Burden of proof when changing valuation of internally produced inventories
A recent ruling by the Supreme Administrative Court (SAC) dealt with proving a change in an accounting method regarding valuation of internally produced inventories, and its impact on the tax base. The ruling provides important conclusions for accounting entities, particularly with respect to documentation and the burden of proof when changing calculation formulas.
The subject of the dispute was whether the taxpayer was entitled, as a result of the change in an accounting method, to reduce their tax base by the amount reported as a reduction in the cost of internally produced inventories, and whether they had correctly calculated this amount. Throughout the proceedings, the tax authorities demanded that the taxpayer prove that there had been a change in an accounting method, i.e. a change in the calculation formula for valuing inventories.
In interpreting what constitutes a change in an accounting method, the courts referred to the interpretation of the National Accounting Board and an earlier judgment of the SAC from 2022. A change in method is not merely a change in accounting results but a change in the exact procedure (calculation formula) and only if both the original and new methods are in accordance with accounting regulations.
A change in an accounting method must also be distinguished from a correction of an error or a change in accounting estimates. If an entity switches from an accounting method that does not comply with legal regulations to a method that does comply, this would be a correction rather than a change in an accounting method.
The taxpayer argued that as a result of changes in accounting regulations (in particular an amendment to the Act on Accounting and to the related decree), they had to adjust the method of valuing their internally produced inventories. The taxpayer failed to prove a change in an accounting method directly, as they did not know the previous calculation formula due to changes in the ownership structure; indirect evidence did not meet the burden of proof either, as the entity did not prove the components of the previous calculation formula. They also failed with their argument that the accuracy of the new valuation of their internally produced inventories had been approved by the auditor. In the court's opinion, this is not sufficient to conclude that the new valuation was the result of a change in an accounting method. The SAC therefore denied the claim for a reduction in the tax base.
Recommendation: archive historical formulas and methodologies
The valuation of inventories in accounting has a direct impact on the tax base. We therefore recommend archiving not only current but also historical calculation formulas and methodologies for inventory valuation to be able to demonstrate what the original and new methods consisted of and what the difference between them is. Moreover, both methods must comply with applicable accounting regulations.