As we near the end of the calendar year, many companies will be busy preparing for their year-end inventory tally. In certain industries, such assets make up a significant portion of a company’s balance sheet. Needless to say, it is important for taxpayers to know or review the tax rules and compliance requirements relevant to their inventories. Some of these rules and requirements are described below.


Since inventory is a major component in determining the cost of goods sold, any inaccurate reporting of inventory will distort taxable income. Thus, it is important to take note that the rules provide two basic tests on inventories: (1) they must conform as nearly as possible to the best accounting practice in the trade or business, and (2) they must clearly reflect income.

With regard to inventory accounting, taxpayers should also consider that there are instances wherein the volume of inventory for annual income tax returns may be different from that on the financial statements due to the difference in the governing rules, i.e., tax rules vs. accounting rules. Hence, taxpayers should maintain the reconciliations to account for such difference.

Further, any change in the inventory method to be used by taxpayers must be authorized by the Bureau of Internal Revenue (BIR).

On another note, if inventory is to be destroyed, taxpayers should also remember that there is a BIR issuance, Revenue Memorandum Order (RMO) No. 21-2020, which prescribes a “Certificate of Deductibility of Goods/Assets Destructed/Disposed.” On whether the certificate is required for deductibility of the loss on destroyed inventory or not, this could be contentious in the light of conflicting views on the matter considering that the BIR issuance vis-a-vis court decisions on the matter. Thus, if taxpayers would like to avoid disputes, they may consider the procedures in RMO No. 21-2020.


Aside from the actual sale of goods/inventory that are subject to VAT, there are also transactions, which, although not actual sales, are also subject to output VAT. These transactions pertain to “deemed sales” transactions, such as the following:

a. Withdrawal of goods from the business by a VAT-registered person for his personal use;

b. Distribution or transfer to shareholders and creditors;

c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and

d. Retirement from or cessation of business, with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether the business is continued by a new owner or successor.

Thus, it is not only the actual sale of goods/inventory that will give rise to output VAT.

On the other hand, when taxpayers purchase goods/inventories from local suppliers, the purchases from such suppliers should be supported with a VAT invoice that is compliant with the invoicing requirements. Although the seller should issue the invoice, the taxpayer-buyer should be prepared to check whether all the information required to be indicated in the invoice is properly filled out, to ensure that the input VAT on such purchases can be validly claimed by the taxpayer-buyer.

For goods/inventory sourced overseas, the corresponding duties and taxes, including VAT, should be paid, if applicable, before the release of goods from customs. Taxpayer-importers should ensure that all import documents are maintained, as these will be used to support claims for input VAT.


For goods, products, and articles subject to excise tax (e.g., alcohol products and tobacco products, among others), taxpayers must ensure that the corresponding excise taxes are properly remitted. Otherwise, there are penalties and fines for violations. These penalties could be a hefty sum which can significantly affect the financials and the operations of the business.

Hence, taxpayers should be diligent in paying the prescribed excise taxes due.


The BIR requires the submission of schedules/list of inventory pursuant to Revenue Memorandum Circular (RMC) No. 57-2015. Taxpayers should conform to the prescribed formats of the additional schedules as shown in Annexes “A”, “B”, “B-1” and “C” of the RMC, whichever is applicable depending on the industry of the taxpayer. Taxpayers are also required to execute a sworn declaration, as shown in Annex “D” of the RMC.

The inventory list, together with the schedules and notarized sworn declaration, is due for submission to the BIR every 30th day following the close of the taxable year. Failure to file or failure to use the prescribed format in the RMC will be tantamount to non-filing, and the taxpayer will be subject to penalties.

As the deadline to submit the inventory list comes earlier than the deadline for the submission of the annual income tax return with the audited financial statements, the amounts reflected in the inventory list may not have undergone a complete checking or financial audit. Thus, there could be instances wherein, after annual income tax return is drafted, differences could arise in the inventory list as against the inventory tally per income tax return.

If there are discrepancies, the taxpayer may consider reconciling and amending the initially filed inventory list due to the information that was only verified/made available during the drafting of the income tax return and during the completion of the related financial audit. Failure to reconcile the discrepancies could be a source of tax finding in a future BIR assessment.

With the many various tax rules, it can be said that taxpayers’ compliance is really not easy. Nonetheless, there are no shortcuts available to the taxpayer except to keep in mind and be updated on the tax rules related to the business, including those relating to inventory.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


As published in BusinessWorld, dated 07 December 2021