October 30, 1990

BIR RULING NO. 206-90

29 (d) 144-85 206-90

Gentlemen :
This refers to your letter dated June 25, 1990 requesting in behalf of your
client, Porcelana Mariwasa, Inc. (PMI), a ruling confirming your opinion that the
foreign exchange loss incurred by PMI is a deductible loss in 1990.
aisadc

It is represented that PMI is a corporation established and organized under

Philippine laws; that it has existing US dollar loans from Noritake Company,
Limited (Noritake) and Toyota Tsusho Corporation (Toyota) in the aggregate
amounts of US $7,636,679.17 and US $3,054,671.27, respectively, that in 1989,
the parties agreed to convert the said dollar denominated loans into pesos at the
exchange rate prevailing on June 30, 1989; that in December 1989, both
agreements were approved by the Central Bank subject to the submission of a copy
each of the signed agreements incorporating the conversion; that thereafter, drafts
of the amended agreements were submitted to the Central Bank for pre-approval;
that on January 29, 1990, the Central Bank advised your office on their findings
and comments on the said drafts which were considered and incorporated in the
final amended agreements; that in June 1990, the parties submitted to the Central
Bank the signed agreements; that you are of the opinion that in the case of your
client, the resultant loss on conversion of US dollar denominated loans to peso is
more than a shrinkage in value of money; that the approval by the Central Bank
and the signing by the parties of the agreements covering the said conversion
established the loss, after which, the loss became final and irrevocable, so that
recoupment is reasonably impossible; and that having been fixed and determinable,
the loss is no longer susceptible to change, hence, it could fairly be stated that such
has been sustained in a closed and completed transaction.
In reply, please be informed that the annual increase in value of an asset is
not taxable income because such increase has not yet been realized. The increase
in value i.e., the gain, could only be taxed when a disposition of the property
occurred which was of such a nature as to constitute a realization of such gain, that
is, a severance of the gain from the original capital invested in the property. The
same conclusion obtains as to losses. The annual decline in the value of property is
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Philippine Taxation Encyclopedia First Release 2014

not normally allowable as a deduction. Hence, to be allowable the loss must be

realized. (Surre Warren, Federal Income Taxation (1950, pp. 422-4)
When foreign currency acquired in connection with a transaction in the
regular course of business is disposed ordinary gain or loss results from the
fluctuations. (Pr Hall Federal Taxes, Vol. 1, par. 6261) The loss is deductible only
for the year it is actually sustained. It is sustained during the year in which the loss
occurs as evidenced by the completed transaction and as fixed by identifiable
occurring in that year. (par, 6570, 34 Am. Jur. 2d, 1976 closed transaction is a
taxable event which has been consummated (p. 231 Black Law's Dictionary, Fifth
Editions) No taxation event has as yet been consummated prior to the remittance
of the scheduled amortization. Accordingly, your request for confirmation of your
aforesaid opinion is hereby denied considering that foreign exchange losses
sustained as a result of conversion or devaluation of the peso vis-a-vis the foreign
currency or US dollar and vice versa but which remittance of scheduled
amortization consisting of principal and interests payment on a foreign loan has
not actually been made are not deductible from gross income for income tax
purposes.
cdtai

Very truly yours,

(SGD.) JOSE U. ONG
Commissioner

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Philippine Taxation Encyclopedia First Release 2014