Virtually every business, especially the retail industry, faces losses resulting from the discovery of product shortages.

The Tax Code of the Russian Federation allows such losses to be included in non-operating expenses, provided that the absence of guilty parties is documented by an authorized government authority. [1]

At the same time, neither the law nor law enforcement practice has developed a clear algorithm of actions to substantiate the legitimacy of accounting for shortages for taxation purposes.

How do the courts approach this issue? What should be done to protect oneself from tax claims? Tax Compliance tax consultant Sergei Ivanov answers the main questions in the article.

Step 1: Collect documents

It follows from an analysis of law enforcement practice that, as a rule, the following documents should be drawn up to justify the recording of shortages in expenses:

• inventory list (INV-3);
• comparison sheet (INV-19);
• statement of inventory results (INV-26);
• an order approving the results of the inventory, containing information on the guilty persons and measures for contacting the internal affairs authorities;
• acts recording the actual loss of goods;
• an accounting statement with a loss calculation;
• explanatory notes of officials;
• documents on guilty persons, containing information on investigative actions taken (resolution on refusal to initiate criminal proceedings, on termination of criminal proceedings or on its suspension, an explanatory statement admitting guilt or a court decision on recovery/refusal to recover losses from the guilty person);
• documents confirming the chain of "delivery" of goods from the supplier to the sales floor: contract for the supply of goods and shipping documents (acceptance certificates, TN, TTN, etc.), as well as internal documents confirming the acceptance of goods for accounting, its delivery to the warehouse, its delivery to the sales floor, etc.;
• manager's order to write off the goods.

It should be remembered that the mere fact that shortages have been identified without establishing the existence of a guilty person is not in itself a basis for writing them off as expenses. In order to establish the guilty party, it is necessary to carry out additional control measures. [2]

Step 2: Identify the person responsible

One of the main problems of accounting for shortages is the identification of guilty parties. As the court pointed out in the case of Posuda Center Servis:

"Shortages and spoilage of goods in storage and use may be due to unskilled or substandard performance by individual employees of their functional duties [...] or may be due to organizational and managerial problems.

Even in this case, however, when the circumstances of shortages or spoilage of stock arise, there is a degree of fault on the part of particular employees who may be held financially liable." [3]

That is, the court's logic is that, under any circumstance, the taxpayer can establish the culpable (at least minimally) employees.

In this connection, if a taxpayer does not have documents on "work" to identify the guilty parties, everything else is meaningless. No matter what clear methodological work on inventory is carried out, it will not be possible to write off shortages as expenses.

For this reason, if a taxpayer discovers a shortage, the taxpayer should conduct an internal audit to determine the amount, causes of the loss and the person responsible.

The service inspection begins with an order. The order must specify:

• the basis of the performance review;
• commission composition;
• purpose of the performance review;
• inspection period. [4]

The performance review should also include a written request for an explanation from the employee. This request must be given to the employee "against signature" and must include a deadline for providing an explanation.

Following the results of the inspection, the commission draws up an act in which it specifies in detail the circumstances of the case (full name, dates of events, witness statements, details of the documents being examined), the amount of damage and the degree of guilt of each employee. After the completion of the inspection, the commission gives a conclusion in which it indicates the guilty person or lack thereof, the grounds for bringing the employee to material responsibility, and its recommendations.

However, the amount of loss can be recovered from the guilty party only if it is established:

• absence of circumstances excluding material liability of the employee;
• the wrongfulness of the employee's behavior and his guilt in causing the damage;
• a causal link between his behavior and the damage;
• the existence of direct actual damage and its amount;
• compliance with the rules for concluding a full material liability agreement. [5]

If the perpetrator is identified

In case of compensation of the loss by the guilty party, the taxpayer recognizes in non-operating expenses the value of the lost property (in connection with the recognition of non-operating income in the form of amounts received in the form of compensation for the loss) [6].

If it is not possible to recover the amount of the loss from the guilty party in court, the relevant amount is also included in non-operating expenses.

If the perpetrator cannot be identified

The issue of accounting for loss from theft of tangible assets when it is impossible to identify the guilty party is considered ambiguously in court practice:

• Position 1: Duty to contact law enforcement authorities

If during an internal audit a guilty person could not be identified, it is necessary to apply to the law enforcement authorities. Only after receiving a decision from the investigating authorities confirming that there are no guilty persons may a taxpayer take the amount of a loss into account in non-operating expenses. [7]

• Position 2: sufficiency of the performance audit

The amount of loss from theft can be recognized as non-operating expenses without recourse to law enforcement authorities. It is sufficient to draw up documents correctly in the course of an inventory and an internal audit. [8]

What's a business to do?

We have prepared a small checklist from which you can start setting up internal processes related to defending against claims by the tax authority on the issue of accounting for shortages:

1. Secure all forms of required documents in the accounting policy;
2. Develop an internal methodology for identifying and accounting for shortages, where the inventory procedure, the order of creation and composition of the inventory commission, execution of documents, etc. are described in detail;
3. Pay special attention to the procedure for identifying those responsible. An internal audit should be conducted regardless of the causes of shortages;
4. In addition to inventory documents, it is necessary to demonstrate to the tax authority the process of movement of goods. It is necessary to be prepared to collect documents on the entire chain "supplier - warehouse - sales floor" (or a similar chain).

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The Tax Compliance team has extensive expertise in customizing internal processes to defend against tax claims of cost-accounted deficiencies. In case you need assistance, you can contact us.

[1] Subp. 5 p. 2 of Art. 265 of the Tax Code of the Russian Federation.

[2] Ruling of the Arbitration Court of the Urals District of 28.09.2021 in case No. A50-1564/2021.

[3] Definition of the Supreme Court of the Russian Federation of 14.01.2021 in case No. A45-21326/2019.

[4] Clause 1 of Article 247 of the Labor Code of the Russian Federation.

[5] P. 4 of the Resolution of the Plenum of the Supreme Court of the Russian Federation of 16.11.2006 No. 52.

[6] Letter of the Ministry of Finance of Russia from 27.04.2020 № 03-03-06/1/34033.

[7] Decision of the Arbitration Court of the Urals District of 06.07.2022 in case No. A60-47791/2021; Decision of the Arbitration Court of the North Caucasus District of 02.12.2022 in case No. A53-42654/2021; Decision of the Arbitration Court of Moscow of 25.02.2021 in case No. A40-110759/20-108-1466; Decision of the AC of the Volga District from 14.10.2022 in case No. A12-1688/2021; Letters of the Ministry of Finance of Russia from 27.04.2020 No. 03-03-07/34451, from 20.08.2019 No. 03-03-06/1/63646.

[8] Decision of the Supreme Arbitration Court of the Russian Federation of 04.12.2013 No. VAS-13048/13.