FIRS CIRCULAR ON TAX TREATMENT OF FOREIGN EXCHANGE TRANSACTIONS
Introduction
The Federal Inland Revenue Service (FIRS’) gives guidance on the tax treatment of foreign exchange transactions. In its circular dated 14 June 2024, it noted that the treatment prescr0.1ibed by the International Financial Reporting Standard, although sufficient for accounting purpose is not the same treatment for tax purpose and as such requires some adjustments when computing tax payable.
KEY HIGHLIGHTS
Foreign Exchange difference arises where different exchange rate is used at different times for transactions that involves foreign currency, that is, from the time of initiating the transaction to the point of settlement.
Revenue Differences: These are foreign exchange differences associated with income generating transactions. Revenue exchange differences affect assessable profits or income for income tax purposes.
Capital Differences: These are foreign exchange differences, gains or losses associated with non-revenue generating transactions, such as purchase or disposal of assets, borrowing, loan etc. Capital exchange affect capital gains for capital gains tax purposes.
The Circular further note that the nature of tax-payer’s ordinary business is a key factor in the classification of foreign exchange transactions as what is classified as revenue for a particular tax payer could be a capital exchange difference for another.
The foreign exchange difference is further classified as realized and unrealized exchange differences.
Unrealized Exchange Differences: Unrealized exchange differences do not impact tax liabilities, this is because it arise from revaluation of foreign transactions for mere accounting purpose and does not result in actual receipt or payment of the revalued sum, hence no tax effect and should be ignored in ascertainment of assessable profit, however where is has been charged as expenses in the Statement of profit or loss and other comprehensive income it is not tax deductible and if treated as income , it is not taxable income and should be adjusted as such.
Realized Exchange Differences: Realized exchange rate on the other hand has a tax impact because it will result in actual payment or receipt of the revalued sum. Realized exchange difference would either increase or decrease tax payable. Realized exchange gain will increase tax due while exchange loss will decrease tax due in ascertainment of assessable profits.
Realized Capital Exchange Loss: Realized capital exchange loss on non-current assets is not tax deductible but can be added to the cost of asset, that is, treated as qualifying capital expenditure for capital allowance computation.
Realized Capital Exchange gain: This will be subject the Capital Gains Tax at the prevailing CGT rate, that is, treated as disposal.
HEDGING TRANSACTIONS
Foreign exchange differences arising from hedging transactions are not taxable income or deductible expense until the hedged item is realized, however upon realization the treatment will either be as revenue or capital depending on the underlying item.
OTHER HIGHLIGHTS
The same treatment as CIT applies to TET. Unrealized exchange differences recognized for accounting purposes shall not be adjusted for computing NASENI, NITDA or minimum tax.
Exchange differences from tax exempt items is not taxable or deductible, however such income or gain should be disclosed and segregated by type in computing tax payable.
Companies must keep detailed records of foreign currency transactions and provide reconciliation of exchange differences recognized in the financial statements.
Commissions, fees and other charges associated with foreign exchange transactions shall be subject to the wholly, reasonably, exclusively and necessarily (WREN) test to determine tax deductible.
Peer-to-peer exchange rates between related parties shall be subject to transfer pricing rules.
Offsetting of exchange gains or losses shall be based on the line of business and tax regimes, that is gains for taxable items shall not be offset from loss from an item that is tax exempt.
