Businesses often provide customer loyalty programs to their
customers where certain redeemable bonus points are granted in
proportion to their purchase amount in the form of either mileage
points or gift certificates (collectively "Mileage
It has long been discussed whether the Mileage Points, when it
is used for a subsequent purchase ("Mileage Purchase"),
should be viewed as a sale incentive (a consideration for money or
money equivalent) on which VAT is generally imposed, or should be
viewed as a sale allowance (a discount to purchase price), which is
not subject to VAT.
II. Supreme Court Decision
Lee&Ko has been representing Lotte Shopping Co., Ltd. for
the cancellation of VAT in regards to Mileage Purchase transactions
from the early stage of the litigation. The case was denied at the
appellate level due to unfavorable precedents on similar merits;
Lee & Ko, however, successfully led the Supreme Court to hold
for the taxpayer through a full bench decision process.
The Supreme Court (Supreme Court 2015 du 58959, 2016. 08. 26)
held that most of the Mileage Points are used as a direct deduction
from a transaction price by specific terms that have been agreed
between the business and customers prior to the Mileage Purchase
transaction, therefore should be viewed as a sale allowance not
subject to VAT. Furthermore, if a business shares a mileage point
system with other businesses where one business makes a payment
through a mileage point issued from another business then later go
through a settlement process, such settlement is a separate
transaction for VAT purposes and still should be viewed as a
discount from end-customers' perspective.
The significance of this case is that it is the first Supreme
Court decision on the application of the VAT rules to Mileage
Purchase. We would expect that there will be a rush of VAT refund
requests based on this ruling. Also, the Lotte case would be
particularly useful to those businesses sharing a mileage point
system such as OK-CASHBACK as a post settlement could be viewed as
a separate transaction for VAT purposes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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