Companies may deduct the loss in value of their inventory if it is irreversible

The tax treatment of inventory impairment is a critical point in determining the taxable base for Corporate Income Tax (IS). A recent resolution from the Directorate General of Taxes (DGT) clarifies the conditions under which the difference between the net realizable value and the acquisition cost of inventory may be considered a deductible expense.

What the DGT has ruled

The advisory body establishes that the detected difference between the market value (net realizable value) and the acquisition cost must be recorded in the accounts as an irreversible loss. For this loss to be considered tax-deductible for Corporate Income Tax (IS), it must strictly comply with the following requirements:

• Accounting registration: The loss must be correctly reflected in the company's books.
• Accrual: It must respect the accrual principles established in accounting and tax regulations.
• Documentary justification: The company must possess evidence that supports the loss.
• Nature of the expense: It must not be an expense expressly classified as non-deductible by current regulations.

The DGT emphasizes that the irreversibility of said loss is a matter of fact that the company itself bears the burden of proving through any means admitted by law.

What this means for you

If your company markets products that have lost market value, you could generate a negative tax base that allows for the offsetting of future profits, provided that the loss is real and definitive. A generic estimate is not enough; the administration will require that the loss in value be irreversible. This implies that the value of the inventory will not be recovered in the near future, directly affecting the tax result of the fiscal year.

What should be done

In a situation of inventory impairment, it is fundamental to ensure impeccable documentary traceability. The company must document the facts demonstrating that the market value is lower than the acquisition cost and that this situation is permanent. It is necessary to review the valuation criteria applied and ensure that the accounting provision aligns with the requirements of the Corporate Income Tax Law and the General Tax Law to avoid contingencies during an inspection.