Selling gift checks? Know your limits

TOP OF MIND - Elaine P. de Guzman - The Philippine Star

As the Christmas season draws near, most people are preoccupied with parties, reunions or social gatherings. For Filipinos, the season is not complete without the delicious holiday food and giving of aguinaldos (gifts) to inaanaks, friends, family, and even strangers.  While some people are creative in finding or making personalized gifts, others get stuck finding the perfect item. It may be due to insufficient budget, lack of time, or simply not knowing the person enough to find what would be the best gift. In times like these, gift certificates (GCs) or store vouchers would seem like the safest choice. It is convenient, affordable, and flexible. Due to its popularity, malls, shops and even coffee shops now sell GCs in different amounts. For more convenience, several online sites also cater to the market for these vouchers/discount coupons. These websites would often require membership wherein members can purchase the vouchers sold and merchants may advertise their goods/services by selling discounted vouchers to be used to avail of their goods/services.

The demand for these vouchers or GCs attracted some corporations, foreign and domestic, in selling the same. But before you jump into this GC business, it is important to know if there are restrictions, such as whether the business of selling vouchers or GCs would be classified as “retail trade” under the law.  This determination is necessary because if it falls under the ambit of retail trade, then the capitalization and nationality requirements of the seller would be affected pursuant to Republic Act (RA) 8762 or the Retail Trade Liberalization Act of 2000.

Under RA 8762, retail trade is defined as any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption. Once the business is considered as retail trade, then it would automatically be subject to the nationality and minimum capitalization requirements for foreign equity participation. The law provides enterprises with paid-up capital of the equivalent in Philippine pesos of less than 2.5 million should be reserved exclusively for Filipino citizens and corporations wholly owned by Filipino citizens. On the other hand, enterprises with a paid-up capital of the equivalent in Philippine pesos of $2.5 million or more may be wholly-owned by foreigners.

The issue of whether the sale of vouchers or GCs to individuals would constitute retail trade is the subject in SEC-OGC Opinion No. 15-10 issued by the Securities and Exchange Commission (SEC) and addressed to Lyoness Philippines, Inc. (LPI). LPI is a domestic corporation engaged in buying vouchers/GC from merchants at a discount and selling the same to its individual members through the internet for the full price.

In its opinion, the SEC is of the view the sale of vouchers or GCs is not considered as “retail trade” within the purview of R.A. No. 8762. It anchored its opinion on the elements laid by the Supreme Court in the case of Marsman & Company, Inc. vs. First Coconut Central Co. Inc. (G.R. No. L-39841, 20 June 1988). In Marsman, the Court stated the following elements should be present in order for a sale to be considered as retail:

(1)       The seller should be habitually engaged in selling;

(2)       The sale must be direct to the general public

(3)       The object of the sale is limited to merchandise, commodities or goods for consumption.

The High Court also defined “consumer goods” as goods which are used or bought for use primarily for personal, family or household purposes. Such goods are not intended for resale or further use in the production of other products.  As held by the high court, consumer goods are goods, which by their very nature are ready for consumption.

It is clear in the Marsman ruling that in order to be classified as retail, the object of the sale must be goods that are ready for consumption. This does not cover the sale of gift check/certificate/card, which is defined by the Department of Trade and Industry (DTI) as “an instrument issued by a supplier to an individual, partnership or juridical entity for monetary consideration evidencing a promise by the issuer that consumer goods or services will be exchanged in favor of the bearer upon presentation of said gift check/certificate/card to the value credit, specific good, service or event shown in the instrument.” Hence, it appears the GC is only an instrument used by the bearer to exchange for goods or services and which in itself, is not a good for consumption as discussed by the high court in Marsman.

While it is now clear the business model of buying and selling these vouchers or GCs is not within the technical definition of “retail trade” and hence, not subject to the minimum capitalization requirements, there may be another hurdle that must be considered. In the LPI opinion, the SEC pointed out that if the corporation is engaged in the operation of a voucher platform on the Internet with the purpose of increasing the sales of a particular product or service, in effect, it disseminates information to the general public through the Internet. Hence, it may be considered as a mass media entity. As defined under RA  7394 or the Consumer Act of the Philippines, “mass media” refers to any means or methods used to convey advertising messages to the public such as television, radio, magazines, cinema, billboards, posters, streamers, hand bills, leaflets, mails and the like.

Although the SEC did not categorically declare corporations engaged in the online voucher platform as a mass media entity, this opinion needs serious consideration as it would be a bigger obstacle than the categorization as retail trade. As a mass media entity, it must be wholly-owned by Filipino citizens, without qualifications, pursuant to paragraph 1, Section 11, Art. XVI of the 1987 Philippine Constitution, as well as the Foreign Investment Negative List (FINL). Considering the very strict nationality requirement is found in the Constitution itself, it may be considered as an effective bar from foreign participation in these types of online businesses.

Considering the above restrictions, you may now decide whether you are fit for this type of business. Otherwise, maybe buying and selling the actual item may be a better idea.

Elaine P. de Guzman is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice and Tier 1 leading tax transactional firm in the Philippines by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.

KPMG R.G. Manabat & Co. will host a one-day seminar 28 Jan. 28, 2016 in Makati City. Be updated with the most recent tax and corporate laws, cases, regulations and issuances of various government agencies. Details and invites will be sent subsequently. The seminar will include CPE credits.

Interested parties can call (02) 885-7000 local 768 or 429. For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.


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