According to the Thai Accounting Standard (TAS) 21: The Effects of Changes in Foreign Exchange Rates, an entity is required to determine a functional currency for its operation based on the primary economic environment in which it operates and to record transactions using that functional currency. 

Therefore, for accounting purposes, a Thai company may end up with a functional currency other than Thai Baht. Under the current tax law, the use of foreign functional currency (FFC) is not permitted. The Revenue Department (TRD) is currently considering amending the Revenue Code to allow companies to adopt the FFC application in computing the corporate income tax. 

The objective of this legislative amendment is to reduce compliance cost and the need to maintain separate books for accounting and tax purposes, enhance competitiveness and create fairness for companies that do not use Thai Baht as their functional currency.

The draft legislation was released in July. The key highlights of the draft legislation are summarized below:

• A company wishing to adopt the FFC application will have to obtain an approval from the Director General of the TRD.  
• A company that adopts Thai Baht as its functional currency may elect to use the average between the buying and selling rates announced by the Bank of Thailand (BOT) to convert non-Thai Baht denominated assets and liabilities at the end of the accounting period.  Similarly, a company that adopts FFC may elect to use the average between the buying and selling rates announced by the BOT to convert non-FFC denominated assets and liabilities at the end of the accounting period.  This will eliminate the unrealized foreign exchange gains and losses resulting from the difference between buying and selling rates. 
• An entity that adopts the FFC application will need to convert non-FFC assets and liabilities acquired or paid during the accounting period to its FFC at the date of the acquisition or payment, in accordance with the rules and conditions prescribed by the Director General of the TRD (which are yet to be released).
• It appears that corporate income tax returns, mid-year and annual, will still need to be submitted in Thai Baht and the tax liability paid in Thai Baht, even where the FFC application has been adopted.  The average between the buying and selling rates for the first 6-months and 12 months of an accounting period, as determined by the BOT, will need to be used for the FFC conversion for the mid-year corporate income tax return and the annual corporate income tax submission respectively.  Foreign exchange gains and losses arising from the FFC application will not be taxable or deductible.

We will keep you abreast of further developments on this topic.