I. Overview of Philippine VAT

The Philippine value-added tax (VAT) is imposed under the National Internal Revenue Code (NIRC), as amended (including by the TRAIN Law), on:

Sale, barter, or exchange of goods or properties in the Philippines
Sale of services and use or lease of properties in the Philippines
Importation of goods

Key points relevant to freebies and promotions:

Standard VAT rate: 12% on the gross selling price (for goods) or gross receipts (for services).
Gross selling price: the total amount the purchaser pays or is obligated to pay, excluding VAT but including charges and fees that form part of the consideration.
Transactions deemed sale: certain transfers of goods without a conventional sale (no or insufficient consideration) are nonetheless treated as taxable sales.

Freebies and promotional items sit at the intersection of:

what constitutes “consideration,” and
which transfers without consideration are “deemed sales.”

II. Legal Framework Relevant to Freebies

The following concepts are central:

Section 106, NIRC – VAT on sale of goods and “transactions deemed sale”
- VAT attaches to the sale, barter, or exchange of goods and to certain transfers treated as deemed sales, including:
  - Distribution to shareholders or investors as share in profits
  - Distribution to creditors in payment of debt
  - Retirement or cessation of business, where inventory is left on hand
  - Certain consignments not sold within a prescribed period
Definition of VATable sale
- Requires:
  - A taxable person (VAT-registered or required to be),
  - A taxable transaction (sale, barter, exchange, deemed sale),
  - Goods or properties in the course of trade or business,
  - Philippine situs.
Sales discounts and price adjustments
- Discounts may reduce the VAT base if they are:
  - Unconditional,
  - Expressly stated on the VAT invoice/official receipt, and
  - Granted at the time of sale.
- Conditional or later-earned discounts (rebates, volume discounts) are handled through adjusting entries and often credit notes.
Input VAT and entitlement to credits
- VAT paid on purchases (input VAT) is creditable if the goods or services are used in the course of trade or business to make VATable or zero-rated sales.
- Input VAT related to exempt sales must be allocated and is generally not creditable.

III. What Are “Freebies” and Promotional Items?

In practice, the term “freebies” covers a wide range of items and schemes, including:

Buy 1 Take 1 (B1T1) or “2-for-1” deals
“Free item with purchase” (umbrella, mug, small product attached to a larger product)
Promo packs and bundled offers (“3-in-1 packs,” “family packs” with free extra units)
Free samples (trial-size products, taste tests, sample sachets)
Loyalty rewards (points redemption, freebies after accumulated purchases)
Corporate gifts and giveaways (calendars, planners, umbrellas, corporate swag)
Employee incentives (free goods as awards, service anniversaries, sales performance prizes)
Contest prizes / raffle items used in marketing

VAT treatment depends on whether the “free” item is:

Part of a single composite sale to a customer, or
A transfer without consideration in a manner that falls under the deemed sale rules or is otherwise consumptive/personal, or
A promotional/marketing expense clearly used in furtherance of the business.

IV. Freebies That Are Actually Part of a Sale

A. Composite or bundled sales

If a taxpayer sells goods as part of a promo package (e.g., “buy a shampoo and get a free conditioner sachet”), there is generally one VATable sale. In substance, the customer is buying a bundle, not just the main item.

Key principles:

The VAT base is the gross amount paid by the customer (excluding VAT). Even if the second item is labeled “free,” the customer’s payment is usually understood as covering both items.
The “free” item is not a separate deemed sale; it is economically priced at zero as part of a bundle.
The taxpayer should properly reflect the promo in the VAT invoice, for example:
- List both the main product and the “free” item, with the free item showing zero unit price and a note like “Promo Free Item.”
- Alternatively, show a single item (the bundle) with an appropriate description.

B. Buy 1 Take 1 / multi-pack promotions

Commercially, B1T1 is often just two units sold at half the regular price each, but marketed with a “free” second unit.

VAT implications:

The selling price base for VAT is the total amount actually charged to the customer.
If the regular price of one unit is ₱100 (VAT-exclusive) but under a B1T1 promo the customer gets two units for ₱100 (VAT-exclusive), the per-unit price is effectively ₱50.
Output VAT is computed on the ₱100, not on ₱200. The “loss” or discount is effectively a marketing cost borne by the seller.

