Taiwan’s Ministry of Finance (“MOF”) has recently reminded businesses that input VAT incurred on gifts distributed to shareholders at shareholders’ meetings is not creditable against output VAT. As many companies provide souvenirs to encourage shareholder attendance, this VAT treatment is often overlooked. Companies should pay close attention to the relevant statutory requirements to avoid the risk of tax deficiency assessments and penalties arising from filing errors. Under Article 19, Paragraph 1, Subparagraph 3 of the Value-added and Non-value-added Business Tax Act (“VAT Act”) and Article 26 of its Enforcement Rules, input VAT on goods or services used for entertainment purposes —including hospitality for guests and gifts unrelated to business promotion— is not creditable against output VAT. The MOF has taken the position that shareholders’ meeting souvenirs are, in nature, gifts to shareholders and are not directly related to the company’s business promotion activities. Accordingly, even where a company obtains a valid uniform invoice, the input VAT paid on the purchase of such souvenirs remains non-creditable against output VAT.
Furthermore, where a company distributes its own manufactured products or goods otherwise held for sale as meeting souvenirs, and input VAT on the related raw materials or goods has already been claimed, such distribution is deemed a sale. The company must issue a uniform invoice, naming itself as the purchaser, based on current market value of the goods, and this invoice is likewise non-creditable.
If a company mistakenly claims a credit for non-creditable input VAT, in addition to being required to pay the deficient tax, it may also be subject to penalties under Article 51 of the VAT Act. However, if the company voluntarily files a supplementary return and pays the outstanding tax together with interest before being reported by an informant or before an audit by the tax authority commences, penalties may be waived under Article 48-1 of the Tax Collection Act. Companies are advised to review their procurement and distribution procedures for shareholders’ meeting souvenirs before convening the meeting and before filing VAT returns, in order to reduce tax compliance risk.
