Taxing customer loyalty programmes : an international perspective

Abstract

Customer loyalty programmes (CLPs) have become prevalent in various economies, which is indicative of a change in the nature of the economic transactions occurring between businesses and customers. Interestingly, research indicates that there has been no change in how these transactions are taxed in South Africa that corresponds with the change in business. In general, the South African tax system provides for tax revenue to fund the expenditure incurred by the South African government. Therefore, the taxation of CLP rewards in the hands of customers should increase tax revenues, which South Africa urgently needs as the government has consistently spent more than it has have received in recent years. Furthermore, it is acknowledged that the South African government needs additional tax revenue because of the damages caused by the COVID-19 pandemic, which has caused severe disruptions to economies over the world. This study contributes by using a doctrinal research methodology to analyse the tax treatment of CLPs internationally for both direct and indirect tax from the perspective of the customer and the CLP provider. The findings revealed that although international jurisdictions such as Australia, Canada, New Zealand, the UK and the USA have made headway in taxing CLPs in direct response to their increased prevalence in the commercial environment, the tax provisions established and the administration thereof can be improved. While research has been done on the indirect tax (consumption tax levied on the supply of goods or services under a CLP), employee benefits tax (employees taxed on the value of CLP rewards received from employers) and income tax implications for the provider (sales revenue from the CLP transaction is fully included in the income of the provider) relating to CLPs in Australia, Canada, New Zealand, the UK, and the USA, it does not address the tax implications of CLPs in the hand of the customer (the rewards). Simply stated, the existing legislation focuses on taxing flight rewards and employee benefit rewards and is insufficient. Consequently, further research on the taxation of CLPs is necessary to contribute to this area of taxation. Therefore, using the findings of this study, South Africa has an opportunity to devise an effective, concise and administratively efficient tax reform for CLPs.