign currency transactions, for reporting purposes. For purposes of functional currency financial statements, Philippine peso and currencies other than the functional currency are considered foreign currencies and transactions therein shall be accounted for under prevailing generally accepted accounting principles. Transactions in foreign currencies shall be converted and recorded in the books of accounts in equivalent functional currency amount using the conversion rate on the day of the transaction. The conversion rate used should always be mentioned in the books of accounts. In the transition to functional currency reporting or in the translation of Philippine peso financial statements at the start of the initial year when functional currency is adopted, the qualified entity shall translate its Philippine peso balances to its functional currency financial statements as follows: a. Functional currency amounts (for both balance sheet and income statement items, including capital accounts) should be specifically identified and carried over to the functional currency financial statements in their original functional currency amounts (i.e. not translated amounts); b. For foreign currency monetary assets and liabilities, translate using the closing spot exchange rate as of the balance sheet date; c. Non-monetary foreign currency items that are measured in terms of historical cost in a foreign currency shall be converted/translated using the exchange rate at the date of transaction; d. Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date such fair value was determined; e. Non-monetary items for which the carrying amount is determined by comparing two or more amounts, such as inventories which are carried at lower of cost or net realizable value, or the carrying amount of an asset for which there is an indication of impairment and is therefore carried at net recoverable amount, the carrying amount is determined by comparing: i. The cost or carrying amount, as appropriate, translated at the exchange rate at the date that amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of historical cost); and ii. The net realizable value or recoverable amount, as appropriate, translated at the exchange rate at the date that value was determined (i.e. the closing rate when the value was determined at the balance sheet date). f. For foreign currency income and expense items recognized in the reporting period, for each period presented (i.e. including comparatives), translation should be based on exchange rates at the dates of the transactions. For practical reasons, a rate that approximates the actual exchange rates at the dates of the transactions, for example, an average rate for the period, may be used to translate foreign currency income and expense items; g. For capital accounts, the exchange rates on the dates the Philippine peso contributions were made shall be used to translate into the functional currency financial statements. In cases where capital is allowed to be contributed in currency other than Philippine peso, such original amount shall be carried over to the functional currency financial statements if the contributions were made in the entity’s functional currency. If the contributions were made in currency other than the entity’s functional currency, then the exchange rates on the dates contributions were made shall be used to translate such amount into functional currency financial statements; h. Any exchange differences resulting from the first-time presentation of functional currency financial statements shall be charged or credited to retained earnings; i. Comparative financial statements are required to be filed; and j. All references to exchange rates refer to the PDS rates. An investor which invests in functional currency (other than Philippine peso) securities can compute its gain or loss from the sale of said investment using the functional currency. It shall also apply to non-resident stockholders of an investee company where such investee company in the Philippines uses a functional currency other than the Philippine peso for its financial statements. However, if an investor makes an investment in Philippine peso, then it shall compute the gain or loss from sale of said investment using the Philippine peso cost and Philippine peso selling price. The Net Operating Loss Carry-over (NOLCO) and excess Minimum Corporate Income Tax (MCIT) can still be carried forward in the Income Tax computation of the taxpayer that has switched to a functional currency other than the Philippine peso, subject to the 3-year life limitation and other rules governing NOLCO and MCIT. However, in all cases, the NOLCO and MCIT that shall be applied in subsequent year/s shall be determined using the historical peso amounts shown in the ITR for the previous year(s) where they originate or emanate. Taxpayers filing tax returns in the Philippine peso may pay the tax in functional currency computed using the functional currency buying rate of the collecting bank vis-àvis the Philippine peso at the time of payment. The collecting bank shall, however, report to the BIR said collection in peso as converted/translated. Despite the permission to pay in functional currency, all figures in the tax returns shall always be in peso. Taxpayers adopting functional currency financial statements (other than Philippine peso) for the taxable year ending December 31, 2005 shall be covered by these Regulations with respect to their annual Income Tax return for 2005. Said taxpayers shall attach to their tax return a copy of the SEC notification/approval, in the case of corporations, or the notification to BIR under oath, in the case of individuals, of their qualification to use functional currency (other than Philippine peso). The same rules shall apply to taxpayers that were previously qualified to use functional currency financial statements (other than Philippine peso) under the previous SEC rules (SEC Memorandum Circular 14 series of 2003).