The Inland Revenue Authority of Singapore (“IRAS”) has updated its circular “Income Tax Treatment of Foreign Exchange Gains or Losses for Businesses (Fourth Edition) (PDF)” on 31 March 2021 (“the March 2021 update"). This circular, which consolidates two (2) earlier circulars on the tax treatment of foreign exchange differences, was first issued in 2012.
The March 2021 update has added a definition of translation differences and a new annex on frequently asked questions (“FAQs”) about the designated bank account (“DBA”) for designated revenue purposes and the application of the de-minimis limit. The purpose of this note is to review how things now stand as far as DBAs are concerned.
Currently, any foreign exchange differences arising from the revaluation of the year-end balance of a DBA are taxable or deductible depending on whether the revaluation gives rise to a gain or loss. The DBA cannot have been used for any capital transactions e.g., the purchase or sale of fixed assets. It can be only used to receive or pay out revenue items.
The IRAS had recently relaxed the rules on the use of a DBA in an update issued on 17 August 2020 (“the August 2020 update). In the August 2020 update, if the number and value of the capital transactions within a bank account fell within the de-minimis limits below, the bank account would still be regarded as a DBA:-
The relaxation of the rules for the purpose of determining if a bank account is a DBA is a welcomed change as it is inevitable that capital transactions may at times, be needed to be put through such a bank account. However, given the need to track capital transactions and their value, the current relaxation may not be of any practical use to companies who have voluminous transactions passing through their bank accounts each year.
A bank account will no longer be considered a DBA once it breaches the de-minimis limit. This rule appears to be somewhat harsh. The breach may sometimes be due to an isolated large and non-recurring capital transaction. We are of the view that the DBA should not be “disqualified” merely because the de-minimis limit is breached by an isolated and atypical transaction.
Having said that, the tax treatment of exchange difference is a “double edged sword”. This is because exchange differences fluctuate from being a gain to a loss from time to time. As such, a company may not be worse off even if the bank account is not considered a DBA. By the same token, not allowing multiple bank accounts to qualify as DBA may sometimes work to the advantage of companies, especially those who have exchange gain on the bank accounts and multiple small value capital transactions (in excess of 12 per year) passing through their various bank accounts.
