Insights on the Income Tax Treatment of Foreign Exchange Gains or Losses for Businesses (Fourth Edition)

Eng Min Lor
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Eng Min and Emily explain the new e-Tax guide on the treatment of foreign exchange differences and share their views on how the government can further refine these rules.

About the e-Tax guide

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:-

  1. Total number of capital transactions: not more than 12 transactions a year; and
  2. Total value of capital transactions: not more than S$500,000 a year.


Key highlights of the FAQs

  • The election to adopt the de-minimis limit on a DBA can be applied when needed and not necessarily in Year of Assessment (“YA”) 2020, the year of the introduction of the de-minimis limit.
  • There is no need to make the election annually.
  • If the de-minimis limit is not met in any YA on or after YA 2020, the bank account will cease to qualify as a DBA going forward, even if the de-minimis limit is met in subsequent years.
  • Any exchange differences directly relating to capital transactions, even if their inclusion will not breach the de-minimis limit for the DBA, would still constitute capital exchange differences on their own.
  • A company may use the spot rate or the MAS average month end rate to convert the value of the capital transactions to S$ for the purpose of the de-minimis limit. Whichever rate that the company has adopted, it has to be used consistently and any switch in exchange rate used has to be explained.
  • Payment of income taxes are considered capital transactions and thus, have to be included in ascertaining the de-minimis limit.
  • Payment of GST and withholding taxes may be considered as part of revenue transactions.
  • The de-minimis limit has to be applied on each bank account. No consolidation of bank accounts is allowed even if the combined value of the capital transactions for all bank accounts are within the de-minimis limit.
  • Subject to meeting the conditions for the claiming deductions for pre-commencement expenses, the exchange difference on a DBA will qualify as a deductible pre-commencement expense as long as it is used solely for the purpose of paying revenue expenses or meets the de-minimis limit.


Our view

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.