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Currency Exchange for the Taxpayers with Foreign-Currency Transactions and Foreign-Currency Debts

Currency Exchange for the Taxpayers with Foreign-Currency Transactions and Foreign-Currency Debts


No.: 200/93/524

Date: September 13, 2014


With regard to the ambiguities and questions raised about the foreign exchange in relation to the taxpayers with foreign-currency assets or transactions and foreign-currency liabilities and for the purpose of uniformity in tax audit procedures, it is hereby provided that the following points shall be taken into consideration:

Generalities:

Generally speaking, the currency exchange is made in two time periods:

1. The date of the transaction: the price of foreign-currency transactions including monetary/non-monetary items is calculated based on the foreign-exchange rate on the date of exchange and is recorded in the accounts.

2. The balance sheet date: foreign-currency items shall only be converted at the exchange rate on the balance sheet date.

If the exchange rate of the monetary items varies within the period from the date of the transaction to the date of transaction settlement or the end of the financial period in question, then the difference between the exchange rate on the settlement date or the balance sheet date with the previous rate recorded in the accounts, as the case may be, shall be taken as profit (loss) deriving from the exchange.

In essence, the monetary items are items to be received or paid out of cash amounts at a fixed or determinable rate. The essential characteristic of monetary items is reception entitlement (or the payment obligation) of fixed or determinable cash amounts.

Examples of monetary items reflected in an INTA balance sheet sample or listed in the basic financial statements (balance sheet) in accordance with standard No. (1) of Iranian Accounting have already been provided to taxpayers together with the tax return forms of legal persons or real persons referred to in Paragraph (a) of Article 95, Direct Taxes Act; such examples are as follows:

  • Balance amounts in cash or in bank accounts;
  • Bank accounts and the notes receivable and payable;
  • Other accounts and notes receivable and payable;
  • Receivable/payable loans;
  • Dividends payable (only for legal persons);
  • Advance payments received (merely the pre-payments received for the sale of goods where the price is determined at the time of delivery); and
  • The current accounts of partners and shareholders.

It is worth mentioning that the above list includes only some examples and other monetary items under any other titles may also exist in the taxpayers’ financial statements.

In contrast, non-monetary items are those whose distinctive characteristic is the lack of reception entitlement (or the payment obligation) of fixed or determinable cash amounts. Pre-payment for the purchase of goods and services at a fixed price (e.g. advance payment for rent), goodwill, intangible assets, the inventories of materials and goods, tangible fixed assets and liabilities settled through delivering non-monetary assets are examples of non-monetary items.

According to Paragraph (29) of the Accounting Standard (16), the differences in the exchange rates of foreign-currency liabilities regarding eligible assets shall be added to the final price of the asset in question, providing that the criteria for including financial costs in the final price of assets have been met in accordance with Accounting Standard (13) entitled "financing costs". In addition, the exchange differences in respect of foreign currency liabilities related to the acquisition and development of assets, resulting from a severe decline in the value of the Iranian Rials, shall be added to the final price of the asset in question up to the recoverable amount, providing that all the following conditions are met:

  1. the decline in the Iranian Rials value, compared to the date of commencement of foreign currency depreciation, is at least 20 percent; and
  2. there is no protection shield against the liability in question.

Moreover, in case of the reoccurrence of a severe decline in the foreign currency value (at least for 20 percent), the benefits accrued from the liabilities exchange, up to the amounts of exchange losses previously added to the final price of the asset, shall be deducted from the final price of the asset, proportionate to the remaining useful life of the asset.


Adopting a Uniform Method:

Adopting a uniform method is intended to maintain the quality of the financial information and its comparability through consistency in measurement and reflection of the financial effects of transactions and financial events. In essence, taking any measures to (non)recognition of the profits (losses) of currency exchange shall generally reveal (non)observance of accounting standards and shall not necessarily mean the rejection of a uniform methodology.

Needless to say, if during previous years, the taxpayer had not  identified the profits (losses) of the foreign exchange but in the year under examination and for the first time, took into account the losses resulting from the foreign exchange, then the costs in question should be deductible by virtue of the provisions of Paragraph (24) under Article (148) of the Direct Taxes Act.

Moreover, if the foreign exchange profit is recorded less than the actual amount, compared to the currency type or the rates announced by competent authorities, then, on the strength of Paragraph (2) and Note (2) under Article (97) of the Direct Taxes Act, it may be added to the taxable income and it is not necessary to refer the tax case to the Board referred to in Paragraph (3) of the aforementioned Article. In addition, the non-recognition of the exchange losses is not included in the issues referable to the said Board.


Fiscal Year – Solar Hijra

Currency Type

[Official] Reference

Rate Currency

[Managed Floating] Exchange Rate Currency

By agreement with the exchange offices certified by the Central Bank of the Islamic Republic of Iran (i.e. Free Market Rate)

1390

(March 21,  2011 -  March 20, 2012)




1391

(March 20, 2012 – March 20,  2013)


(From September 23, 2011 onwards)


1392

(March 21, 2013 - March 20, 2014)





In this instruction, the agreed exchange rate applied by authorized exchange offices (at free market rates) is briefly called as “agreed [free market] currency rate”. Furthermore, foreign currency type may refer to the [official] reference rate currency, [managed floating] exchange rate currency or agreed [free market] rate exchange.

Where there exist several rates (including the [official] reference rate, [managed floating] exchange rate and agreed [free market] rate), the above rate types shall be used to account for the currency exchange on the transaction date or the exchange of the residual of the monetary items, taking into consideration the fact that, on the strength of the existing regulations, taxpayers shall only be obliged to make settlement at the [official] reference rate or [the managed floating] exchange rate or rather, they may have no obligations in this regard and are entitled to make settlement at the agreed [free market] rate.


