OREANDA-NEWS. September 06, 2010. In response to a request by X5 Retail Group CEO Lev Khasis, President Medvedev has asked the Finance Ministry to consider a tax exemption for inventory shrinkage. The X5 CEO complained that food retail companies cannot reduce taxable profit by the amount of inventory shrinkage and therefore incur a higher tax burden. Finance Minister Kudrin promised to consider the issue and to respond to the president shortly, reported the press-centre of OTKRITIE Financial Corporation.

View: If the Russian government eases the tax burden for retailers it would represent a major positive development for all retail sector players. Naturally, all the listed stocks in the food retail segment (FIVE, MGNT, DIXY, SCON) would benefit. Despite the fact that inventory shrinkage constitutes a rather significant portion of the cost of goods for retailers, companies cannot reduce their taxable base by the amount of these costs, and ultimately see a higher effective tax rate.

According to the financial reports, in 2009 Magnit’s inventory shrinkage totaled 0.98% of net sales, while Dixy recorded a whopping 2.14% in inventory shrinkage over the same period. While X5 Retail does not disclose figures on shrinkage, according to its 2009 IFRS accounts it made a provision on inventory shrinkage (recognized as cost of sales) in the amount of 0.72% of sales.