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. Last Updated: 07/27/2016

THE TAX ADVISER: Managing Forex Can Improve Cash Flow

I am financial officer of a Russian legal entity, which is a distributor of consumer goods. I do not fully understand the Russian tax treatment of foreign exchange gains and losses.

Russian legislation includes different ways of treating foreign exchange gains and losses, which provides opportunities for creative tax planning.

Be aware that Russian legislation provides for two different types of exchange gains and losses: summary differences and exchange differences.

Summary differences arise between two Russian legal entities when a contract's terms include a value specified in hard currency but the payment is required in rubles. Exchange gains and losses arise when Russian entities receive or pay for goods and services in hard currency.

Exchange differences may occur prior to the settlement of the transaction as hard currency assets and liabilities must be revalued at a minimum of once a year, on Dec. 31.

For profit tax purposes, summary gains are taxable and losses are not deductible (the government wins either way). Exchange gains and losses are fully taxable and deductible.

These transactions present planning opportunities. In today's current environment, where the ruble is being significantly devalued, it is imperative that firms review existing liabilities to reduce the risk of Russian tax exposure. Paying off summary liabilities before all other liabilities will diminish a company's potential for nondeductible losses.

Additionally, every Russian legal entity is required to file its accounting policies each year with the tax authorities. By establishing an accounting policy depending upon the business (importer versus exporter), a firm can improve its cash flow.

Entities must institute an accounting policy which either requires them to record foreign exchange gains and losses on a quarterly or yearly basis (by posting the loss to Russian statutory account 83 or 80). Companies can improve cash flow by choosing the best time to revalue exchange gains and losses. For example, exporters receiving hard currency may prefer a yearly revaluation during a period of devaluation because gains on this are only taxed at the year end.

Conversely, importers who will have hard-currency liabilities would benefit with a quarterly revaluation, thereby accelerating exchange losses during times of ruble devaluation.

Glen Geffner is a senior tax manager at Deloitte & Touche in Moscow. Please fax any questions to: The Tax Adviser, Deloitte & Touche, 956-5001.