The Israeli Tax Authority (ITA) has just issued new operating instructions (14/2018 of November 11, 2018) on how to deal with inventory destruction. The unstated aim is, of course, to make sure the inventory doesn’t vanish into thin air as illicit untaxed gain.
According to the Circular, inventory sometimes accumulates and is unsold for various reasons such as: wear and tear, shrinkage, obsolescence, etc and must be destroyed. Sometimes the taxpayer is required to destroy inventory by the Health Ministry, Environment Ministry, Agricultural Ministry and so forth.
What must be done?
Before destroying inventory, the instructions require the taxpayer to notify his Assessing Officer 30 days in advance, stating: exact address, planned date(s) and book value. The Assessing Officer will then decide whether to send an observer. If immediate destruction is necessary (by law or regulatory instruction) the Assessing Officer must still be notified.
At the time of the inventory destruction, the taxpayer must prepare a two part protocol (note): Part A must state the date, means and reasons. Part B should state the items by name and serial number as they appear on inventory lists. If the items were purchased during the last year after the last inventory count, the purchase documents must be attached to the protocol. The protocol must be signed by the taxpayer or someone representing the taxpayer, stating the date, person’s name, position and identity number.
If the taxpayer operates a computerized inventory system, partially or entirely, Part B must also be computerized.
The instructions cite various examples where the law mandates inventory destruction, including: electronic waste in old electrical machinery, batteries, electronic equipment; food and imported food in certain cases; surplus agricultural produce. Where mandatory procedures are followed, the mandatory documentation may replace the above protocols, but there must be a trail to the destroyed items.
The above protocols and mandatory documentation must be retained along with the other accounting records for 7 years after the end of the year concerned, or 6 years after filing the relevant annual income tax return, whichever is later.
The fact that these operating instructions now exist is important. Taxpayers can no longer write-off inventory items without considering the above procedure. But does the inventory have to be physically destroyed? It is unclear what happens with lost, stolen or obsolete inventory.
And what about machinery that is too large or too tough to destroy? There appears to be no mention about fixed assets such as old computers or phones.
The above all relates to income tax. Will VAT officials claim that destroyed inventory was used for private purposes and is subject to 17% VAT?
All in all, the ITA gets a middling grade for this pronouncement. The proof will be in the pudding… which must be destroyed not given to the needy?
As always, consult experienced tax advisors in each country at an early stage in specific cases.