Practical Guide to Tax Treatment of Corporate Gifts

In corporate operations, gift-giving is a common practice for promotion, employee rewards, or maintaining client relationships. However, gifts involve multiple regulations in taxation and accounting. Improper handling may lead to tax risks and financial statement errors. This article provides practical guidance for financial accounting and tax professionals on the tax and accounting treatment of corporate gifts, covering value-added tax (VAT), corporate income tax, and employee individual income tax aspects, to assist companies in handling gift-related matters compliantly and accurately.

I. VAT Treatment of Gifts

When a company gives gifts, whether self-produced goods or externally purchased items, they are generally treated as deemed sales according to VAT regulations, requiring the calculation of output VAT. Specifically:

• If self-produced products are gifted to employees or clients, the company should first transfer the inventory at cost. Upon distribution, the gift cost is reclassified as an expense, while output VAT is calculated based on the gift's sales price (or reasonable valuation), with relevant invoices issued.
• If the gifts are purchased, they are similarly treated as deemed sales, requiring invoice issuance and output VAT calculation.
• Gifts such as shareholder meeting souvenirs or entertainment gifts, though falling outside core business sales, still require invoice issuance as deemed sales. However, such expenditures cannot claim input VAT credits, must be reported as entertainment expenses, and are subject to deduction limits.
• Input VAT on purchased or gifted items for entertainment purposes is non-deductible as per regulations to avoid penalties.

Furthermore, gift cards are not considered physical sales; the seller issues non-taxable invoices, so this stage is excluded from VAT. However, relevant accounting and tax regulations must still be observed upon usage.

II. Accounting and Tax Treatment for Corporate Income Tax

From an accounting perspective, companies distributing gifts should first determine the gift's cost and record it under relevant expense accounts, such as sales expenses, administrative expenses, or manufacturing expenses, categorized by recipient and purpose.

For corporate income tax filing, gift-giving falls under promotion or welfare expenses and is generally deductible as business expenses. Key considerations include:

• Entertainment-related gift expenses have deduction limits, with excess amounts non-deductible.
• Gifts of self-produced products treated as deemed sales require confirmation of correct revenue reporting to prevent income underreporting.
• Gifts for promotional purposes should be reasonably valued according to tax laws to avoid undervaluation affecting income declaration.

III. Individual Income Tax Treatment for Employee Gifts

When companies provide gifts to employees, whether cash, physical items, or gift cards, these constitute employee income and are subject to withholding as required:

• If combined with salary payments, they should be taxed as salary income.
• If given separately, the tax should be calculated based on the gift's tax-inclusive value (typically at 6%) and reported for withholding.
• Gift cards, as prepaid vouchers, are treated as cash payments and require withholding.
• If the withholding tax per instance does not exceed NT$2,000, withholding may be exempt, but reporting is still required.
• Gifts or bonuses from employee welfare committees, while exempt from withholding, must be declared the following year and included in employees' comprehensive income tax filings.

IV. Practical Operational Recommendations and Internal Control Management

To mitigate tax risks, companies should establish robust internal control systems, clarifying gift-giving procedures and record-keeping:

• Clearly classify gift procurement or production processes and account for them based on usage.
• Gift valuation should have reasonable basis, with professional accountant or appraiser review if necessary.
• Employee gifts should be clearly listed on payroll reports, with correct individual income tax withholding as required.
• Strictly control entertainment and promotional gift expenses within legal limits to avoid excess deduction risks.
• Establish comprehensive invoice management and tax filing procedures to ensure accuracy and compliance in VAT and corporate income tax reporting.

Through such systematic management, companies can effectively reduce tax audit risks and enhance financial transparency and compliance standards.

Conclusion

The tax treatment of corporate gifts involves multiple regulations covering VAT, corporate income tax, and employee individual income tax. Financial accounting and tax personnel must be familiar with relevant laws, properly distinguish gift types and purposes, and conduct accurate accounting entries and tax filings. Particular attention should be paid to VAT deemed sales rules, entertainment expense deduction limits, and withholding obligations for employee gifts. By establishing internal control processes and professional valuation, companies can not only safeguard against tax risks but also improve management quality, achieving tax compliance and financial transparency goals.