BIR Clarifies the Taxability of Transactions involving Purchase of E-Gift Vouchers/Certificates by Companies from Merchants

On 8 March 2024, the Bureau of Internal Revenue (“BIR”) issued Ruling No. OT-018-2024 addressing the issue on the taxability of Share Treats Innovation Corporation’s (“STIC”) purchases of E-Gift Certificates (“eGC”) which are later sold to its clients.

STIC is a domestic company engaged in the business of buying and selling brand vouchers. Companies such as STIC enter into Marketing or Promotional Agreements with merchants wherein STIC would purchase eGCs for distribution to its clients through its online platform; payments for those eGCs shall be labeled as a prepaid expense. Upon purchase, either the merchant or STIC would generate unique eGC codes for clients to redeem. Once an eGC is purchased by a client, it shall be credited from the prepaid expense account established, and revenue is recognized for STIC’s service fees for administration and/or marketing efforts for the sale of the merchant’s eGCs. STIC subsequently issues an acknowledgement receipt for the value of the eGC, which is credited to STIC’s prepaid expense account, and an official receipt representing service fees billed to its clients.

STIC sought the confirmation of the BIR with respect to the non-taxability or exemption of the proceeds from issuance of eGCs and issuance of such from expanded withholding tax (“EWT”) and value-added tax (“VAT”) respectively. STIC stated that it is only subject to 12% VAT on the amount it receives from its clients for the service fees.

Preliminary Issue on the Nature of Ownership of the Purchased E-Gift Certificates

The BIR opined that there is an inconsistency between the existence of a Marketing or Promotional Agreement between the merchant and STIC and the need to purchase the eGCs by STIC. The existence of the agreement shows that ownership of the eGCs still belongs to the merchant which is inconsistent with the fact that STIC owns the eGCs upon making advance payments to the merchants and the generation of unique eGC codes only after STIC purchases the eGCs.

Nature of a Gift Check or Certificate and its Taxability

Section 2 of Republic Act No. 10962 or the Gift Check Act recognizes that a gift check represents value which is held in trust by the issuer (merchant) on behalf of its beneficiary or bearer. 

The proceeds from STIC’s clients for the face value of the eGCs issued do not constitute taxable income of STIC in accordance with Section 27(A) of the National Internal Revenue Code (“Tax Code”). The Supreme Court ruled in the case of Commissioner of Internal Revenue v. Tour Specialists Inc., citing the case of Commissioner of Internal Revenue v. Manila Jockey Club Inc., that:

“Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit.”

Given this, the BIR concluded the following:

1. Proceeds from the clients for the face value of the eGCs do not constitute taxable income on the part of STIC, therefore it is not subject to EWT;
2. Proceeds from the clients for the face value of the eGCs are not subject to VAT as it does not fall under the term “taxable income” or “payment for goods sold” or “compensation for services rendered” in accordance with Section 105 of the Tax Code;
3. STIC, despite being the owner of the eGCs after purchase, may still be considered as a beneficiary or bearer of the eGCs not sold yet to any client. Therefore, the face value of the eGCs do not represent a sale but rather a value held in trust by the merchants in favor of STIC in accordance with the Gift Check Act – a corresponding acknowledgement receipt shall be issued;
4. Proceeds from the clients pertaining to service fees shall be considered as taxable income and thus subject to 12% VAT and EWT on the part of the clients – a corresponding VAT official receipt shall be issued; and 
5. All unused or unspent eGCs shall be subject to ordinary corporate income tax, and commissions, if any, paid by STIC to merchants for every eGC spent in their stores shall be subject to income tax and to creditable income tax and VAT.