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Bank Indonesia reported that the US dollar weakened against regional currencies, including the Indonesian rupiah, throughout July 2024. In fact, on August 15, 2024, the foreign exchange rate was pegged at Rp15,700 for every USD. The weakening of the US dollar exchange rate can be attributed to various factors, one of which is the increasingly strong signal of a cut in the benchmark interest rate by the US Central Bank (Kontan, 2024). According to several experts, the lowering interest rates issue in the United States was driven by slowing inflation and high unemployment rates (Kontan, 2024).
Source: KursDollar, 2024
The graph above shows a gradual increase in the US dollar exchange rate against the Indonesian rupiah since the beginning of 2024. However, in the last two months, there has been a drastic decline in the exchange rate of this superpower country.
For entrepreneurs with debts in USD, the weakening USD exchange rate against regional currencies results in exchange gains. Conversely, for those with receivables in USD, the strengthening of the rupiah against the USD can lead to losses due to exchange rate differences. In this article, we will discuss the tax treatment of foreign exchange gains and losses as outlined in tax regulations.
Legal Basis
The main legal basis for imposing tax on exchange gains is found in Law Number 7 of 1983 regarding Income Tax (PPh Law), as amended by Law Number 7 of 2021 regarding Harmonization of Tax Regulations. Article 4, section (1), point l, specifies that the object of the tax is income, defined as any additional economic capacity received or obtained by a taxpayer, whether originating from Indonesia or from outside Indonesia, which can be used for consumption or to increase the wealth of the taxpayer concerned, in whatever name and form, including exchange gains.
Additionally, the explanation of Article 4, section (1), point l, emphasizes that gains obtained due to foreign exchange rate fluctuations are recognized based on the accounting system adopted and carried out by the Financial Accounting Standards (SAK) of Indonesia.
Article 6, section (1), point e of the Income Tax Law stipulates that the taxable income for domestic taxpayers and permanent establishments is determined by subtracting costs for generating, collecting, and maintaining income, including exchange losses, from gross income. The explanation further clarifies that losses due to foreign exchange rate fluctuations are recognized based on the accounting system adopted and carried out by the SAK of Indonesia.
Financial Accounting Standards Statement 10 (PSAK 10) specifies that exchange gains are recognized as profit in the period they occur, and conversely, exchange losses are recognized as losses in the period they occur. From a tax perspective, gains on exchange rate differences are recognized only when they are realized. Similarly, losses are recognized only upon realization. If the gain or loss remains unrealized, it is not recognized for tax purposes.
For detailed technical regulations on foreign exchange gains and losses, refer to Government Regulation Number 94 of 2010 regarding the Calculation of Taxable Income and Settlement of Income Tax in the Current Year. Specifically, Article 9, section (2) of this regulation states that foreign exchange gains or losses directly related to a taxpayer's business, which is subject to final income tax or not considered a tax object, are not recognized as income or expenses.
For instance, PT X, a construction company, invoiced PT Y for building an apartment at a cost of US$1,000.
On October 1, 2022. The exchange rate on that day was Rp15,000.00 per US$1, so PT X recognized an income of Rp15,000,000.00 (US$1,000 x Rp15,000.00).
PT Y paid the invoice on October 15, 2022, when the exchange rate was Rp16,000.00 per US$1, resulting in a payment of Rp16,000,000.00 (US$1,000 x Rp16,000.00).
This created an exchange rate loss for PT X of Rp1,000,000.00 ((Rp16,000.00 - Rp15,000.00) x US$1,000). However, this loss is not recognized as an expense because the construction services are subject to final income tax.
On the other hand, foreign exchange gains or losses not directly related to a business subject to final income tax or not considered a tax object are recognized as income or expense if they are incurred to generate, collect, or maintain income.
For example, PT A, which operates in the apartment rental sector, received a loan of US$10,000,000 in September 2010. Out of this, US$9,000,000 was used to build apartments, and US$1,000,000 was used to purchase transportation equipment for a transportation services business.
The gain or loss from the exchange rate difference on the US$1,000,000 loan can be recognized as income or expense for two reasons: first, the gain is not directly related to PT A's apartment rental business, which is subject to final income tax. Second, the gain is an expenditure to generate, collect, and maintain another type of income in the form of transportation services, subject to income tax at the rate specified in Article 17 of the Income Tax Law.
This explanation highlights the tax implications of exchange rate differences. If you need further explanation, Ideatax is here to help.
