VAT Computation for Sponsored Products Used in Business
Philippine legal perspective – July 2025
Note: This article is for general information only and should not be relied on as a substitute for professional advice or a BIR ruling on a specific set of facts.
1 | Statutory & Regulatory Framework
| Source | Key provision for sponsored products |
|---|---|
| National Internal Revenue Code (NIRC) 1997 (as amended) | • § 105–108 – scope of VAT, definition of “in the course of trade or business” • § 106(B) – deemed sale rules (withdrawal, donation, or use not in the ordinary course) • § 110–112 – input VAT crediting & refunds |
| Revenue Regulations (RR) | • RR 16‑2005 – claim of input VAT • RR 4‑2007 – invoicing requirements for deemed sale withdrawals • RR 18‑2011 & RR 16‑2011 – treatment of promotional giveaways • RR 16‑2023 – unified VAT return and quarterly filing |
| Revenue Memorandum Circulars (RMC) | • RMC 89‑2012 – VAT on promotional items and corporate giveaways • RMC 34‑2021 – income‑tax & VAT effects of free goods/discount promos |
| Jurisprudence | Commissioner of Internal Revenue v. San Miguel Corp., G.R. No. 205045 (2018) – confirms that withdrawals of finished goods for “marketing support” are deemed sales subject to output VAT. |
2 | What Are “Sponsored Products”?
| Variant | Typical transaction | VAT questions that arise |
|---|---|---|
| Give‑aways / freebies | Business buys or manufactures items (shirts, sample packs, corporate gifts) then gives them away as part of a sponsorship package or promo. | Is there output VAT on the withdrawal? Is the earlier input VAT still creditable? |
| In‑kind sponsorships | Company donates or lends its product to an event in exchange for naming rights or advertising mileage. | Is this barter? What is the tax base? How do both parties invoice? |
| Products received free of charge | A supplier “sponsors” the business by giving equipment or inventory at no cost. | Can the donee claim input VAT? Is the supplier liable for output VAT on a deemed sale? |
| Digital “sponsored products” (ads) | Payment to online marketplaces for “Sponsored Products” ad slots (e‑commerce). | Is the service subject to Philippine VAT? Is it importation of a digital service? |
Throughout this article, “sponsored products” means tangible goods withdrawn from inventory or received/provided under a sponsorship arrangement. (Treatment of digital ad services is tackled briefly in § 10.)
3 | General VAT Rules Recap
- VAT Rate: 12 % (zero‑rating possible for export sales and some ecozone situations).
- Output VAT is due on every sale, barter, exchange, or deemed sale of goods (§ 106).
- Input VAT on purchases may be claimed if goods/services are directly and exclusively used in VAT‑taxable activities (§ 110).
- Non‑VAT taxpayers (annual sales ≤ ₱3 million) cannot charge or credit VAT; any VAT paid becomes part of cost or expense.
4 | When Sponsored Products Trigger Output VAT
| Scenario | Why VAT applies | Timing | Tax base |
|---|---|---|---|
| Withdrawal for freebies / promo | § 106(B)(1): “transfer, use or consumption not in the course of business” → deemed sale | Date of withdrawal | Lower of acquisition cost or current FMV |
| Donation to a non‑VAT entity | Still deemed sale. Donation is not exempt from VAT. | Date of delivery | FMV |
| Barter for advertising | § 106(A): sale, barter or exchange; both parties regarded as making a sale. | Earlier of issuance of invoice or receipt of consideration (§ 113) | FMV of consideration received (usually FMV of goods withdrawn) |
| Transfer to a branch (different VAT entity) | If the branch is a separately registered VAT entity, treated as a sale. | Date of shipment | Transfer price (must be arm’s‑length) |
Key point: A withdrawal is exempt from output VAT only when the goods remain strictly for use or consumption in the business (e.g., tools, machinery). The moment they are given away or used for promotion, the withdrawal is “not in the ordinary course” and the deemed‑sale VAT rule clicks in.
5 | Claiming or Losing Input VAT
| Situation | Input VAT credit? | Authority / notes |
|---|---|---|
| Goods bought & later given as freebies | Yes, creditable when originally purchased (RR 16‑2005). BUT you will pay equal output VAT on withdrawal → net effect is zero. | |
| Goods imported tax‑free, then withdrawn | No input VAT (zero import VAT), but output VAT still due on deemed sale. | |
| Goods received free from supplier | Donee cannot claim any input VAT (there is none in the invoice). Supplier must account for output VAT using FMV. | |
| Goods partly used in VATable and VAT‑exempt activities | Allocate input VAT using sales ratio (§ 110(B); RR 7‑95). | |
| Non‑VAT taxpayer withdraws goods | Cannot claim input VAT; no output VAT (because entity not VAT‑registered) but instead percentage tax may apply. |
6 | Computation Walk‑Through
Example 1 – Freebie withdrawal
ABC Corp. (VAT‑registered) buys 1 000 umbrellas at ₱100 each + ₱12 VAT per unit. After a trade fair, it gives away 600 as freebies.
