Foreign Exchange Losses as Expenses

Recently, there has been increasing news in the media that employees of the State Fiscal Service of Ukraine, during tax audits, do not recognize negative exchange rate differences as expenses, which are related to the recalculation of accounts payable of such a taxpayer to/from any non-resident (for a received loan/borrowing, for goods (works, services), etc.). Moreover, one of our clients also faced such a situation, where tax authorities tried to deprive them of the right to reflect expenses amounting to UAH 35 million in tax accounting. Tax authorities justify this position with the norms of paragraph 9 of P(S)BO 21 "Impact of Changes in Foreign Exchange Rates" (hereinafter – P(S)BO 21).

So, let's try to understand how legitimate this position of the controlling body is and whether the taxpayer should agree with it.

As a general rule, in the vast majority of cases, exchange rate differences from the recalculation of "monetary" items of foreign currency payables are reflected as expenses of the current period (see paragraph 8 of P(S)BO 21 and the Instruction on the Application of the Chart of Accounts for Assets, Capital, Liabilities, and Business Operations of Enterprises and Organizations, approved by the order of the Ministry of Finance of Ukraine dated November 30, 1999,  N 291). However, current Ukrainian legislation also provides for some exceptions to this "general rule", namely:

• exchange rate differences arising from the recalculation of founders' liabilities during the formation of share capital are reflected as additional capital (see the last paragraph of paragraph 8 of P(S)BO 21),
• exchange rate differences arising in respect of accounts receivable or liabilities for settlements with a business unit outside Ukraine, the repayment of which is not planned and not probable in the near future, are reflected as other additional capital and recognized in other comprehensive income (see paragraph 9 of P(S)BO 21).

During their audits, tax authorities, relying specifically on paragraph 9 of P(S)BO 21, deny taxpayers the right to current period expenses for exchange rate differences on payables to any non-resident (both a non-resident founder of the taxpayer and a regular non-resident supplier or lender), if such payables have not actually been repaid by the taxpayer for a long period of time (due to the taxpayer's difficult financial situation, in accordance with the terms of relevant agreements with non-residents, or for other reasons).

In our opinion, such a position of the controlling bodies is unfounded, as current Ukrainian legislation does not contain a requirement to reflect exchange rate differences from the recalculation of payables to any non-resident as additional capital – paragraph 9 of P(S)BO 21 refers not to "any non-resident," but specifically to a "business unit outside Ukraine." The definition of such a business unit is provided in paragraph 4 of P(S)BO 21: "a business unit outside Ukraine – a subsidiary, associate, joint venture, branch, representative office or other unit of an enterprise, which are located or conduct business activities outside Ukraine".

Thus, a taxpayer is obliged to comply with the requirements of paragraph 9 of P(S)BO 21 exclusively if they are dealing with foreign currency payables to their subsidiary (associate, joint venture) or branch (representative office, other unit) of such taxpayer. The definitions of such specific enterprises and separate units are provided, in particular, in the Order of the State Committee of Ukraine on Technical Regulation and Consumer Policy dated May 28, 2004, N 97, the Commercial Code of Ukraine, and some other regulatory legal documents.

Exchange rate differences from the recalculation of foreign currency payables to/from any other non-resident (including a founder/shareholder of the taxpayer) are reflected by the taxpayer in the usual manner – as expenses of the reporting period.

Director of Audit Services
Certified Auditor
Safinsky Viktor