It’s the question every operations manager asks in December: "Do we *really* have to count everything?"
While regular stock-taking is good for business health, the annual count is often a legal requirement. Tax authorities care deeply about your inventory because your closing stock value directly affects your calculated profit—and therefore, the taxes you owe.
If your ending inventory is understated, your Cost of Goods Sold (COGS) looks higher, your profit looks lower, and you pay less tax. Governments know this, so they mandate accurate, verifiable counts. Here is the breakdown by region.
The United States (IRS)
If you hold inventory, the IRS requires a physical count. It’s not a suggestion. The regulations state that businesses must:
- Physically count all items at least once a year.
- Choose an identification method (Specific Identification, FIFO, or LIFO) to value the stock.
- Value the inventory consistently, often using 'Cost' or 'Lower of Cost or Market'.
If audited, the IRS can ask for a facility tour and your original count sheets. If your records are messy or non-existent, they can estimate your income for you—which is rarely in your favor.
Europe
European regulations vary by country but generally align on the need for annual verification.
The Agencia Estatal de Administración Tributaria (AEAT) requires all firms to conduct a yearly inventory. According to the Agencia Tributaria, you must submit a presentation of the stock count.
Under French Financial Law, the year's final accounts (*Comptes de Synthèses*) must include an accurate inventory valuation filed at the Commercial Court Registry.
Accounting Law No. 82/1991 explicitly mandates that administrators must perform a full patrimony inventory at least once a year.
Latin America
Latin American tax systems can be particularly strict regarding documentation.
The Brazilian Treasury requires every company using the 'Real Profit' method to conduct an annual physical inventory, typically at the end of the tax year.
Generally, companies with warehouses are not required to do strict physical inventory taking unless they are part of programs like IMMEX (for foreign manufacturers) or need to prove COGS for deductions.
The Chilean tax system requires accurate declarations of assets under Article 16 of the Civil Code. This implies a justified inventory value.
The Bottom Line
Regardless of where you operate, assume the answer is yes. Even if a specific law has a loophole, accurate inventory is the only way to prove your Cost of Goods Sold.
Don't view it just as a tax burden. It’s a chance to reset your system accuracy and start the new fiscal year with a clean slate.