| Step | Amount |
|---|---|
| Original input VAT on purchase | 1 000 × ₱12 = ₱12 000 |
| Deemed‑sale VAT on 600 freebies | 600 × ₱100 × 12 % = ₱7 200 (output) |
| Net VAT effect in the month | Input ₱12 000 less Output ₱7 200 → excess input ₱4 800 carried forward |
Example 2 – Sponsorship barter
DEF Brewery supplies 100 cases of beer (FMV ₱150 000 excl. VAT) to a music festival in exchange for exclusive pouring rights.
| Party | VAT treatment |
|---|---|
| DEF | Issues VAT invoice to festival for ₱150 000 + ₱18 000 VAT; remits ₱18 000 as output VAT on the barter. |
| Festival organizer (if VAT‑registered) | Issues VAT‑official receipt for the advertising service (value also ₱150 000 + ₱18 000 VAT). Each side books both input and output VAT of ₱18 000; net effect is zero if both are VAT‑registered. |
Example 3 – Goods received free of charge
GHI Trading receives five pallets of shelving worth ₱50 000 (FMV) as part of a supplier’s showroom sponsorship.
| Supplier (donor) | Output VAT of ₱6 000 (₱50 000 × 12 %) on a deemed sale; issues a “zero‑price” VAT invoice stating FMV. | | Donee | Cannot credit input VAT (no VAT actually passed on). Shelving becomes capital asset; no VAT until eventual disposal. |
7 | Invoices, Books & Returns
Withdrawal or donation invoice RR 4‑2007 requires issuance of a sales invoice even when price is zero. Indicate “deemed sale‑withdrawal” and show FMV, VAT, and “zero” consideration.
Official receipts for services exchanged in a barter must mirror FMV.
Books of accounts should contain:
- Promotional expense ledger (for non‑barter freebies)
- Input VAT account separated into: attributable to taxable, zero‑rated, exempt, and mixed activities.
VAT returns (BIR Form 2550‑Q)
- Output VAT on deemed sale is reported under Schedule 1, line 12 (Other Taxable Sales).
- Attach Summary List of Withdrawals/Donations if volume is substantial (per RMC 34‑2021 best‑practice).
8 | Common Pitfalls & How to Avoid Them
| Pitfall | Why it matters | Prevention |
|---|---|---|
| Treating freebies as “marketing expense” but NOT booking output VAT | BIR disallows deduction and assesses deficiency VAT plus 50 % surcharge. | Always test withdrawals against § 106(B). |
| Using “cost of goods sold” lower than FMV but after price increases | Tax base is lower of cost or FMV at time of withdrawal – update cost records carefully. | |
| Failure to issue zero‑value invoices | Violation of invoicing rules, up to ₱1 000 000 penalty per Sec. 264. | Configure POS/ERP to allow “deemed‑sale” invoice types. |
| Sponsorship barter without back‑to‑back invoicing | Both parties may be assessed for under‑declared sales. | Prepare reciprocal invoices showing equal FMV. |
| Claiming input VAT on goods received free | No VAT was passed on; credit will be disallowed. | Keep donation documents separate from purchases. |
9 | Penalties for Non‑Compliance
| Offence | Statutory basis | Basic penalty |
|---|---|---|
| Under‑declaration / non‑payment of output VAT | § 248(A)(3) | 25 % surcharge + 12 % interest p.a. |
| Failure to register withdrawal invoices | § 264(A) | ₱1 000 – ₱50 000 per offense; may reach ₱1 M with criminal liability |
| Repeated violations / willful attempt to evade | § 255 | Fine ₱500 000 – ₱10 M + prison 6 – 10 years |
10 | Special Note: Digital “Sponsored Products” Ads
Many marketplaces (Amazon, Lazada, Shopee) sell “Sponsored Products” ad slots.
| If provider is… | Place of supply | VAT treatment for PH advertisers |
|---|---|---|
| Resident or PEZA‑registered entity | Philippines | 12 % VAT on fee; creditable to advertiser. |
| Non‑resident digital service provider | Outside PH but “electronically rendered” in PH | Importation of services under § 108(B)(2); advertiser self‑assesses 12 % VAT (reverse‑charge) unless DSP has BIR VAT registration per RR 21‑2021. |
The ad spend is not a “product” withdrawal; it is a service expense, so §§ 106(B) deemed‑sale rules do not apply. However, if ad spend yields free goods shipped to customers (e.g., marketplace vouchers), those withdrawals may still be subject to the rules discussed in this article.
11 | Best‑Practice Checklist
- □ Maintain a master schedule of all promotional withdrawals and donations with cost, FMV, and computed VAT.
- □ Program accounting system to auto‑generate “deemed sale” invoices.
- □ Secure BIR confirmatory rulings for complex three‑party sponsorships.
- □ Reconcile input vs. output VAT on sponsored items every quarter to avoid unnoticed carry‑over balances.
- □ Train marketing teams on VAT implications before launching promos.
12 | Conclusion
In Philippine VAT, “Sponsored Products” are never free from tax just because no cash changes hands. The VAT law treats:
- Withdrawals and giveaways as deemed sales liable to output VAT;
- Barter sponsorships as two taxable sales, each based on fair market value; and
- Input VAT as creditable only where actual VAT is passed on and the goods ultimately support VAT‑taxable activity.
Failure to apply these rules generates both financial exposure (surcharges and interest) and criminal risk. Implementing rigid controls—especially proper invoicing and documentation—ensures that the marketing value of sponsorships is not offset by unforeseen VAT assessments.