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VAT treatment of bonus point systems

When competing for business in online retail, bonus point systems are very popular among retail companies and their clients. The VAT treatment of these customer loyalty programs is, however, complex and many aspects are still unclear.

In practice the bonus point systems used have very different designs. There is great interest among customers for such systems, in which sales-related points can be collected for purchases at affiliated partner firms (retail firms). The points are credited to a proprietary points account that the bonus points provider manages for the customer. When making purchases later on (e.g. at a firm participating in the bonus point system), customers can used the collected points in lieu of a payment.

According to case law and the tax authorities, granting bonus points itself is not a VAT-relevant procedure (in accordance with the principles of so-called multi-purpose vouchers that have been applicable since 1 January 2019). From the provider standpoint, the provision of a VAT-liable service to a customer can only take place when the customer actually redeems the bonus points as part of a subsequent purchase (e.g. in exchange for bonuses in kind or vouchers). If granted bonus points are forfeiting or not redeemed, this does not have any negative consequences for the provider. The granting of bonus points by the provider is also irrelevant for VAT purposes (insignificant issuing of an alternative means of payment). The original service for which the bonus points were granted, by contrast, initially has to be taxed in full (and corresponding full input tax deduction is possible). Nevertheless, with regard to the original service, a (subsequent) reduction of the VAT assessment basis must be taken into consideration. The question is, however, at which point in time is this the case.

In a current ruling on 23 August 2017, the Finance Court in Munich held that the assessment basis for the original service is already reduced at that point in time when the affiliated partner firm has to compensate the provider for the value of the bonus points granted for this service (so-called points clearing). By contrast, the tax authorities recognize a reduction in the assessment basis for the original service only when the customer actually redeems the bonus points received from this service. The tax authorities have lodged an appeal against the ruling by the Finance Court Munich at the Federal Fiscal Court (case number V R 42/17).

Conclusion: The introduction of bonus point systems can be an appropriate way for bricks-and-mortar retailers to compete with the mail-order industry. Due to their complexity and numerous VAT issues, however, corresponding systems should always be supported and monitored by a specialist VAT advisor.

Dr. Michael Rutemöller, LL.M. (Taxation) is an attorney-at-law/specialist attorney for tax law at PKF WMS Dr. Buschkühle PartG mbB Rechtsanwälte Steuerberater, co-operation partner of PKF WMS Bruns-Coppenrath & Partner mbB Wirtschaftsprüfungsgesellschaft Steuerberater Rechtsanwälte (member company of the PKF network).

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