Friday, April 18, 2008

Marketing VS Tax

It is unarguable that the role of marketing in achieving success is important. In fact, in most companies, especially private ones, marketing holds a vital role just like a striker in soccer play. Marketing may lead to the companies’ goal or give contribution to the ruin of the Company at a same time.

Considering the significant role of marketing, many companies have developed various ways to introduce or sell their products to its customer using direct and indirect methods. In the direct method (direct marketing), a company would give a free gift directly, discount, or any other benefit to the buyers or users. In practice, this method is easier but can only give a short time benefit for the company. The indirect marketing method, in the contrary, can give the company a longer benefit but requires more money in its implementation. This indirect method can be performed by establishing brand awareness and brand image to potential customers about the company’s products.

Many Companies do not pay attention to additional cost of their marketing fund. In this case, they are not aware about taxation aspects related with their fund allocation as a strategy to minimize tax implication in the future. Some examples of marketing strategy and its taxation implications are explained below:

Provision of Sales Commission

A company usually has a policy to give commission both to individuals and bodies that give contribution to the Company’s product sales. This commission represents an appreciation as well as a method to increase the product selling in the future.

According to accounting term, commission is defined as money received as remuneration for broker/agent in a transaction of goods, loan agreement, etc. Upon this commission, a Company as a taxpayer has to impose Income Tax Article (ITA) 21 to an individual recipient or ITA 23 to a corporate recipient.

In addition, a Company should also pay attention to taxation aspects of deemed commission. According to Circular Letter S-29/PJ. 43/2003, the Tax Office may deem a discount or an incentive on sales given to buyer as a commission if the discount and the incentive are treated as remuneration to reduce customer’s liability. This provision includes the term of gift in whatever form and name in relation with work, service and other activities conducted by the gift recipient.

Discount or sales incentive are not treated as commission if it is given as price deduction to determine net sales value for the seller or price value for the buyer. In Circular of Director General of Taxes No.S-350/PJ.52/2005, Tax Office requires the discount to be stated in the tax invoice or it would be deemed as a sales commission.

Based on Article 1 of Law No. 18 of Value Added Tax and Sales Tax on Luxury Goods (VAT Law), the discount stated in a tax invoice may reduce the sales price or compensation value to be used as a tax base. Referring to that provision, there has been a bias in the implementation of regulation where the discount stated in tax invoice is supposed to be a facility for a taxpayer to reduce VAT base. If the taxpayer does not take benefit from this facility, however, then the Tax Office should not impose sanction by treating the discount as commission.

Provision of Free Sample or Direct Gift

Sample product and direct gift given to potential customer/buyer are still considered as an effective marketing strategy for a company to introduce their new products to the public.

According to the VAT Law, this strategy is categorized as free of charge delivery on which VAT is due. Consequently, the company should collect VAT on the free giving. Therefore, the Company should not only consider the free giving but also additional cost of 10% from the expense incurred.

Nowadays, the term of free giving has changed from its previous meaning. In earlier time, free giving may only refer to a company’s product or sales goods owned by the company which is given to other parties. In the meantime, the free giving does not only refer to a company’s products but to any products/goods given to a potential customer or the public.

In Circular No.S-557/PJ.33/2005, one of illustrations mentions a company’s contribution merely in form of shroud that is still categorized as free giving on which the VAT is due.

From this point, we can see that when a company performs a promotion activity by giving their products for free in form of umbrella, ballpoint, calendar, or other marketing tools on which the company’s logo is printed, this activity would potentially be deemed as free giving of goods on which VAT is due. This VAT due is calculated from the sales value after reduced by gross profit. The question is which gross profit? It is because of the company has never planned or has no plans to gain profit from such activity).

The above illustration is an example of many problems faced by taxpayers when they try to apply or develop their strategies.

The Tax Office that should give a space for the strategies to be developed and fro creating conducive business climate tends to act against the strategies without considering its advantages and disadvantages. It seems that the Tax Office still considers the strategies as a threat for their supremacy. As a result, an expectation where the Tax Office and Taxpayer are able to walk hand in hand is still far from reality.

To change the condition above, the company does not only need to develop marketing strategies but also to plan self defense strategies in order to overcome the Tax Office’s attack. Some plans for this case are as follows:

1. Strategy to overcome the implementation of Deemed Commission
o Maximizing facility
To maximize facility by stating discount in tax invoice can be considered as a best way to avoid deemed commission. This strategy can also give other benefit in form of deduction of VAT tax base.
For cash discount which is previously not stated in tax invoice, the company may make revision on the tax invoice by adding discount element in a new tax invoice.
o Reducing price
As an alternative, the company may also make net off between discount and sales price. To avoid transfer pricing, this alternative is recommended only if the transaction is conducted with a party with no special relationship.
o Say no to Cash Back
The company should avoid discount in cash. In this case, instead of consider that “cash is the king”, the company should avoid the discount in cash since it will lead the Tax Office to consider the discount as commission as meant in Circular of Director General of TaxesNo. S-350/PJ.52/2005.
2. Strategy to give free sample and direct gift
o Buy one get one free
Buy one get one free is a term commonly used in many shopping centers to increase product selling. It is a strategy in which a free sample or a direct gift given to customers when they buy similar products of a company. At the same time the said company will include the value of the free sample or gift as element of the selling price. Further, the said company states the actual price of the free sample or the direct gift as discount in the related tax invoice. Using this strategy, only the selling price given to the costumers is subject to VAT since the actual price of the free sample or the direct gift has been calculated as discount in the tax invoice.

Of course there are many other strategies that can be developed by a company. In practice, however, these strategies should be in line with the general provisions and tax procedures. Breaking the prevailing provision will only cause a new problem in the future.

Source : http://mucglobal.com/main.php?open=h&mode=view&volid=&id=38&kat=

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