BIR Ruling

February 15, 1972 San Miguel Corporation San Miguel Building 6766 Ayala Avenue Makati, Rizal Attention: Mr . D . T . Reyes Gentlemen : This refers to your letter dated February 4, 1972 requesting information as to the qualification of the expenses itemized therein incurred in promoting your export beer for purposes of Sec. 9(a) of R.A. No. 5186. For ready reference, such expenses are reproduced, viz: "I. EXPENSES TO MAINTAIN PROMOTION OFFICES ABROAD : a. Salary and allowances of personnel based abroad, U.S. Mainland and Hawaii. b. Rental for office and storage spaces. c. Telephone, telegraph, telex and postage. d. Office supplies. e. Dues and subscriptions. f. Insurance accidents and medical. g. Medical expenses. h. Taxes and licenses necessary to main offices. i. Miscellaneous includes professional and legal fees, retainers, flower, Christmas gifts for distributors, bartenders, Military custodians and other clients, office equipment rentals. "II. ADVERTISING & PROMOTIONS (incurred abroad) a. Advertising fees thru all media, productions, talent and service fees. b. Cost of advertising materials like ash trays, coasters, trays, paper napkins, bottle openers, etc., including ocean and other inland freight expenses of these materials for delivery to end-users. c. Cost of painting distributors' trucks and vans with product brand name. d. Promotional give-aways namely athletic uniforms driver's uniforms, and blazers all with brand names, patches and emblems. e. Promotional samples of products given as gifts or donations or for tasting purposes. f. Convention expenses including rental of suite for hospitality rooms, entertainment, cost of food and delicacies, cost of product displays, extra personnel for promotional purposes, photographers publications in trade journals, product literatures and brochures. g. Sponsorship of athletic or civic events to gain better rapport and image with distributors, h. Interstate travel expenses including accommodations, car rentals, car maintenance expenses, air transportation expenses in promoting the product from state to state. i. Representation and entertainment expenses during promotional work with sales personnel of the distributors and clients. "III. ALL-EXPENSES-PAID TOURS : Sponsorship of travels for distributors, especially those who have surpassed targets or quota, and other clients to visit the different plants and breweries so as to familiarize them with the facilities of the manufacturer and the country as a whole. Most American, European and Japanese breweries use this effective method of promotion from time to time. "IV. EXPENSES INCURRED FOR PROMOTIONS PERSONNEL BASED IN MANILA WHO TRAVEL TO FOREIGN COUNTRIES FOR PROMOTIONAL PURPOSES : a. Salary and allowances. b. Travel expenses includes accommodations, land and air transportation abroad, car rentals and travel insurance. c. Representation and entertainment expense," In reply, I have the honor to inform you as follows: SECTION 9(a) of the Investment Incentives Act allows registered enterprises to deduct from taxable income twice the amount of the ordinary and necessary expenses incurred for the purpose of promoting the sale of their products abroad. To be entitled to this privilege, it must be established that such expenses are incurred directly to stir up consumers', wholesalers' or retailers' or even service dealers' interest in San Miguel beer. The resolution to the question posed by you necessarily, therefore, requires the appreciation of the various expenses incurred by you, that is, whether or not they are connected to the promotion of your sales of beer abroad. We shall discuss the expenses under the four major classifications presented. I. EXPENSES TO MAINTAIN PROMOTION OFFICES ABROAD : Unquestionably, the maintenance of an office and the personnel thereof abroad is very necessary as promotional work could not possibly be carried without them. They serve as the springboard for operations. Accordingly, expenses connected to the maintenance of such offices such as those enumerated in paragraphs a, b, c, d, e, f, g and H under this heading qualifies as promotional expenses and some of those under paragraph i. Specifically, it is the opinion of this Office that Christmas gifts for distributors, bartenders, military custodians and other clients are not ordinary and necessary promotional expenses. II. ADVERTISING AND PROMOTIONS : The activities under this classification are clearly propaganda in character, and, therefore, the expenses connected therewith as enumerated qualifies also as promotional expenses. III. ALL-EXPENSES-PAID TOURS : These expenses appear to be also promotional in character as these sponsored tours to your plants will certainly stir up interest in your products. IV. EXPENSES INCURRED FOR PROMOTIONS PERSONNEL BASED IN MANILA WHO TRAVEL TO FOREIGN COUNTRIES FOR PROMOTIONAL EXPENSES : This Office finally believes that the expenses itemized in paragraphs b and c under this heading are the result of the promotion work abroad and, therefore, will also qualify for double deduction. However, it is the opinion of this Office that the salaries (par. a) of these promotions men who are actually based in Manila cannot qualify for double deduction as they would have been paid their salaries just the same even if they had not gone abroad. If, however, the allowances under this paragraph are given them only on account of the work to be performed abroad, then such allowances may qualify for double deduction. Very truly yours; MISAEL P. VERA Commissioner of Internal Revenue