BIR RULING NO.

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. 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 preapproval; 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 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.