In a few weeks, 2020 will draw to a close. It is time for corporate taxpayers to revisit their accounts to ascertain that all necessary year-end adjustments are effected and appropriate tax considerations are evaluated before finally closing their books of account. One of the items worth reviewing is the cost of damaged or obsolete inventory written off.
Losses incurred by businesses may be claimed as deductions for income tax purposes under Sections 94 and 96 of Revenue Regulations (RR) No. 2-40. For losses to be generally allowed as deductions, they must: (1) actually be sustained and written off during the year; (2) not compensated for by insurance; and (3) be evidenced by closed and completed transactions.
In theory, the requirements for deductibility seem straightforward. In practice, however, the deduction is only allowed if the Bureau of Internal Revenue (BIR) issues a Certificate of Deductibility of Inventory or Asset Loss. Consequently, the bureaucratic process created concerns among taxpayers. For instance, the taxpayer incurs additional storage costs if the disposal/destruction is put on hold due to unavailability of the designated BIR representative who must witness the destruction. Moreover, the deductions may be disallowed due to the delay in the issuance of the certificate by the BIR.
With the issuance of Revenue Memorandum Order (RMO) No. 21-2020 in July, the policies, guidelines and procedures for the inspection of the destruction/disposal of inventory of goods/assets were streamlined.
Some of the significant revisions and updates in RMO 21-2020 (amending RMO 6-2012) are the inclusion of the timeline to submit the application (i.e., at least seven days before the proposed date of destruction/disposal of the inventory) and when to schedule the destruction of inventory/assets (i.e., on regular working days; weekends must be approved by the BIR). Further, the RMO also clarified that the value of the inventory or asset to be destroyed will be the actual cost. In the case of fixed assets, the carrying value must be used.
For the destruction/disposal of goods, products, and articles subject to Excise Tax, an authorized BIR official from the Excise Tax Division of the Large Taxpayers will be designated to witness/validate the process.
It is also noteworthy that the RMO now provides the taxpayer with an option on who may witness the destruction of inventory or assets, subject to the BIR’s approval. Together with the application for destruction, the taxpayer must submit a letter stating the intention to avail of the services of a third party, who may either be a BIR accredited tax practitioner or external auditor, as a witness to the destruction/disposal.
After the destruction/disposal of the inventory/assets, the taxpayer must submit a Sworn Declaration of Asset Disposal, together with a video, photo files of the activity taken before, during and after the destruction of inventory, and the latest audited financial statements. Also, the taxpayer must submit a notarized Sworn Statement executed by the third party who witnessed the process of destruction stating the accuracy as to the quantity of the items and the manner of destruction of inventory in case the destruction was witnessed by the third party. The complete documents must be submitted to the BIR Office where the principal place of business of the taxpayers is registered within three days after the actual destruction. After verification, the BIR is to issue the Certificate of Deductibility of Goods/Assets Destructed/Disposed within five days from the date of submission of the complete documents of destruction/disposal.
The detailed procedures under the RMO facilitate the efficient preparation of all requirements and ensure completeness, thereby avoiding delays and rejections in the application process. On the part of the BIR, it can easily scrutinize the application and determine the appropriate manner of witnessing the destruction or disposal, which may either be physical, virtual or through the optional third party witnessing.
Based on the foregoing, taxpayers and the BIR can now set aside arguments during the tax audit. It may perhaps avoid disputes arising from the ruling of the Court of Tax Appeals that a certification from the BIR of the actual destruction of the claimed obsolete inventory is not necessary to claim the cost of inventory loss provided that competent documentary evidence establishes the amount claimed as losses. It is hoped that with clear-cut guidelines and shortened timeframes, delays in the release of the certificate will be minimized and thus also address the issue of deduction timing.
Although the policies and guidelines on the destruction/disposal of inventory of goods/assets were issued due to the pandemic, it should prove useful even past the pandemic because it could help expedite the process because of the option for the third party witness.
I trust that corporate taxpayers will find the above guidelines useful and start to plan ahead for their year-end closing activities.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maybellyn O. Pinpin-Malayao is a senior manager with the Client Accounting Services group of Isla Lipana & Co., the Philippine member firm of the PwC network.
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