The VAT implications of loyalty programmes in South Africa

Abstract

Loyalty programmes are considered value-sharing instruments and therefore enhance customers’ perceptions of what a company can offer to them. The value enhancement function is important as it is key to customer retention (Yuping, 2007). Customer loyalty programmes may take on many different forms, whether they are inhouse programmes or multi-party promotions. Due to the rapid development of loyalty programmes into modern systems, the value-added tax (“VAT”) systems face challenges in keeping pace with the variety and complexity of these programmes (KPMG. Global Indirect Tax Brief, Issue No. 18 – June 2010). Customer loyalty programmes may have significant VAT implications; this is reflected in the number of judicial decisions by the European Court of Justice (“ECJ”) (Global Indirect Tax Brief, Issue No. 18 – June 2010). The popularity of loyalty programmes in the South African market has increased during the past decade (Travel wires, 2011). To understand the VAT implications of loyalty programmes, it is necessary to understand the functioning of loyalty programmes in South Africa. The core issue of this dissertation is to examine the VAT treatment of loyalty programmes by interpreting existing VAT legislation and to determine if there is a proper and clear guidance in the current South African VAT legislation on the taxing of loyalty programmes.