Practice Note 1/2023 – Explanation on the tax treatment on forex gain & losses under PITA 1967

The Inland Revenue Board of Malaysia (HASiL) issued Practise Note No. 1/2023 on 15 June 2023 to explain how foreign exchange (forex) gains and losses are taxed for a chargeable person under the Petroleum (Income Tax) Act 1967 (PITA) based on the rules set out in Public Ruling No. 12/2019 and MFRS 121 Guidelines.

Foreign exchange gains and losses occur when a transaction in a foreign currency is compared to Ringgit Malaysia (RM) on two different dates.

The tax treatment in relation to foreign exchange gains and losses is explained in this Practice Note. Therefore, the tax treatment for Chargeable Persons under the PITA is as follows:

1. For gains or losses from foreign exchange transactions in petroleum operations that are revenue in nature and are realised, such gains or losses shall be subject to tax or allowed as a deduction under subsection 15(1) of the PITA.
2. For gains or losses from foreign exchange transactions in petroleum operations that are revenue in nature and are unrealised, such gains or losses shall neither be subject to tax nor allowed as deduction under subsection 15(1) of the PITA until they are realised.
3. For gains or losses from foreign exchange transactions in petroleum operations that are capital in nature, whether realised or unrealised, such gains or losses shall neither be subject to tax nor allowed as a deduction under subsection 15(1) of the PITA.
4. Foreign exchange gains or losses arising from the translation of the functional currency to the presentation currency in the financial statements for accounting purposes, such gains or losses shall neither be subject to tax nor allowed as a deduction under subsection 15(1) of the PITA.

A transaction in petroleum operations is considered realised when the settlement payment is made.

Suppose the amount is settled in a foreign currency through a foreign currency account. In that case, the currency in question does not need to be physically converted for the transaction to be considered as realised. In other words, realisation does not necessarily occur in a situation of physical exchange.

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