I. Background 

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 Points").

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. 

III. Observations

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.