From the beginning of 2014, as a result of the Senate’s legislative measure coming into effect, the provision defining the income tax base will undergo a quiet but very interesting change. The provision (Section 23 (1) of the Income Taxes Act) specifies the definition of income by providing that the taxable income of a taxpayer who is a company/accounting unit is its revenues. Therefore, from 2014, unrealised exchange differences may no longer be excluded from taxes as suggested by last year’s judgment of the Supreme Administrative Court. But how to treat the unrealised exchange differences in 2013?
The change in the definition of the tax base is a response to ambiguities that started to arise after the judgment of the Supreme Administrative Court (“SAC”) was published. In 2012, the SAC was considering a dispute over the inclusion of unrealised exchange differences in the tax base. According to the SAC, “the accounting method that causes unrealised exchange differences to be included in revenues in accounting may not result in the taxation of ‘income’ that is no income by nature under the Income Taxes Act and has not even been considered income by the tax administration since the very beginning of the force of the Income Taxes Act (i.e. since 1993)”. The General Customs Directorate (“GCD”) perceived the SAC judgment as a decision in a specific case and therefore impossible to follow in other cases due to its uniqueness. The GCD did not see any reason for changing the established practice regarding the taxation of unrealised exchange differences – this means that it insisted on reporting the differences in the P&L and their taxation despite the conflicting opinion of the SAC.
However, in connection with the legislative change effective from 2014, the GCD has now responded by issuing “Information regarding ‘unrealised’ exchange differences in view of the Supreme Administrative Court’s judgment”. The GCD claims in the information that it will not change its view on the taxation of unrealised exchange differences. However, at the same time, the GCD states what rules taxpayers should follow if they decide to include or, not to include, the “unrealised” exchange differences in the tax base in compliance with the SAC’s judgment. By issuing this, the GCD in fact reluctantly accepts the judgment.
Although there is no difference between these two options in the end as the taxation is merely spread over individual tax periods, we are of the opinion that some taxpayers may find it more advantageous to proceed in accordance with the SAC’s judgment and not to include unrealised exchange gains (or losses, of course) in the tax base.
If you wish to discuss this issue in more detail, please contact us at the numbers below or via email.