What matters is how the promotional mechanics are documented and how the invoice is written. The BIR typically looks at:

Whether the promo price is realistically commercial and consistently applied, and
Whether the “free” item is part of a publicly announced promotional scheme, not a hidden transfer.

V. Transfers Without Consideration – When Freebies Are Deemed Sales

The NIRC treats certain transfers of goods without consideration as taxable transactions, particularly where:

There is a distribution to owners or investors as share in profits;
There is a transfer to creditors in payment of debt;
There is retirement or cessation of business;
There are other analogous transactions captured by regulation.

For VAT on freebies, the main issues are:

Whether the transfer is in the course of trade or business (e.g., promotional giveaways to customers); and
Whether the transfer is more properly seen as personal consumption or a distribution of profits (e.g., high-value gifts to shareholders/owners).

Promotional items used in advertising and marketing generally remain “in business” use, not personal use, so many are not treated as deemed sale, provided they are:

Low- to moderate-value items;
Given to the public/customers as part of marketing;
Properly recorded as promotional or advertising expenses; and
Not specifically earmarked as profit distributions or personal consumption.

On the other hand:

Free goods given to owners or officers in their personal capacity may be treated as deemed sale, especially if:
- They are not part of a general promo,
- The recipients are related parties, and
- The goods are part of inventory ordinarily held for sale.
The output VAT would be computed on the acquisition cost or current market value, as provided in the VAT rules for deemed sales.

VI. Specific Types of Freebies and Their VAT Treatment

A. Free samples to the public

Free samples are common in pharmaceuticals, food, cosmetics, and consumer goods.

Typical treatment:

If the samples are distributed to the general public or to potential customers as part of a structured promotional campaign, they are:
- Used in the course of business,
- Recorded as marketing or promotional expenses,
- Not treated as sales or deemed sales, and
- The input VAT on their purchase/production is generally creditable, subject to documentation and allocation rules.

Points to watch:

There should be promo mechanics, approvals, and reasonable correlation between volume of samples and realistic marketing needs.
Abnormal or excessive sampling, especially if directed to specific related parties, may be scrutinized as possible deemed sale or non-business use.

B. Freebies bundled with main products

When free items are physically attached or inseparable from the main product (e.g., “extra 10% free,” “with free small sachet”), the treatment is similar to B1T1:

The entire pack is treated as one sale.
VAT base is the promo pack price, not the hypothetical full price of each component.
For accounting, the producer may allocate costs internally, but for VAT, the critical item is the total selling price on the invoice.

C. Loyalty points and rewards

Many retailers and service providers run loyalty programs where consumers accumulate points convertible into free goods.

Possible approaches:

Points treated as future discount.
- When points are redeemed, the “free” good is seen as partly funded by previous purchases.
- VAT is often recognized at the time of the original sale on the full consideration; the redemption itself may be treated as a zero-priced sale funded by marketing expense.
Separate remuneration via program operator (for coalition loyalty schemes).
- If a third-party operator pays the merchant for goods supplied to members redeeming points, the redemption becomes a VATable sale to the operator, not a true freebie.

Key is to ensure the contractual and accounting treatment is clear. Regardless of structure, the value of goods given away to customers as part of a loyalty scheme is typically a business expense, with input VAT creditable and no separate VAT on “free” goods beyond what is already captured in the sale(s) that generated the points.

D. Corporate gifts and giveaways

Common items: calendars, notebooks, umbrellas, shirts, bags, USB drives, etc., often branded with the company logo.

VAT treatment:

If the items are:
- Low to moderate in value;
- Mass-produced;
- Branded;
- Distributed to customers, suppliers, or the public as part of advertising/promotion;
- Properly recorded as marketing/advertising expense;
then they are generally treated as business use, not deemed sales, and input VAT is creditable.
If the items are:
- High-value (e.g., expensive gadgets, appliances),
- Given to owners, officers, or related parties outside of any general promo, or
- Clearly personal in nature,
then the BIR may argue they are deemed sales or profit distributions, triggering output VAT on the acquisition cost or fair market value, and possibly other tax consequences (like fringe benefit tax or income tax issues).

