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5.2. Treatment of Foreign Profits / Losses

Foreign profits/losses are not taxable/deductible in Singapore due to the applicable territorial system unless they are received in Singapore and qualifications for tax exemption are not met. (Covered in Sec. 6.)

The Inland Revenue Authority of Singapore (IRAS) has published the e-Tax guide on the tax treatment of foreign exchange gains or losses for businesses, which has been updated in August 2020. The guide provides that:

  • When foreign exchange (FOREX) gains or losses are deemed revenue in nature, they will be taxable/deductible. If the FOREX gains or losses are capital in nature, or if they are due to the translation of financial statements prepared in the functional currency of a business to another currency for presentation purposes, they are not taxable/deductible. All exchange differences recognized in the profit and loss account are taxable or deductible, regardless of whether they are realized or unrealized. This tax treatment is applicable automatically to banking companies. This is also applicable to non-banking companies, unless an option (irrevocable) was made in the Year of Assessment (YA) 2004 by the business for its unrealized exchange differences to not to be treated as gain or loss for tax purposes. From 12 November 2018, an election may be made to revoke the option.
  • In order for exchange gains/losses of bank accounts kept in foreign currencies to be taxable/deductible, they must be designated solely for receiving trade receipts and paying revenue expenses and cannot be used for any other purpose. The designation must be reported in writing to the Singapore tax authorities, and documentary evidence must be provided.
  • Effective from the YA 2020, even if the said designated bank account is not maintained solely for revenue purpose, foreign exchange differences arising from the revaluation of such designated bank account may be allowed to be treated as revenue in nature, provided the number and value of capital transactions within the designated bank account do not exceed the de-minimis limit. The de-minimis limit is: a) Total number of capital transactions: not more than 12 transactions a year; and b) Total value of capital transactions: not more than SGD 500,000 a year. For the purpose of computing the total number and value of capital transactions, the inflow and outflow of funds are to be considered together. An application must be filed in the designated form to the Singapore tax authorities to adopt the de-minimus limit treatment, and documentary evidence/computation must be provided. A business whose designated bank account was not maintained solely for revenue purposes prior to YA 2020 will not be allowed to adopt the de-minimis limit for the prior years. However, the business may apply to adopt the de-minimis limit with effect from YA 2020 if it is able to meet the de-minimis limit prospectively.
  • The designated bank account treatment will cease to apply from the year of assessment when: The designated bank account is not maintained solely for revenue purposes and the total number or value of capital transactions exceed the de-minimis limit or the business chooses not to adopt the de-minimis limit. In such cases, the exchange differences arising from revaluing the bank account would not be regarded as revenue in nature and hence, not taxable or deductible from that YA onwards, even if the said bank account is used solely for revenue purposes or meets the de-minimis limit in subsequent years.
  • In the past, unrealized exchange gains/losses were not taxable/deductible until they were realized; however, an administrative concession was implemented in the year 2004 to allow accounting treatment for exchange gains/losses.
  • In general, unrealized exchange gains/losses are taxable/deductible if they are recognized in the profit and loss accounts in accordance with the generally accepted accounting principles (GAAP), provided that they are revenue in nature and the accounting treatment is consistent for both gains and losses. Exchange gains/losses arising from ordinary business transactions are taxable/deductible, while exchange gains/losses that are capital in nature or due to a translation are not.