Abstract

This research examines the issue of taxation on customer loyalty programs (so called “mileage programs”). We refer to a case in business practice in order to closely observe the appropriateness of the current taxation system. The Company addressed (hereafter “Company”) maintains both tax-exempt and taxable operations. The controversy arises when the points earned in the tax-exempt business are exchanged for services, provided by the taxable operations. While it is frequently argued that the transactions of such nature should be taxed, we conclude that they are not liable for taxation based on the related laws and regulations. Offers for free service in discussion contravenes the legally defined range of service provided and what’s more, the points earned do not carry monetary value. Furthermore, the current value-added tax laws confine property liable for taxation to goods under the article No. 48. Also, the revenue from service made by mileage (the points) should be excluded from the tax base according to the reinterpretation of the Ministry of Strategy and Finance Case No. 319 (March 29, 2006) However, here arises the controversy. When points are utilized as a means of payments, they are expected to be subject to taxation. The same logic is to be implemented in the light of tax equality. Meanwhile, once value-added tax is imposed on the revenue made by mileage (the points), it would largely impact the industry offering loyalty programs to its customers. Thus, it is necessary to establish tax laws and regulations concerning customer loyalty programs.

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