E. Employee incentives and prizes

When employees receive goods as part of:

Sales incentives,
Service awards, or
Holiday giveaways,

VAT analysis involves two steps:

Is there a deemed sale for VAT?
- The goods move from inventory to employees for personal consumption.
- If these goods are of the kind normally sold by the company and transferred outside the ordinary course of sales to customers, the transfer can fall within “transactions deemed sale” rules, triggering output VAT based on acquisition cost or fair market value.
Is there a fringe benefit or taxable compensation?
- For income tax, non-de minimis benefits can be subject to fringe benefit tax (for managerial/supervisory) or treated as compensation income (for rank-and-file).
- VAT and FBT operate independently: a benefit may be VATable as a deemed sale and subject to FBT or compensation tax.

In practice, companies often:

Treat the goods as employee benefits expense,
Recognize a deemed sale for VAT (if material), and
Compute any applicable FBT or compensation withholding tax.

F. Contest prizes and raffle items

If the contest or raffle is a marketing activity for the business (e.g., “Buy and Win” promos registered with the DTI), the goods given as prizes:

Are part of promotional expenses;
Are not usually treated as deemed sale if they are integral to marketing;
Allow input VAT claims, assuming the goods are used in the course of trade or business.

However, where the promo mechanics blur the line between business and personal consumption (for example, awarding high-value appliances exclusively to employees, or to directors unrelated to public promos), the BIR may scrutinize and classify the transfer under deemed sale or as compensation/FBT.

VII. Input VAT on Freebies and Promotional Items

A. General rule

Vatable businesses may credit input VAT on purchases of goods and services used in the course of trade or business to produce VATable or zero-rated sales. Freebies and promotional items often qualify as:

Advertising or promotional expense; or
Selling and distribution expense.

Therefore:

Input VAT is claimable on the purchase/production of freebies if:
- They are reasonably necessary and directly connected to the business, and
- They are properly substantiated with VAT invoices/official receipts.

B. Allocation between VATable and exempt activities

If the VAT-registered taxpayer is engaged in:

Both VATable sales and VAT-exempt sales, or
Both VATable activities and non-business activities,

then:

Input VAT on common expenses, including promotional items, must be allocated based on a reasonable method (e.g., sales ratio), and
The portion allocable to exempt or non-business activities is not creditable and may have to be expensed or capitalized for income tax purposes.

C. Capital goods vs ordinary goods

If freebies relate to capital goods (e.g., expensive demo units, large equipment given away), special rules on input VAT amortization and minimum useful life can be implicated. When such capital items are given away, there can simultaneously be:

A deemed sale and output VAT based on value at the time of transfer; and
Possible adjustments or accelerated deduction of unamortized input VAT.

VIII. Invoicing, Documentation, and Bookkeeping

Proper documentation is crucial in defending VAT treatment for freebies:

VAT invoices / official receipts
- For bundled promos and B1T1:
  - Reflect the bundle or promo pack clearly.
  - Show the total selling price and any unconditional discounts.
  - If listing the free item separately, show it with zero price and clear notation that it is part of a promotional scheme.
- Proper invoicing supports the position that the free item is part of a single composite sale and not a separate deemed sale.
Promo mechanics and approvals
- Maintain:
  - DTI-approved promo mechanics (where required),
  - Internal approvals, budgets, and marketing plans,
  - Logs and reports of promo execution.
- These documents substantiate that freebies are business promotional expenses.
Accounting records
- Freebies should be tracked under:
  - Sales discounts, or
  - Promotional/advertising expense, or
  - Employee benefits expense, as appropriate.
- The classification should align with the VAT treatment (output VAT recognition, input VAT claims) and with income tax deductions.
Inventory records
- Movement of goods from inventory for sale to promo/expense or employee benefit should be supported by:
  - Requisitions,
  - Inventory withdrawal slips,
  - Stock transfer forms,
  - Internal delivery receipts.

These help the taxpayer reconcile beginning inventory, purchases, and ending inventory with sales and freebies in case of audit.

IX. Interaction with Other Taxes

A. Income Tax

Freebies recorded as promotional or advertising expenses are generally deductible, subject to normal ordinary and necessary tests.
Excessive or abnormal promotions may be challenged as not wholly business-related or as capital expenditures (e.g., brand-building that should be capitalized), though this is fact-dependent.
For employee freebies, the cost may be treated as compensation expense or fringe benefit and subject to corresponding withholding taxes.

