Thai Revenue Department (TRD) recently released draft amendment to the Thai Revenue Code (TRC) to introduce a new functional currency method, which may be adopted by the entities that use functional currency for accounting purposes (Eligible Entities). The eligible entities must notify the Director-General that they will use that functional currency to prepare their financial statements for tax purposes and to calculate their net profit, gross income and income tax payable or refundable.

The draft explains how eligible entities should transition to functional currency. Items in Thai baht in the entities’ financial statements (including currencies, assets and liabilities) on the last day of the accounting period before the transition must be converted to functional currency in accordance with accounting principles under the rules, methods and conditions prescribed by the Minister which has not yet been released.

Other items including losses carried forward must be converted by using the average of the buying and selling rates of commercial banks, as ascertained by the Bank of Thailand, for the last day of the accounting period before the transition to functional currency. Currencies, assets and liabilities that are received/acquired or spent/incurred during the accounting period and are not in functional currency must be converted into functional currency by using the market rate on the date of receipt or payment.

At the end of each accounting period, any currency, asset and liability balances that are not in functional currency must be converted into functional currency using one of two methods i.e. (1) The average of the buying and selling rates of commercial banks as ascertained by the Bank of Thailand or, if this is not viable (e.g. where converting a non-Thai currency into functional currency), another method approved by the Director-General. Once a method has been approved, any subsequent changes must also be approved by the Director-General. (2) Another method in compliance with accounting principles under the rules, methods and conditions prescribed by the Minister (has not yet been released).

For tax payment and refund, the eligible entities are still required to pay tax and will receive tax refund in Thai baht. The payment or refund amount must be converted from functional currency to Thai baht by using the average of the buying and selling rates of commercial banks, as ascertained by the Bank of Thailand, for the day before the date of the tax payment or the date of approval of the tax refund. In computing net taxable income for payment of tax, foreign exchange gains or losses from conversions to functional currency (or from changes between different functional currencies) will not be taxable income or deductible expenses.

The proposed amendments will be effective from 1 January 2019. This amendment may solve a number of problems faced by many entities using functional currency for accounting purposes.