Enterprises can include production and business losses in deductible expenses when determining corporate income tax, but must comply with tax laws.

This article was consulted by Lawyer Nguyen Quang Trung

Legal ground:

• Circular No. 96/2015/TT-BTC;
• Official Letter 796/TCT-CS dated March 20, 2023 of the General Department of Taxation;
• Official Letter No. 43627/CT-HTr dated July 3, 2015 of the Hanoi Tax Department.

We have received the following question:

Hello TLT Legal, my company often has defective products during the production process, these products cannot be repaired or recycled and must be destroyed. So can the cost of these products be included in deductible expenses for corporate income tax?

Clause 2.1, Article 6 of Circular No. 78/2014/TT-BTC, amended and supplemented by Circular No. 96/2015/TT-BTC, stipulates that enterprises are allowed to include losses and damages caused by objective and force majeure reasons in deductible expenses when determining corporate income tax. Specifically, enterprises are allowed to include the following damages in deductible expenses:

• Losses caused by natural disasters, epidemics, fires and other force majeure events that are not compensated
• Goods damaged due to changes in the natural biochemical process, expired goods, are not compensated

According to the above provisions, losses in the production process due to subjective errors are not listed in the types of expenses that are deductible when determining corporate income tax.

In addition, Official Dispatch No. 796/TCT-CS dated March 20, 2023 of the General Department of Taxation provides the following guidance:

In case the Company has defective or damaged goods during the production process that cannot be recycled and must be destroyed, which are not in the cases prescribed by the law on corporate income tax, the value of the destroyed goods shall not be deducted when determining taxable income for corporate income tax.

Official Dispatch No. 43627/CT-HTr dated July 3, 2015 of the Hanoi Tax Department provides the following guidance:

Regarding corporate income tax: In case the company imports goods that are damaged during transportation (losses not due to natural disasters, epidemics, fires and other force majeure events), the cost of damaged goods shall not be deducted when determining taxable income for corporate income tax.

According to the above instructions, the tax authority has based on the cause of the damage to determine whether the expense is deductible when determining corporate income tax or not. Accordingly, the tax authority only accepts losses due to objective and force majeure reasons.

However, Clause 2.1, Article 6 of Circular No. 78/2014/TT-BTC, amended and supplemented by Circular No. 96/2015/TT-BTC, only lists a number of cases that are accepted as deductible expenses, without affirming that it will exclude losses due to subjective reasons.

While damage during the production process is possible, in reality, businesses do not want this because it increases business costs.

Therefore, if there is a defective product during the production process that must be destroyed, businesses can discuss with the tax authority about their situation for consideration. However, it should be noted that enterprises must still comply with the conditions of a deductible expense as stipulated in Clause 1, Article 6 of Circular No. 78/2014/TT-BTC, amended and supplemented by Circular No. 96/2015/TT-BTC. In addition, there must be complete documents determining the value of the damage.