Providing Souvenirs: the Risk of Double Taxation

The beginning of the year is usually the busiest period for the marketing division in every corporation. During this period, companies begin preparing their marketing activity plans for the year ahead. One of the plans is to provide various types of merchandise or souvenirs, such as umbrellas, calendars, mugs, and tumblers, as marketing tools. 

Using souvenirs as marketing tools is common among corporations in order to build the company’s brand awareness. However, other than selecting the right type of souvenir as a branding tool, companies also need to carefully anticipate the emerging fiscal risks. 

The provision of souvenirs by companies to clients, consumers, or business partners often becomes a subject of tax dispute. This is particularly the case with respect to the imposition of Value Added Tax (VAT). 

The tax authority often makes a correction to the cost of promotional goods procurement. Eventually, the tax authority treats the transaction as a transfer of Taxable Goods subject to VAT Out, even though the goods are provided free of charge. In some cases, this may even result in double taxation. 

From the tax authority’s perspective, a free gift is often regarded as a transfer of goods to another party, namely a transaction without direct consideration. The question is whether every transfer without payment automatically becomes subject to VAT upon a free gift. 

Souvenirs Are Not VAT Objects 

From a normative standpoint, Indonesia’s VAT regulations are often seen as allowing overly broad room for the definition of a free gift. However, referring to the elucidation of Article 4 paragraph (1) letter a of the VAT Law, a transfer of goods is subject to VAT only if it cumulatively satisfies certain requirements, namely that the transfer must be made in the course of the taxpayer’s “business activities or work.” 

This is the key point. For a company operating in the food and beverage industry, for example, the main business activity is producing and selling consumer products. Accordingly, the VAT object should be limited to the transfer of the main products, not souvenir items that do not form part of the VAT-Registered Entity’s business object. 

This concept is further reinforced by Minister of Finance Regulation Number 11 of 2025. The regulation explains that the “other value” used as the tax base for free gifts is the selling price or consideration after deducting gross profit. 

The formulation of “deducting gross profit” implicitly suggests that free gifts subject to VAT are limited to goods that indeed have a selling price component and a profit margin. 

In other words, the goods are used for trading, or merchandise. If not merchandise, from a fiscal logic viewpoint, no selling price or gross profit can be used as the tax base. 

Part of the Cost of Goods Sold 

From a business perspective, the provision of promotional goods does not actually fall within the literal concept of a “free gift.” In reality, the provision of promotional goods is not an expense incurred without purpose. Rather, the provision has a clear economic intent to increase brand awareness and boost the company’s sales. 

In accounting, the cost of procuring promotional goods is recorded as part of selling and marketing expenses. All of these operating expenses are then accumulated together with the cost of goods sold in determining the selling price of the core products. 

The basic concept of VAT also governs the relationship between VAT In and VAT Out, as regulated under Article 9 of the VAT Law. Creditable VAT In is any expense directly related to business activities, which include production, distribution, marketing, and management activities. 

Because the provision of promotional goods is an integral part of marketing activities aimed at generating output in the form of product sales, the cost constitutes an important element in an integrated business process. 

The Threat of Double Taxation 

The most fundamental issue arising from the forced imposition of VAT on promotional goods is the risk of double taxation. When a company collects VAT Out on the sale of its core products, the value of the promotional goods has, in practice, been subject to VAT along with the collection because the value has been absorbed into the product price. 

In other words, because the procurement cost of the souvenirs has been included in the components forming the selling price of the main product, when a VAT-Registered Entity sells that product, the value of the souvenir is automatically “taxed.” 

Imposing VAT once again on the physical transfer of the souvenir may create a double tax burden on the same economic value. Therefore, clarity of interpretation on this issue is important so that the purpose of VAT collection remains aligned with the principles of fairness, legal certainty, and tax neutrality in business activities. (ASP) 
 

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.