B. Fringe Benefit Tax (FBT)

Non-de minimis benefits given to managerial or supervisory employees in the form of goods or other property can be subject to FBT, computed on the grossed-up monetary value.
The same transfer may:
- Trigger FBT, and
- Be considered a deemed sale for VAT if the goods came from inventory ordinarily for sale.

C. Local business tax and other local taxes

Some local government units impose local business tax (LBT) based on gross sales or receipts.
Freebies that are part of promo packs or B1T1 deals are typically already embedded in the sales amounts used for LBT.
Free samples and purely free giveaways may not generate “gross sales” in themselves, but local assessors may scrutinize the relationship between sales and expenses.

X. Sector-Specific Considerations

A. Fast-moving consumer goods (FMCG)

Heavy use of B1T1, promo packs, and on-pack free items.
VAT focus:
- Correct invoicing of promo bundles;
- Appropriate pricing (avoid artificially low pricing that appears designed to evade VAT);
- Proper treatment of large-scale sampling.

B. Pharmaceutical and medical

Doctor and patient samples are common.
Issues:
- Whether samples are used legitimately to promote products or function as disguised transfers to specific persons;
- Documentation linking samples to marketing programs and medical conferences;
- Input VAT claims on sample production and distribution.

C. Telecommunications, banking, and services

Free gadgets with subscriptions, or free items tied to deposit drives or credit cards.
Often structured as:
- A composite supply (service plus device); or
- A sale of goods with bundled service.
VAT is typically levied on the total contract value for goods plus services; the “free” phone or gadget is simply an allocation of that value.
Prizes and gifts not linked to specific contracts (e.g., “open an account and get a free gift”) are often treated as marketing freebies with the same issues discussed above.

XI. Common Audit Issues and Practical Guidelines

Frequent BIR audit contentions:

Understated output VAT
- BIR may argue:
  - Some freebies are deemed sales,
  - Bundled promos conceal higher values, or
  - “Free” transfers to related parties should be VATable at fair market value.
Disallowed input VAT
- On the basis that:
  - The expenses are not ordinary and necessary,
  - The freebies are personal or non-business in nature,
  - The goods relate to exempt activities, or
  - Documentation requirements are not satisfied.
Mismatch of inventory movements
- Excessive promotional and giveaway items versus recorded sales may prompt BIR to allege unreported sales or unsubstantiated expenses.

Practical guidelines for taxpayers:

Design promo mechanics with tax in mind
- Clarify that the price charged to customers already reflects the promo.
- Ensure promos are documented, publicly announced, and DTI-registered when required.
Treat promos as composite sales where appropriate
- For B1T1 and bundled offers, treat the actual transaction as one sale at the promo price.
- Avoid separate “under the table” transfers of goods without documentation.
Separate personal/owner-related transfers
- Clearly distinguish:
  - Inventory used for customer-facing promos; and
  - Goods given to employees, officers, and owners.
- Be prepared to treat the latter as deemed sale and/or fringe benefits and compute appropriate taxes.
Maintain robust documentation
- VAT invoices clearly showing promo arrangements.
- Promos and campaigns supported by internal and external documents.
- Inventory reconciliations that show movement of goods into promo/expenses versus sales.
Apply consistent accounting and tax treatment
- The way freebies are handled in books (as discounts, advertising expenses, employee benefits, or inventory drawdowns) should correspond to the VAT treatment and income/fringe benefit tax reporting.

XII. Conclusion

Freebies and promotional items in the Philippine VAT system are not a simple “free = no tax” question. Their proper treatment depends on:

Whether they are part of a composite sale or a stand-alone transfer;
Whether the transfer is clearly in the course of trade or business;
Whether it falls within transactions deemed sale;
How the taxpayer handles input VAT, discounts, employee benefits, and profit distributions; and
The quality of documentation supporting the taxpayer’s position.

Handled properly, freebies and promotional items can be structured so that:

Output VAT is correctly computed on genuine consideration,
Deemed sale exposure is managed,
Input VAT on promotional spending is maximized within the rules, and
The taxpayer’s position is defensible in a BIR audit.

Because the application of these principles is highly fact-specific and the BIR’s positions can evolve over time, taxpayers typically review major promotional campaigns with their tax advisors or counsel before implementation and ensure that every “free” item is clearly documented as either part of a sale, a business promotion, or a benefit with appropriate tax handling.