Things to Know When Issuing Invoices in Foreign Currency

Businesses whose costs are in foreign currency may choose to determine their sales prices in foreign currency to avoid being affected by increases in exchange rates. This method, which aims to reduce the risks that firms may face due to exchange rate fluctuations, is a practice called "hedging" in financial literature. So, why are invoices issued in foreign currency? We have discussed the details in the rest of our article.

 

 

Reasons for Issuing Invoices in Foreign Currency

 

The aim may not always be to protect against exchange rate risk. In some sectors, the market prices of products or services are directly determined in foreign currency. In this case, firms may issue invoices in foreign currency to adapt to market conditions and avoid being left behind in the competition. In addition, the contracts between the parties may clearly specify the exchange rate, amount, and date of invoice issuance. The same contract may clearly state the payment time and, if the collection is to be made in Turkish Lira, which exchange rate will be used. Due to such contractual conditions, firms may be forced to issue invoices in foreign currency.

 

 

In What Language and Currency Should Invoice Descriptions and Amounts Be?

 

According to Article 215 of the Tax Procedure Law, it is mandatory to keep books and records in Turkish and to show amounts in Turkish Lira. However, the same legislation also permits the issuance of invoices in foreign currency.

In this context, product or service descriptions on the invoice can be written in a foreign language. Amounts can be stated in foreign currency. However, in this case, the Turkish Lira equivalent must be clearly stated on the invoice. At least the Value Added Tax (VAT) amount in Turkish Lira must be clearly shown.

The Turkish Lira equivalents can be stated in an appropriate section of the invoice. Generally, it is shown in parentheses below the line or in the invoice total. It is not mandatory to write the Turkish Lira equivalent on a product basis; stating the total amount is sufficient. The exchange rate used must also be clearly stated.

 

 

Is it Mandatory to State the Exchange Rate? Which Rate Should Be Used?

 

The exchange rate used in foreign currency invoices must be stated. This allows the Turkish Lira equivalent of the invoice amount and VAT to be clearly seen. Both the foreign currency amount and its Turkish Lira equivalent are tracked together in accounting records.

 

In practice, the exchange rate announced by the Central Bank of the Republic of Turkey is usually used as the basis for buying foreign currency. However, a private exchange rate agreed upon between the buyer and seller and explicitly stated in the contract can also be used. However, care should be taken to ensure that this rate is not too far from market values. Otherwise, the justification for using this rate may be questioned in a potential tax audit.

 

 

Can a Foreign Currency Invoice Be Collected in Turkish Lira?

 

An invoice issued in foreign currency can be collected in foreign currency or paid in Turkish Lira equivalent. Both methods are possible according to legislation.

 

 

What is Exchange Rate Difference and Why is it Important?

 

When an invoice is issued in foreign currency and collection is also made in foreign currency, the commercial transaction is completed. However, the accounting process is not yet finished. Because accounting records are kept in Turkish Lira.

The exchange rate on the invoice date and the exchange rate on the collection date are usually different. Due to the exchange rate change between these two dates, a difference occurs in the Turkish Lira equivalents. Even if the foreign currency balance is closed, this remaining difference in Turkish Lira is called an "exchange rate difference".

 

According to legislation, this difference must also be closed. To cover this, an exchange rate difference invoice is issued to the other party for the resulting difference amount. This invoice is only an accounting adjustment and no payment is made in return.

Closing the TL balance without issuing an exchange rate difference invoice is an incorrect practice. To avoid problems during potential tax audits, it should be ensured that exchange rate differences are always closed with an invoice.

 

 

Example Application

 

Let's assume a sale of 100 USD was made on January 1st (VAT not considered).

 

• Exchange rate on invoice date: 2.02 TL/USD
• Accounting entry: 100 USD and 202 TL
Let the due date be February 14th and the customer pay 100 USD on this date. • Exchange rate on collection date: 2.13 TL/USD
• Collection entry: 100 USD and 213 TL
In this case, the foreign currency account is closed; however, a difference of 11 TL occurs in TL terms. To close this difference, an exchange rate difference invoice for 11 TL is issued to the customer. No payment is made in return for this invoice; The sole purpose is to balance the accounting records.