RR No. 6-2006: 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

Key points

1. How the currency is chosen. A tax-filer cannot pick a functional currency arbitrarily. It must weigh the currency that mainly influences sales prices, the currency of the country whose competitive forces and regulations set prices, the currency that mainly influences labor, material and other costs, the currency in which financing funds are generated, and the currency in which operating receipts are usually retained.
2. Mixed indicators and changes. If the indicators are mixed, the entity uses its judgment on the dominant currency. Once set, the currency is not changed unless the underlying transactions, events and circumstances change substantially.
3. Notification to the BIR. A corporation submits a copy of its SEC-received notification to the RDO, LTDO or LTS within 30 days from filing it with the SEC, and attaches it to the Income Tax return. An individual files a notification under oath within 30 days after the taxable year in which the use takes effect. A change of currency follows the same 30-day periods.
4. No mid-year changes. As a rule, a taxpayer cannot change its functional currency in the middle of the year or adopt one for less than one year. Business combinations such as mergers or consolidations are an exception.
5. Returns stay in pesos. The ITR and all other tax returns are prepared in Philippine pesos. Income and expenses are translated monthly at the average PDS exchange rate, and the year-end ITR figures are reconciled with the peso equivalents in the subsidiary ledgers.
6. Books, statements and other rules. Only audited financial statements in the qualified functional currency are submitted, with a supplementary schedule of quarterly figures translated to pesos. NOLCO and excess MCIT may still be carried forward within the 3-year limit, using historical peso amounts. Tax may be paid in functional currency, but the return figures remain in pesos.

Who is affected

• Corporate tax-filers using a functional currency other than the peso
• Individuals using a functional currency other than the peso

Deadlines and effectivity

• Corporations: notify within 30 days from filing with the SEC
• Individuals: notify within 30 days after the taxable year of adoption
• Covers taxpayers adopting it for the year ending December 31, 2005, starting with the 2005 annual ITR