ATJ Asian Tax Journal

Asian Tax Journal

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A Study on the Problem and Improvement of Current Value－added Tax System on the Transactions Involving Mileage

  • Son, Do-Guk University of Seoul Graduate School of Taxation

Asian Tax Journal Vol. 15 No. 6 (2014), pp. 83-116

Abstract

Recent years have seen that many companies and businesses recognize that Customer LoyaltyPrograms including mileage rewards programs or point schemes are essential programs to them inorder to secure new customers and to continuously maintain existing customers. Not only anindividual company autonomously or a group of companies forming alliance together operatescomplicated and various mileage schemes but also such mileage rewards programs are evolving atthis very moment. On the other hand, according to the Korean Value－Added Tax Law (“VATL”), a provisionapplied to the transactions using mileage is the Article 61 (4) of the Enforcement Decree of theVATL which is the only one in association with mileage system and thus, except for some cases,the amount equivalent to the corresponding mileage utilized is included in the tax base of valueaddedtax (“VAT”). Therefore, for the reason that the taxability of any transactions in connectionwith the complicated customer loyalty programs is determined by relying heavily on the onlyprovision established in 2010, a great deal of controversy between tax authorities and taxpayers inregard to the taxability of the transactions using mileage and its appropriateness for the purposesof VAT has been frequently provoked. Although transactions using mileage are formally andseemingly complicated, by figuring out the essence of such transactions involved mileage rewardsprograms, finally it can be concluded one of ‘lagniappe (an extra), free gift, or discount. Theexisting VATL already embrace this. Thus, it is necessary to prepare countermeasures that determine logically the taxability of thetransactions involving mileage by types according to the nature and essence of such transactionsrather than by the current provision that treats such mileage transactions as separate independenttransactions determining the taxability of such transactions as a whole. This would resolve theissue of double taxation (or excessive determination of the value of supply) about the transactions using mileage and reduce the disputes between taxpayers and tax authorities in connection withsuch issues. In addition, as European VATL was the matrix of Korean VATL in implementation of VATsystem, in order to draw improvement plans about taxation system relating to the transactionsutilizing mileage for VAT purposes, this study referred to recent law cases and tax ruling in Europeand Australia respectively where more advanced studies have been developed than Korea andconsidered such references carefully. In particular, by analyzing Loyalty Management UK Limitedcase recently decided by the Supreme Court in United Kingdom (2013. 3. 13), this research cameup with the right solution that is how the supply made by mileage should be treated for thepurposes of VAT. As a result, in order not to infringe ‘The Principle of the Neutrality of Taxation’and ‘The Principle of the Final Consumption Taxation’ that are directing points and major premises,this paper examines that the legislation system of the Korean VATL should be improved, providingthe whole structure of such improvement plans. First, it is reasonable that the transactions involvingmileage should be excluded from the tax base for VAT purposes. Second, in a typical structure ofmileage transactions, payments from mileage partners to a mileage operator and from a mileageoperator to mileage redeemers should be treated as service fees which are subject to VAT ratherthan third party consideration. Lastly, since there does not exist any clear interpretation or criterionas to the taxability of transactions relating to customer loyalty programs including mileage, it isrequired to establish VAT guideline as to customer loyalty programs for taxpayers and taxprofessionals.

Keywords

  • Value－added Tax
  • Mileage
  • Customer Loyalty Program
  • Tax Base
  • Discount

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