Independence - Freedom – Happiness
No. 3133/TCT-CS
Re: Tax policies for exchange rate differences
Hanoi, August 07, 2007
To: Tax Department of Hung Yen province
In response to the Tax Department of Hung Yen province’s Official Letter No. 752/CT-CV dated March 22, 2007, on tax policies for exchange rate differences, the General Department of Taxation gives the following opinions:
1. Under the guidance of the Finance Ministry's Official Letter No. 4594/2007/BTC-TCT of April 6, 2007, on the handling of exchange rate differences:
- Losses/profits arising from an exchange rate difference prompted by fiscal year-end reevaluation of receivables or payable debts shall be accounted into financial expenses or revenues from financial activities on the fiscal year’s business result report. Enterprises may not account these losses/profits as expenses or incomes for determining business income tax, not to distribute profit nor pay dividend on those profits.
Enterprises may account the exchange rate difference actually arising in the period into turnover or expenses and include it into their incomes or expenses in determination of business income tax.
The exchange rate difference is determined at the time of actual debt payment compared to the time of arising of debts.
2. Point 2.1, Section III, Part I of the Finance Ministry’s Circular No. 55/2002/TT-BTC of June 26, 2002, guiding the application of the Vietnamese accounting system to foreign-invested enterprises and organizations operating in Vietnam stipulates: The exchange rate difference arising (profit or loss) when converted from the book-keeping entry currency unit being Vietnam dong into another one or vice versa must not be accounted into the business result report, but shall be classified as a separate part of the owner’s capital and handled upon the liquidation of the enterprise.
The handling of the exchange rate difference in this case applies to “the owner’s capital, provision funds belonging to the owner’s capital and undistributed profits which are converted according to the period-end exchange rate (at the time of conversion)” as provided under Item b, Point 2.1 above.
Under the above guidance, when the Motorbike Parts Manufacture Co. Ltd reduced its contributed capital and refunded its members their contributed capital in foreign currencies and this payment prompted an exchange rate difference compared to the time of initial capital contribution, that difference (profit or loss) must not be accounted into the company’s business result.
The General Department of Taxation informs the Tax Department of Hung Yen province thereof for instruction on compliance.

Pham Duy Khuong