Japan Tax Bulletin
Tax Treatment of Foreign Currency Transactions and Points to Consider

October 2023
For the translation of foreign currency transactions and assets andliabilities held in a foreign currency at the end of the fiscal year, therate used for conversion and the method of conversion for each
asset and liability are defined in detail for Japanese tax purposes.
Although there have been no major revisions to the tax treatmentof foreign currency transactions in recent years, it is necessary toconsider the advantages and disadvantages for tax purposes,
including the applicability of a special treatment (the so-called“15% rule”) in the event of large fluctuations in exchange rates dueto the recent sharp depreciation of the Yen.
1. Method of converting foreign currency transactions

Under the Corporation Tax Law, the Yen equivalent of a foreign
currency transaction is the amount converted using the exchange
rate at the time the foreign currency transaction is conducted, andin principle, the TTM (middle rate) should be used as the exchange
rate1. However, provided the method is applied consistently, TTB
may be used for revenues or assets, and TTS for expenses orliabilities2.
 In addition, the following exchange rate conversions are alsopossible, provided that they are also applied consistently on anongoing basis3.
 The exchange rate at a certain point in time, such as the end of
the month or the end of the previous weekend prior to thetransaction date.
 The average exchange rate at the end of the month prior to thetransaction date or at the end of the previous weekend, orwithin a certain period of time within a month.
2. Translation of assets and liabilities denominated in foreign currencies(a) Conversion method for tax purposes
Outstanding credits and debits denominated in foreign
currencies at the end of each accounting period should, inprinciple, be valued by the following exchange rate for tax
purposes4:
 Short-term foreign currency receivables and payables - theconversion method on an accrual basis or the conversion
method at the current exchange rate*.
 Long-term foreign currency receivables and payables - theconversion method on an accrual basis* or the conversion
method at the current exchange rate.

 Foreign currency securities- Securities held for trading purposes - the market price- Securities held for non-trading purposes with redemption
deadlines and redemption amounts – the conversion method
on an accrual basis* or the conversion method at the current
exchange rate.
- Others - the conversion method on an accrual basis*Statutory conversion method when the conversion method
is not reported to the tax authority5.
(b) Selection and change of conversion method
If a conversion method other than the statutory conversion
method is selected, it is necessary to select a conversion method
for each foreign currency and for each category of foreign
currency denominated assets, etc., and submit a notification to thecompetent tax office6.
The deadline for submitting a notification in the case ofacquisition of foreign currency denominated assets, etc. in a new
currency or classification is the deadline for submitting the tax
return for the fiscal year.
In addition, the deadline for submitting an application in thecase of a change in the year-end translation method for foreign
currency denominated assets, etc. is the day before the beginningof the fiscal year in which the new year-end translation method is
to be adopted7.
With respect to an application for approval of a change in theyear-end conversion method for foreign currency denominatedassets, etc., if three years have not passed since the current
conversion method was adopted (except for special reasons suchas a merger), the district director may reject the application 8.
(c) 15% rule
For tax purposes, assets and liabilities denominated in foreign
currencies that are converted into Yen using the accrual method
may be converted at the year-end rate if there is a significantchange in the exchange rate, which is referred to as the "15%rule"9.
The 15% rule can be applied in cases where the following
formula is approximately equal to or greater than 15% of the total
amount of assets and liabilities of the company 10.

(Yen value converted at the year-end rate - Yen book value
converted at the accrual rate)/Yen value converted at the year-end
rate ≧ 15%
In principle, this determination should be made for eachindividual foreign currency denominated asset and liability.
However, if it is difficult to make this determination, such as in
the case of a large number of foreign currency denominatedassets and liabilities, the determination can be made by grouping
foreign currency denominated claims, foreign currency
denominated liabilities, foreign currency denominated securities,
foreign currency deposits, or foreign currencies that share thesame foreign currency type11.
However, if there are multiple foreign currency denominatedassets and liabilities of the same type, where the ratio calculatedusing the formula above is roughly equivalent to 15% or more,
the 15% rule cannot be partially applied, so all foreign currency
denominated assets and liabilities of the same type must beconverted12.
It should also be noted that foreign currency denominatedassets, etc., for which foreign exchange risk is hedged by forward
exchange contracts, etc., are not subject to the 15% rule. Whenthe 15% rule is applied the assets are considered to have beenacquired at the year-end rate, so unlike the normal year-end
translation method, foreign currency translation differences(gainsor losses) are not reversed at the beginning of the next year 13.

1Article 61-8① of the Corporate Tax Law
2 Corporate Tax Basic Circular 13-2-1-2
3 Corporate Tax Basic Circular 13-2-1-2 (Note 2)
4 Article 61-9① of the Corporate Tax Law
5 Article 122-7, Order for Enforcement of the Corporate Tax Law
6 Article 122-4, Order for Enforcement of the Corporate Tax Law
7 Article 122-5 and 122-6, Order for Enforcement of the Corporate TaxLaw

8Article 122-6③, Order for Enforcement of the Corporate Tax Law andCorporate Tax Basic Circular 13-2-2-15
9 Article 122-3①, Order for Enforcement of the Corporate Tax Law
10 Corporate Tax Basic Circular 13-2-2-10
11 Corporate Tax Basic Circular 13-2-2-10 (Note 2)
12 Corporate Tax Basic Circular 13-2-2-10 (Note 3)
13 Article 122-3①, Order for Enforcement of the Corporate Tax Law© Grant Thornton Taiyo Tax Corporation. All rights reserved. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients
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