Tax issues relating to trading inventory

Keywords: Mazars, Thailand, Tax, Inventory, Corporate income tax, VAT, Revenue Department

4 July 2022

Therefore, we set below the corporate income tax and VAT implications of some inventory issues which business operators should be aware of, as they may lead to the Revenue Department assessing additional tax in the event of a tax audit.

1. Inventory shortage

1.1     Corporate income tax implications

• Unlike the VAT provision discussed in point 1.2 below, there is no corporate income tax provision stating that the value of an inventory shortage should be considered a sale for corporate income tax purposes. However, if there is no evidence of the reason for the shortage, such as evidence that the inventory was stolen, a company is required to include the value of the shortage as sales income when calculating corporate income tax.   

1.2     VAT implications

• If actual inventory is found to be lower than recorded, the value of the shortage should be considered a sale for VAT purposes under Section 77/1(8)(e) of the Revenue Code. The VAT liability in this case arises when the company becomes aware of the shortage.
• A company is obliged to pay VAT on the value of the shortage to the Revenue Department in the month that the VAT liability arises, but is not required to issue a tax invoice.
• The VAT base shall be the market value of the shortage on the date that the VAT liability arises, according to Section 79/3(3) of the Revenue Code.     

2. Obsolete inventory and destroyed inventory

2.1     Corporate income tax implications

• Any provision set up for obsolete inventory is a non-deductible expense for corporate income tax purposes under Section 65 ter(1) of the Revenue Code. It must be added back when calculating corporate income tax.
• A company can deduct an expense related to obsolete inventory only in the event that it is sold or destroyed in accordance with the rules, procedures, and conditions prescribed by the Revenue Department under Departmental Instruction No. Paw. 79/2541 (“D. I. Paw. 79”). 
• If the company does not comply with the rules, procedures, and conditions set out in D. I. Paw. 79 of the Revenue Code, the cost of destroyed stock would be a non-deductible expense for corporate income tax purposes.

2.2     VAT implications

• Under the Revenue Department’s ruling no. KorKhor 0706/308 dated 15 January 2008, if inventory is destroyed in accordance with the rules, procedures, and conditions set out in D. I. Paw. 79, the value of the inventory will not be considered a sale for VAT purposes. In that case, the company is not required to remit VAT on the destroyed inventory to the Revenue Department. 

3. Stolen inventory

3.1     Corporate income tax implications

• If inventory is lost due to theft and a company has already reported this to the police, the value of the loss is considered a loss arising from business operations. Accordingly, the company can treat the entire value of the stolen inventory as an expense when calculating corporate income, tax provided that the stolen inventory was not covered by any insurance. Furthermore, the company must have reliable evidence to show that the inventory was actually lost.

3.2     VAT implications

• When inventory is lost, its value is considered a sale for VAT purposes under Section 77/1(8)(e) of the Revenue Code. 
• A company is obliged to pay VAT on the value of the lost inventory to the Revenue Department, but is not required to issue a tax invoice.
• The VAT base shall be the market value of the lost inventory on the date that the VAT liability arises. The VAT liability for the lost inventory arises when the company becomes aware of the loss.   

The corporate income tax and VAT implications set out above are based on the Revenue Department’s ruling no. KorKhor 0706/34060 dated 5 April 2006.