Tax Alert – Foreign Exchange Differences – De-minimis Limit

Introduction of a de-minimis limit for the treatment of foreign exchange differences

With the recent update of the e-Tax Guide Income Tax Treatment of Foreign Exchange Gains or Losses for Businesses (Third Edition) on 17 August 2020, Inland Revenue Authority of Singapore (“IRAS”) introduced a new de-minimis limit for Designated Bank Account (“DBA”). This will take effect from Year of Assessment (“YA”) 2020 prospectively.

Generally, exchange gains / losses are regarded as revenue in nature where such gains / losses relate to trade transactions of the Company such as accounts payable or receivables. Exchange gains / losses relating to revaluation of cash, bank balances (unless it is a DBA for receiving and making payments on revenue account), fixed deposits / loan principal amounts, non-trade balances and the purchase of fixed assets are regarded as capital in nature and will not be taxable or deductible, whether realised or not.

If the exchange differences arose from the foreign currency bank accounts that were set up solely for trade settlements (i.e. a DBA), IRAS is prepared to regard such differences arising out of the DBA as revenue in nature. Any foreign exchange gain / loss arising from the translation of year-end balances of the DBA into the Company’s functional currency will be taxable or tax deductible as appropriate. However if the DBA is tainted with other non-revenue related transactions, the foreign exchange differences arising from such bank accounts’ balances would be capital in nature, unless it fulfils the de-minimis limit.

De-minimis limit

With effect from YA 2020, IRAS is prepared to allow businesses to treat foreign exchange differences arising from the revaluation of DBA balances as revenue in nature, even if the said DBA is not maintained solely for revenue purposes in prior YAs, provided the number and value of capital transactions within the DBA does not, on a prospective basis, exceed the following de-minimis limit:

  • Total number of capital transactions is not more than 12 in a year; and
  • Total value of capital transactions does not exceed S$500,000 in a year.

For the purposes of computing the total number and value of capital transactions, the inflow and outflow of funds are to be added together.

You should be aware that IRAS may request the Company to provide documentary evidence to substantiate the DBA claim. The key documentary evidence would be the bank statements of the DBA showing the movements of funds. Such documentary evidence should be maintained and readily available for inspection (if requested) by IRAS.

Businesses that do not wish to track the nature of the transactions within their foreign currency bank accounts may continue to treat the exchange differences arising from the revaluation of their foreign currency bank accounts’ balances as capital in nature.

DBA treatment will cease to apply from the YA when:

  • The DBA is not maintained solely for revenue purposes and the total number and value of capital transactions exceed the de-minimis limit; or
  • The DBA is not maintained solely for revenue purposes and the business chooses not to adopt the de-minimis limit.

In such events, the exchange differences arising from the bank accounts’ balances would be capital in nature and this treatment applies even if the said bank account is used solely for revenue purposes or meets the de-minimis limit in subsequent years.

Summary of treatment of foreign exchange differences from the revaluation of foreign currency bank accounts’ balances

The table below outlines the different scenarios.

Nature of bank account Tax treatment of foreign exchange differences arising from the revaluation of foreign currency bank accounts’ balances

 

Prior to YA 2020 With effect from YA 2020

Maintained solely for designated revenue purposes

Revenue
(i.e. taxable / deductible)

Revenue
(i.e. taxable / deductible)

Maintained not solely for designated revenue purposes

Capital
(i.e. not taxable / not deductible)

Revenue
(i.e. taxable / deductible) if the de-minimis limit is met

Otherwise, capital (i.e. not taxable / not deductible)

Maintained for mixed usage / does not wish to adopt the de-minimis limit treatment

Capital
(i.e. not taxable / not deductible)

Capital
(i.e. not taxable / not deductible)

This brief has been prepared for general information only. Please feel free to reach out to our corporate tax team for further clarifications and advice if your entity wishes to explore the claim under the de-minimis limit in YA 2020.

 

For further information or assistance, please contact:

Koh Puay Hoon, Partner & Head of Tax
T +65 6594 7820
[email protected]

Cindy Lim, Tax Partner
T +65 6594 7852
[email protected]

William Chua, Tax Partner
T +65 6594 7860
[email protected]

Joanna Yap, Tax Partner
T +65 6594 7859
[email protected]