According to Chinese tax law, the term ‘asset’ refers to assets possessed or controlled by enterprises for operation or management. Which includes cash, bank deposits, receivables, prepayments and other monetary assests. It also comprises non-monetary assets such as inventory, fixes assets, intangible assets, projects under construction, productive biological assets as well as the debt and equity instruments. Any assets loss incurred shall be deducted after reporting to the competent tax authorities according to the prescribed procedures and requirements. It is not allowed to deduct loss before calculation of tax if it has not been declared. The following is tax treatment for regular inventory loss:

1. Treatment for VAT input tax
   
   According to the provisional regulations on VAT, the input tax of goods, goods consumed by work-in-process products and finished products and their corresponding taxable services with abnormal losses shall not be offset against the output tax. The specific reasons for inventory loss shall be analysed. Where is caused by abnormal losses, the corresponding input tax needs to be transferred out.
   
   
2. Treatment for Corporate Income Tax
   
   When calculating the taxable income, the inventory loss is allowed to be deducted. It is the balance of inventory cost minus the compensation made by the responsible person.
   
   The input VAT is not allowed to be offset against output VAT due to the inventory loss, damage, scrappage, theft and other reasons. While it can be deducted together with the inventory loss when calculating taxable inome. Taxpayers shall fill in 'Schedule of Pre-tax Deduction and Tax Adjustment for Loss of Assets' in annual declaration of enterprise income tax, and retain the relevant documents for future reference.
   
   
3. Documents shall be retained
   
   Enterprises shall retain the complete documents for assets loss and ensure their authenticity and legality. The documents shall be retained for inventory loss are as following:
   
   

   (1)	The determining ground for the inventory tax basis.
   (2)	The internal documents for determination of liability, statement of compensation by the liable person and approval document from management.
   (3)	Inventory sheet.
   (4)	The inventory custodian’s explanation for inventory loss.

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