Conversion of foreign currencies at the average monthly exchange rate for the valuation of foreign financial assets in the R.W. framework. Use of the historical exchange rate to convert currencies relating to an investment valued at purchase cost. If the asset is valued at market value, the average monthly exchange rate is used.
One of the main problems we face when filling in the R.W. form of the Income Form is related to the fact that we can hold assets and financial assets in foreign currencies.
In these situations, it is necessary to define the procedures for the conversion between the foreign currency and the Euro. All this to correctly complete the framework dedicated to the fiscal monitoring of foreign financial assets and the payment of IVIE and IVAFE.
On this point, the Revenue Agency has intervened to identify the correct exchange rate to be used for the conversion into Euro of values expressed in foreign currency. This applies to both investments and financial assets held abroad by taxpayers’ residents in Italy.
Therefore, let’s see the criteria to be used to identify the exchange rate to be used for foreign assets and financial assets.
FOREIGN CURRENCY TRANSLATION: VALUATION AT COST OR MARKET VALUE OF ASSETS
To correctly identify the exchange rate to be used in the translation of foreign currencies, it is necessary to refer to the valuation criterion of the foreign asset.
To complete the R.W. framework of the Income model for tax monitoring and the liquidation of IVIE and IVAFE, it is necessary to check whether:
- The asset or financial asset is valued at cost. In this case, the foreign currency conversion must be made at the average exchange rate of the month when the purchase date falls. In this case, there is no need to update the amount shown in the declaration from year to year;
- The asset or financial asset is valued at Market value. In this case, the conversion of foreign currencies must be made at the average exchange rate for the month in which this value is determined. For example, 31 December of the tax period or period of holding the foreign asset. Therefore it is necessary to update the value annually within the R.W. framework.
These are generally the main indications that should be used when converting foreign currencies. However, it is possible to consider an objective difficulty in interpreting the Agency’s provision. For this reason, any different behavior on the part of the taxpayer may not be subject to dispute.
THE VALORISATION OF ASSET INVESTMENTS AND FINANCIAL ASSETS HELD ABROAD
Taxpayers for tax purposes in Italy (individuals, non-commercial entities, simple companies) are required to declare in the R.W. framework of the income tax model PF.
This is to indicate all assets and financial assets held abroad during the tax period.
The panel must also be completed in the event of disinvestment before the end of the tax period.
In fact, with the compilation of the R.W. framework, the tax authorities can monitor the foreign investments made by resident taxpayers.
The taxpayer who directly holds a foreign investment or foreign assets of a financial nature must indicate their value in this box. As well as the percentage of ownership.
The obligation to fill in the R.W. panel also exists if the taxpayer owns the assets through a third party.
This is the case, for example, of individuals who have the actual availability of financial and patrimonial assets formally registered in the name of a resident or non-resident trust.
VALUATION OF ASSETS AND FINANCIAL ASSETS
Once the assets and financial assets held abroad have been identified, it is necessary to determine their valuation.
The valuation criteria must be the same for tax monitoring purposes and the possible payment of property taxes IVIE and IVAFE.
Let us, therefore, see, in summary, how to arrive at the valuation of assets and financial assets held abroad.
PROPERTY HELD ABROAD
The value of the property is the purchase price. Or, failing that, the market value detectable at the end of each calendar year in the place where the property is located.
If the property is no longer held on 31 December of the year, the property’s value at the end of the holding period shall be used.
For property acquired by inheritance or gift, the value is that indicated in the declaration of the estate. Failing this, the purchase or construction cost incurred by the deceased or the donor is assumed.
REAL ESTATE RELATING TO EU OR EEA COUNTRIES
Suppose the property is located in a European Union country or in countries belonging to the European Economic Area (EEA) that guarantee an adequate exchange of information. In that case, the value to be used is the cadastral value.
Or failing that, the purchase cost or, failing that, the market value ascertainable at the place where the property is situated.
OTHER ASSETS OTHER THAN REAL ESTATE.
Other than real estate, for which IVIE is not due, the taxpayer must indicate the purchase cost for other assets held abroad.
Or, failing that, the market value at the beginning of each tax period (i.e., on the first day of holding) and at the end of that period (i.e., at the end of the period of holding).
FOREIGN FINANCIAL ASSETS
The same criteria should be used to determine the value of financial assets as for IVAFE.
Therefore, the value is equal to the market value, recorded at the end of the tax period or the holding period.
Or, in the case of financial assets not traded on regulated markets, the nominal value or, failing that, the redemption value.
If financial assets belonging to the same category are sold but acquired at different prices and at other times, the method to be adopted for determining which of the financial assets is held in the reference period is the so-called “LIFO” method and, therefore, those acquired more recently are considered to be sold first.
As for the currency exchange rate to be applied, the exchange rate of the currency of the periodic statement should be used. This refers, for the initial value, to the average value of December of the previous year, or of the month in which the relationship began during the year and, for the final value, to that of December of the year or of the month in which the relationship ended.
CONVERSION OF FOREIGN CURRENCIES AND MONTHLY EXCHANGE RATES
Circular n 10/E/2014 of the Italian Revenue Agency indicates that for assets held abroad on 1 January, reference should be made to the average monthly exchange rates. While for assets held on 31 December, the average exchange rate of December of the previous year must be taken as reference. The exchange rate is determined based on the provision of the Director of the Revenue Agency issued for the identification of monthly exchange rates.