Deductibility of loss from destruction of inventories/assets

off/destroyed inventories as deductions. But that is not necessary and certainly not the only means. Some other reliable proofs, other than selfserving pronouncement by the taxpayer, would serve the same purpose.

Even the issuance of Revenue Memorandum Order 16-2012 was vague on this requirement. Although the RMO prescribed the policies and guidelines for the required physical/ ocular inspection and supervision over the destruction/disposal of equipment or of inventory of goods or assets which have been declared, among others, as waste or obsolete due to different causes rendering the same unfit for sale or for use in production, before it can be considered as deductible, it was referring to casualty losses. The term “casualty” is the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature. It does not apply to losses arising from ordinary deterioration of assets from operating causes. Also, it was referring to cases where the inventories, machineries or equipment applied for destruction are located outside the territorial jurisdiction of the BIR office where the taxpayer is registered. It would seem that it did not cover goods/assets located within the jurisdiction of the BIR office where the taxpayer is registered.

The confusion on the requirements for the deductibility of losses arising from destruction/disposal had come to light with the recent issuance of RMO 21-2020. Prescribing the policies, guidelines and procedures for the inspection or supervision of the destruction/disposal and determination of deductible expense pertaining to inventory of goods/ assets which have been declared as waste or obsolete, the RMO requires an application for destruction/disposal of goods/assets to be filed with and processed by the concerned BIR office where the principal place of business of the taxpayer is registered. An application has to be filed at least seven days before the proposed scheduled date of destruction/disposal of the inventories/equipment.

Among other documentary and procedural compliance, the new RMO also requires actual witnessing of the destruction of a representative of the BIR, who must later issue a Certificate of Deductibility. Interestingly, an accredited tax practitioner or external auditor may also be a witness. The certificate issued by the witness shall be the basis of the taxpayer in claiming deductions. Clearly, before a loss is recognized as a deduction, it is now mandatory for a BIR authorized representative to witness the actual destruction of inventories and other kinds of assets and to issue certification on his observation.

With this new RMO, there is now clarity on the requirements before a loss on inventories and assets which have become waste or obsolete due to spoilage, deterioration, obsolescence, expiration, or other causes rendering the asset unfit for sale or for use in production. Taxpayers should follow the guidelines provided in the RMO, with the certificate issued by the BIR as the primary document to support a claim for deduction. Taxpayers cannot rely on other documents to substantiate their deductions, no matter how significant such other documents are. These may only serve as additional proofs. But compliance with these requirements applies only to losses resulting from actual destruction and not to other reasons. Certainly, it does not apply to losses from sale of inventories and assets sold at less than their carrying values.

The author is a partner of Du-baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at fulvio.dawilan@ bdblaw.com.ph or call 8403-2001 loc 310.