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Ivan Fučík | July 30, 2021

Natural inventory decline and setting its norms or when is it a tax cost?

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Natural inventory decline represents an inventory difference, which has its specifics that we will discuss in the following paragraph.

By means of inventory-taking under Act no. 563/1991 Coll., on Accounting (hereinafter “the AA”), accounting entities determine the actual balance of all assets and liabilities and verify, if the detected actual balance corresponds to the balance of assets and liabilities in the accounting.

Stock inventory
As the name suggests, here we will be dealing with stock inventory. Accounting entities recognize stock according to types, according to the locations, where it is kept, or according to persons with material responsibility. A company may set the date of inventory-taking by itself, but each type of inventory needs to undergo inventory-taking at least once during an accounting period (the AA specified the period, in which an accounting entity should perform the given inventory-taking). Verification is usually performed as of the date of the financial statement, but may be performed continuously as well.

Based on the performed physical stock inventory, the detected balance is compared with the balance in the accounting. In case differences exist between these balances, we speak about inventory differences. This is a situation, when the balance of inventory recorded in the accounting is different from the balance detected by inventory-taking, and this difference can neither be explained nor substantiated. A deficit (shortfall) and a surplus are considered inventory differences. We speak about a deficit, in case the actual balance is lower than the balance recorded in the accounting, and we speak about a surplus in case the actual balance is higher than the balance in the accounting. Surplus and deficit in case of a similar type of inventory may be due to their substitution. Substitution of stock needs to be justified and substantiated.

Inventory deficit (inventory shortfall) of stock
Let us take a closer look at the shortfall, which we can understand from the perspective of two levels:

  1. Accidental shortfall
    • up to the specified norm
    • exceeding the specified norm
  1. Culpable shortfall

Accidental shortfall

Accidental inventory shortfall is based on the assumption that the loss of goods, raw materials and semi-finished products detected during inventory-taking does not result from a fault of responsible persons but from the natural character of the goods, raw materials and semi-finished products (for example drying up), or from objective causes (e.g. minor theft by customers in shops) or from overwork or it is due to objective deviations when recorded (for example rounding-off).

Let us take a closer look on the issue of accidental shortfall up to the norm specified by the accounting entity. Accidental shortfall up to the norm (natural inventory decline and loss allowance norm) – these are technological or technical losses, which have not been caused by a fault of the responsible worker, but:

  1. by natural character of inventory – in the case of materials or raw materials of natural character, such as metals, wood, loose materials, chemical substances etc., natural decrease may arise from dispersion, shrinking, expansion, drying up, evaporation, leakage etc.
  2. during the purchase of raw materials – a variation may exist, which the producer declares (the so-called manufacturer’s variation)
  3. during storage – for example the brewing industry, liquidation of electronic waste – depends on thermal and air conditions,
  4. in the production and sales process – i.e. caused by the process of production – for example cuttings or records of rejects caused by faulty material,
  5. on grounds of so-called loss allowances – e.g. loss in retail caused for example by minor theft in shops, where the offender has not been caught.
  6. for other objective reasons – for example due to rounding-off.


We may encounter inventory difference caused by natural inventory decline in nearly all fields, especially in the food, chemical, pharmaceutical, engineering and processing industry, in agriculture, trade and in catering.


What is the impact of inventory differences from the tax perspective?

Income tax:

According to Act no. 586/1992 Coll., on Income Taxes (hereinafter “the ITA”), detected surplus is considered taxable revenue. Decrease (damage and shortfall), except for specified exceptions, are tax ineligible costs. We have already defined a shortfall earlier. Damage in this connection is understood to mean physical devaluation (impairment or destruction) of an asset owned by the taxpayer, due to objective as well as subjective causes, if the asset is disposed as a result of the damage.

Exceptions, where decline represents tax eligible costs, include natural inventory decline, as well as loss allowances in retail and accidental death of animals, which are not tangible assets for the purpose of the law, up to the amount of the economically justified norm for natural decline and loss set by the taxpayer. The tax administrator may assess, if the amount of the set norm corresponds to the nature of the taxpayer’s activity and the common amount of norms of other taxpayers with the same or similar activity, and adjust the tax base for the detected difference.

According to the ITA article 25 paragraph 1 letter n), damage and shortfall may also be considered tax eligible costs up to the amount of their compensation (for example compensation from insurance companies, apprehended perpetrators, employees, who have caused the loss), or under article 24 paragraph 2 letter zg) also costs arising provably as a result of liquidation of inventory (in case of the food or pharmaceutical industry only in case it cannot be put into circulation again). Liquidation must be substantiated with a liquidation protocol, specifying the object of liquidation, the way, in which liquidated inventory was handled, and the staff responsible for the liquidation.

Value added tax:

According to article 72 of Act no. 235/2004, on Value Added Tax, the taxpayer is entitled to deduct input tax for received taxable transactions, which he will use within his economic activities for the purposes of performing his transactions.

If the taxpayer applied entitlement to VAT deductions to the full extent, the resulting shortfall or damage is considered supply of goods against remuneration and tax should therefore be returned, because a part of the accepted transactions was used for purposes not related to economic activity.

In case of VAT, too, exceptions are defined, where VAT need not be returned for detected shortfall or damage. These include for example proven theft with a burden of proof (for example a police record) of the taxpayer, proven culpable destruction of inventory by natural disasters, shortfall prescribed for payment to an employee (this is compensation of damage) as well as natural decline and loss allowances up to the norm.

For the above-mentioned reasons, it is important for the company to adequately set the norms for accidental shortfall and loss allowances (natural inventory decline) and a possible percentage of variation (the limit, up to which loss is considered natural inventory decline). The norms for accidental shortfall (natural decline) mean that the loss of goods, raw materials and semi-finished products detected during their inventory-taking, not exceeding the set norm, though, did not arise from a fault of persons with material responsibility, but from the natural character of goods, raw materials or semi-finished products (drying up, evaporation, chilling, shrinkage by freezing, leakage, melting, spilling of liquid or dry materials, meltdown, dispersion, dissipation, crumbling, cutting, portioning, decay, sawing, chopping, decomposition, volatility, hardening, setting, clinging to objects and breaking) or for objective reasons (minor theft of customers in supermarkets and convenience stores, who have not been caught, in public catering facilities by full or partial use of left-over meals as raw materials for other meals or during other manipulation with finished meals).

Norms for natural decline may be set based on an analysis of the extent of technological losses, historical information, technical measurements, observations, professional estimate etc.

No official limits exist at present. It is therefore necessary for the norm for natural decrease to be set as objectively as possible by responsible staff or external experts. When assessing the adequacy of the norms, the burden of proof, which the taxpayer bears before the tax administrator, is the key.



Do you have norms for natural inventory decline? If you report inventory differences annually, you are paying income tax of 19% and VAT of 21% or 15% from these inventory differences. Perhaps you need not pay these taxes. Would you like assistance in drawing up the norms for natural inventory decline? Please, do not hesitate to turn to us. Let us know, if you are interested, and we will be happy to organise a specialised webinar on the given topic, where we will share our knowledge and experience with you.