An international comparison of the valuation of trading stock for tax purposes

Abstract

In the past few years the Supreme Court of Appeal has handed down judgments against the taxpayer with reference to the method used in determining the value of trading stock held at year end. These judgments have set the standard on the interpretation of section 22 of the Income Tax Act 58 of 1962. For a number of years, taxpayers have argued that the International Financial Reporting Standards’ prescribed valuation methods should be accepted by the Commissioner as satisfactory. The contentious issue is the different interpretations that exist with regard to the valuation of trading stock at the end of the year of assessment for tax purposes in South Africa. Taxpayers in South Africa are currently experiencing some uncertainty with regard to the valuation of trading stock and the discretion which may be exercised by the Commissioner. The objective of this study was to establish how the trading stock valuation treatment for tax purposes in South Africa currently compare with the treatment in other countries. The taxation laws regarding the acceptable method to determine the value of trading stock may differ from country to country. A literature review was conducted on the treatment of trading stock valuation in South Africa and other countries. In order to draw a meaningful comparison, the criteria and principles of a good tax system were explored and established, with reference to the valuation of trading stock, against which the South African trading stock treatment was measured. Some areas of improvement were identified for the current South African trading stock treatment. It was established that the taxpayer needs to be equipped with the required knowledge. The South African taxpayer would have more certainty regarding the valuation of trading stock if the discretion which may be exercised by the Commissioner were better defined. This knowledge and certainty might be transferred by means of an interpretation note issued by the South African Revenue Service. Government could also consider a change in legislation in order for tax to be more closely aligned with the accounting standards as seen in countries like the United States of America. In addition, special rules for trading stock valuation for small businesses could be implemented to provide some relief to these businesses.