Forex taxes losses
In summary, assets and liabilities are required to be translated and booked at the FX rate, at the end of the accounting period of each transaction. Income and expenses are required to be translated at the FX rate existing on the dates of each of these events. And lastly, FX rate differences are recognised under Other Comprehensive Income and subsequently reclassified to the Profit and Loss Account on the disposal or completion of the FX related transaction.
In an article by Jenny Bourne Wahl, published in the National Tax Journal, this writer while considering the United States of America Tax Reform Act , was of the opinion that the timing of the recognition of FX gains and losses directly influence the effective tax rate that will apply to foreign assets and liabilities. This writer concluded that legislation which allows FX gains or losses to be taxed on the realisation of the gain or loss, as opposed to when the loss or gain accrues, or comes into existence, is a much stronger tax incentive to promoting transactions in the FX market.
Recipients are therefore advised to seek professional legal counselling to their specific situations when they do arise.
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Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed. Box Falomo Ikoyi Lagos Nigeria. Related News. FG grants 27 new industries eligibility for pioneer tax incentive. Taxation of FX Profits Elementarily, it is the profits of a company, from all its trade or business, and not its revenue or turnover, that is taxed on a preceding year basis. FX Taxation The taxation of profits accruing from foreign exchange denominated transactions is usually not contentious as can be deciphered from the above.
Conclusion In an article by Jenny Bourne Wahl, published in the National Tax Journal, this writer while considering the United States of America Tax Reform Act , was of the opinion that the timing of the recognition of FX gains and losses directly influence the effective tax rate that will apply to foreign assets and liabilities. FG grants 27 new industries eligibility for pioneer tax incentive 5. US Shale Production to Climb to 6. Francis Owosina. Latest News. Nigeria in 1min: Economic, Business and Financial Headlines - March 31, You would be the first to know the latest happenings around the Financial Market on Markets.
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The basis of the assessment was that the foreign exchange losses had not been realised and, furthermore, were capital in nature and therefore not tax deductible. The assessment was subsequently confirmed on 16 September KRA, on the other hand, argued that the manner in which the debt was settled did not result in the realisation of the foreign exchange losses and that the conversion of debt to equity was a transaction that is "capital" in nature and therefore not tax deductible under section 16 of the ITA which sets out deductions not allowed for tax purposes.
KRA also argued that it was not one of the capital transactions provided as being deductible under section 15 of the ITA which also provides for tax allowable deductions. The Tribunal held that foreign exchange losses were realised upon the permanent cessation of the obligation to pay the debt.
This was tantamount to "payment" of the debt.
Futures and Cash Forex
It followed that both the conversion of debt to equity, as well as offsetting amounts against receivables, resulted in the realisation of the foreign exchange losses. The Tribunal, however, went on to find that the conversion of debt to equity was capital in nature and therefore the foreign exchange losses in this respect were not tax deductible. Being aggrieved by this finding, the appellant appealed to the High Court on the basis that section 4A of the ITA does not in any way restrict the nature of realisation.
The High Court has allowed the appeal, determining that foreign exchange losses realised through the conversion of debt to equity are deductible under section 4A of the ITA. There is no express or implicit restriction on the manner in which realisation occurs. Taxpayers may rely on section 4A of the ITA to make tax deductions of realised foreign exchange losses as long as they do not fall under the existing provisos.
The court has pointed out that section 4A of the ITA as currently worded does not limit the nature of realised foreign exchange losses to be taken into account and gone as far as recommending legislative changes to remedy this. This is yet another decision where the courts have considered and applied the principle of strict interpretation of tax laws. The court has done this to reach a rational outcome that achieves consistent results, irrespective of the perceived advantage to taxpayers or to the KRA. KRA has a right to appeal the decision to the Court of Appeal but, unless and until this decision is overturned, it will apply to both taxpayers and KRA.
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