Stock-taking, or inventory reconciliation, is counting all raw goods in materials in our inventory. The frequency depends on the size of the business and our services. With that in mind, a company should perform stock-taking at least once a year to keep track of the goods in storage.
The preparation for annual stock-taking involves several financial statements. It is one of the reasons why most companies use inventory management applications to keep track of their products. Depending on where our business is, we may be required by the tax authorities to do this inventory regularly.
Why Is It Required by the Law to Perform Inventory-Taking?
When doing inventory, we calculate not only how many goods we have left in stock but also how much we have sold. The products sold must go on a tax form, as each sale brought us a certain amount of profit. This kind of profit requires the payment of business income taxes.
Regardless of the country, we need to record the value of our trading stocks by the time the income year starts. This will help us determine whether we have any taxable income or not.
If the stock value by the end of the year is different from the one we had at the beginning, we need to record it. This will affect our income when we file for a tax return. Prices often change throughout the year as a result of economic shifts and inflation. This means that our assessable income may be different.
Stock values do not always change throughout the year. But if they do, the tax authorities must know this. Annual stock-taking is an excellent method to determine that – even if extra payments are unnecessary.
Tax Authority Requirements for Inventory-Taking by Country
Each country will have specific tax obligations to respect. Very often, the differences will be minimal. Still, specific inventory-taking requirements may be characteristic of a particular country. Overall, here is what some important trading countries require:
The United States
When it comes to the US, businesses that keep inventories are required by the IRS to physically count their inventory each year.
Taking a physical inventory typically entails three steps:
- First, count every item in your inventory.
- Next, choose an identification method, which essentially refers to how you compare the inventory items’ prices. Standard techniques include the Specific Identification Method, FIFO, and LIFO approaches, that is used when you can match the actual cost of each item separately.
- The last step is to value the inventory, which might significantly influence determining your taxable revenue. The price you pay for the goods and the lower the actual cost are two ways that are frequently employed.
In the event of an IRS audit, the business owner will be required to provide the physical inventory count sheets, the item valuations, and a facility tour so that the IRS can view your inventor
Spain
The Agencia Estatal de Administración Tributaria (AEAT), a division of the Spanish Treasury Ministry, is responsible for managing Spain’s tax system.
The administration of some taxes and the control of some things has been delegated to the Spanish regions (principally, rates and deductions). Municipal entities manage several local taxes and have the authority to control their municipal taxes, typically within a framework provided by state law and subject to specific restrictions.
According to the official website of Agencia Tributara, all firms that operate in Spain are required to conduct a yearly inventory and then submit a presentation of the stock count.
The purpose of this procedure is to make it easier for taxpayers to create an electronic file with the documentation about the inventory that they must compile in situations where the application of the special Value Added Tax regimes begins or ends, as specified by the regulations governing this ta
Chile
Within borders, taxes on goods and services are assessed using the general territoriality of law principle found in Article 16 of the Civil Code. The Chilean tax system includes both direct and indirect taxes; businesses must pay income tax and value-added tax (VAT), among other taxes.
In principle, all organizations and taxpayers are required to keep thorough accounting records. A cashbook, journal, ledger, and balance sheet register—or their equivalents—are examples of these accounting records. Additionally, the subsequent documents must be retained for tax purposes:
- Journals of sales and purchases
- Employer register (only with 5 or more employees)
- A tax withholding account
- Register for inventory
- Ledger for taxable profits (FUT)
Chile has fully embraced IFRS accounting standards since 2014. Additionally, recent modifications to the tax code have made it simpler to maintain accounting records in foreign currencies when certain conditions are met.
Mexico
Unless part of the IMMEX program, which allows foreign manufacturers to import goods in Mexico, companies with warehouses are not required to do inventory-taking. This means that only companies from countries such as the US, which expanded into Mexico, must pay their dues to the Mexican tax system.
Business owners need to maintain inventory control systems tied to Annex 24. This includes a variety of materials, products, and modules that a business owner may use while holding stocks in Mexico. The automated inventory control system will gather the data automatically. Also, the amount owed depends on the type of company that the owner has.
Brazil
The Brazilian Treasury requires every company that uses the “Real” profit method to conduct an annual physical inventory. Ideally, the inventory needs to be done by the end of the tax year. However, if a business has a permanent inventory in Brazil, it can perform the stock-taking operation at any time.
Businesses with warehouses in Brazil must follow Sections 40.1 and 40.2 of the Brazilian tax guide. The Brazilian Government requires business owners to add specific tax information for each item in their inventory. Both stock and non-stock items have to be valued during the inventory. Further information on the Brazilian taxation rules may be accessed here.
France
Accounts must be filed by every person and every legal entity that engages in economic activity. According to French Financial Law, Comptes de Synthèses, which are the year’s final accounts, must be filed at the Commercial Court Registry.
Foreign businesses with branches in France must also file accounts. The auditor’s report, the minutes of the annual general meeting of members, and these accounts are all available to the public.
In general, businesses must record all events that historically affect their assets and obligations. They must also submit a balance sheet, a profit and loss statement, an appendix with supplemental information, and annual inventory figures.
Romania
According to Accounting Law No. 82/1991, a company’s administrator must make an inventory of the patrimony once a year, which entails going through and paying attention to several steps and procedures without which its outcomes may be affected.
To prepare annual financial statements that reflect a clear picture and transparency of the financial position but also the company’s performance, it is necessary to establish the actual situation of all elements of each company’s assets, liabilities, and equity, as well as the assets or held values, these belonging to other legal or natural persons.
The annual inventory is often completed at the conclusion of the fiscal year, taking into consideration the business’s operations’ particulars with regard to the nature of assets, liabilities, and equity.
Another requirement is the inventory, which must take place in various situations:
- When interim financial accounts are submitted
- When the control bodies request control
- When there are signs of management deficits or surpluses
- When management is transferred
- When leadership is reorganized.
A fine of 400 to 5,000 lei is imposed for failure to comply with the patrimonial inventory obligation.
The Bottom Line
No matter where we conduct our business, it is recommended – if not required by the law – to do an annual stock-taking. The process can be used to notify the tax authorities, enabling the deduction process. It is also a must to pay business income taxes. These are calculated based on the storage products that were sold.
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