Exchange fluctuations: Foreign firms’ subsidiaries not allowed to cut income

LAHORE: Tax authorities are not allowing subsidiaries of foreign companies to deduct the loss on income from business realized on account of the exchange fluctuation while terming it as a notional loss and not the actual one, said sources.

They said the tax authorities are not ready to consider any gain or loss realized by subsidiaries on the date of payment to be made to their counterparts when their accounting systems deduct the exchange fluctuation as loss on income from business.

The department, on the other hand, is of the view that the exchange loss claimed by the taxpayers is a notional loss and not the actual one, and the Income Tax Ordinance stipulates that any loss or claim, which is not actual, is not allowable until and unless the same is actually incurred. Therefore, the assessing authorities are fully justified in adding the same to their income from business.

However, the taxpayers have stressed that the procedure adopted by them is as per the accounting system followed by them, therefore, the department errs in considering the loss to be a notional or fictional loss, which is incurred as per the books of accounts and the accounting system regularly maintained by them.

It may be noted that the law allows deduction for any expenditure incurred during a tax year while computing the income chargeable under the head of income from business for that particular tax year.

So far as the method of accounting is concerned, the law permits to compute income chargeable to tax on accrual basis in accordance with the method of accounting regularly employed by a company. In case of any change in the accounting method, the company is bound to apply in writing for the approval from the competent authority.

The law also stipulates that a person accounting for income chargeable to tax under the head “income from business” on an accrual basis shall derive income when it is due to the person and shall incur the expenditure when it is payable by the person.

Sources from among the subsidiaries of foreign companies have pointed out that they ascertain their liabilities while determining them on the basis of the valuation of the rupee on the date when accounts are closed for a tax year.

Accordingly, the loss so declared by them is an actual loss and not fictional and it is a settled principal of taxation that any amount of expense incurred wholly or exclusively for the purposes of business is an allowable expenditure.

It may be noted that all such expeditions on the part of tax authorities could not sustain before the appellate forums but the assessing authorities keep creating such demands to meet revenue targets set by the Board.

Copyright Business Recorder, 2023