The tax treatment of unrealised exchange gains or losses
poses certain challenging questions when a foreign denominated debt
becomes irrecoverable. SARS issued a draft interpretation note that
provides their views on, amongst others, the tax effect of such
gains or losses when a debt goes bad or is reduced. While the
effect of unrealised exchange differences appear to be neutral from
a lender perspective, this is not necessarily the case for a
borrower whose debts are reduced.
Difficult economic times may invariably lead to some debts
becoming irrecoverable. The irrevocability of a debt has tax
consequences for both the lender and bor rower. These tax
implications become more complex if the debt was denominated in a
foreign currency. The South African Revenue Service (SARS) recently
issued a draft interpretation note that deals with gains or losses
on foreign exchange transactions (draft IN). Amongst others, this
draft IN provides some insight into SARS' views on