Notes to Be Taken into Account in Tax Examinations/Audits:

1. The profits derived from the foreign currency exchange, regardless of its source, shall be taxable (for example, the exemption for the export income shall not be a proof for the exemption of the profits derived from maintenance or use of foreign currency exchange resulting from exportation). It is obvious that foreign currency exchange losses accrued from the exports shall be deductible in accordance with the existing provisions.

2. With regard to exports:

(A) Where the taxpayer is required to sell the foreign currency derived from exports at the [official] reference rate to the Central Bank of I.R.I, then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the operation of export sales shall all be made at the [official] reference rates on the respective dates.

(B) If the taxpayer is required to sell the foreign currency derived from the exports at the Foreign Exchange Chamber, then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the operation of export sale shall all be made at the [managed floating] exchange rate announced by the Foreign Exchange Chamber on the respective dates.

(C) If the taxpayer is not required to sell the foreign currency derived from the exports at the Foreign Exchange Chamber or the I.R.I. Central Bank (at the [official] reference rate), then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the operation of export sale shall all be made at the agreed [free market] exchange rate on the respective dates.

(D) In accordance with Article (16) of the Customs Affairs Act, approved on November 13, 2011, where the values of the exported goods as recorded in the customs licenses are different from the amounts recorded in the books of accounts, then the exchange rate used for determining the price of exported goods and identifying the profits derived from exports, regardless of the currency type employed by the Customs Administration for determining the value of the exported goods in the Iranian Rials, shall be applied in accordance with the provisions of Paragraphs (a), (b) and (c) above, that is the [official] reference rate, the [managed floating] exchange rate or the agreed [free market] exchange rate.

3. With regard to imports:

(A) If the foreign currency needed by the taxpayer for imports is provided by the I.R.I. Central Bank at the [official] reference rate, then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the import operation shall all be made at the [official] reference rates on the respective dates.

(B) Where the foreign exchange needed by the taxpayer is provided by the Foreign Exchange Chamber, then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the import operation shall all be made at the [managed floating] exchange rate announced by the Foreign Exchange Chamber on the respective dates.

(c) Where the foreign exchange needed by the taxpayer is not provided by the Foreign Exchange Chamber or the I.R.I. Central Bank, then the primary registration of foreign exchange transactions, settlement of foreign claims and the exchange of the balance of residual foreign currency monetary items related to the import operation shall all be made at the agreed [free market] exchange rate on the respective dates.

(D) In accordance with Article (16) of the Customs Affairs Act, approved on November 13, 2011, where the values of the imported goods as recorded in the customs licenses are different from the amounts recorded in the books of accounts, then the exchange rate used for determining the price of imported goods and identifying the profits derived from imports, regardless of the currency type employed by the Customs Administration for determining the value of the imported goods in the Iranian Rials, shall be applied in accordance with the provisions of Paragraphs (a), (b) and (c) above, that is the [official] reference rate, the [managed floating] exchange rate or the agreed [free market] exchange rate.

4. With regard to claims/liabilities of the shareholders (partners) and foreign exchange loans:

Any of the foreign currency exchange rates including the [official] reference exchange rate, the [managed floating] exchange rate or the agreed [free market] exchange rate may be applicable for the purpose of the primary registration of foreign exchange transactions and the exchange of the balance of residual foreign currency monetary items related to the foreign exchange transactions on the date of the balance sheet (including such items as residual asset or foreign-exchange liability not settled in the period in question), taking into account if the taxpayer is legally required to settle at the [official] reference exchange rate / the [managed floating] exchange rate or if he is not required to do so and the settlement is to be made at the agreed [free market] rate. Furthermore, at the time of settlement of foreign-exchange claims/liabilities, in addition to the above considerations, the taxpayer shall provide adequate documents in order to prove which type of foreign currency exchange is applicable.

5. With regard to purchase and sale of the currencies:

(A) For the sale of foreign currency, an invoice shall be issued by the vendor in order to be submitted to currency exchange offices certified by the I.R.I. Central Bank (in case of issuance of currency exchange office invoices) and/or to any other competent authorities, in which the purchaser’s name and address or the documents related to the sale of foreign currency are inserted.

(B) For the purchase of foreign currency, all related documents such as purchase invoice shall be provided by the currency exchange offices, banks or any other competent authorities.

                                                                               

                                                                                     The President

Iranian National Tax Administration (INTA)

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A Summary of the Address Instruction on the Issuance of Invoices Pursuant to Article 19 of the VAT Act
Administrative By-Law of Article (107) of the Amended Direct Taxes Act
Administrative By-Law of Note (3) under Article (169) of Amended Direct Taxes Act approved on July 22, 2015
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Bylaw of Paragraph (14) under Article (12) of the VAT Act
Extension of the Rule of Note (2) under Article (119) of the Fifth Five-Year Development Plan of I.R.I to Those Entitled to the Tax Exemption Provided in Art. (13) of Law for the Management of Free Trade/Industrial Zones
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New Directive Regarding the Prevention from the Exit from the Country
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Resolutions Made by the Tax Supreme Council regarding Tax Exemption in Free Zones
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Some Provisions Related to Article (197) of the Direct Taxes Act
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The Exemption of the Profits Derived from Currency Exchange in the Economic Activities Carried Out in Trade/Industrial Free Zones
The Resolution No.: 30/4-5586 Date: June 12, 1995 (issued by the Plenary Board of the Supreme Tax Council on the Tax Exemption of Free Zones)
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