VAT implications of a Multiple Entity Loyalty Programme

Transaction

The UAE VAT Treatment - assuming both parties are in the UAE

Joining fees

There is no immediate consequence for joining customers unless they are charged for this. A fee charged to the customer for granting a right to participate in the loyalty programme would be covered under the definition of ‘service’ and would be subject to VAT at standard rate.

Purchase of goods

When a customer purchases goods or services from a Loyalty Partner, depending on the nature of supply, the supply will be subject to normal provisions of the UAE VAT Law and will taxed accordingly.

Allocation of points by LPO

The LPO is responsible for rewarding points to the customer based on agreed value of each point. In terms of the UAE VAT Law, a service is defined to include, amongst others, the granting, assignment, cession or surrender or right of loyalty points from one person to another the same make constitute a supply. However, in light of the fact that there is no consideration for allocation of points, it is unlikely that the same would trigger any VAT implications.

Transaction between Loyalty Partners and LPO

• Management or administration fee paid by Loyalty Partner to LPO for the management of the loyalty programme – this would be considered as supply of service by the LPO in the course or furtherance of the LPO’s business and will therefore be subject to VAT at 5%.
• Payment by a Loyalty Partner to the LPO for an amount equal to the value of the loyalty points allocated to customer as a result of the customer’s purchases at the Loyalty Partner (points fee) – considering the fact that there is no underlying supply and the points fee is merely an allocation of monies between the Programme Partners, VAT implications may not arise.

Redemption of points by customer at with Redemption Partners

The customer redeems the points by offering the same as payment for purchase of goods or services supplied by the Redemption Partner. The term consideration is defined under the UAE VAT Law, to mean all that is received or expected to be received for supply of goods or services, whether in money or other acceptable forms of payment. At the time of redemption, the customer offers the loyalty points as payment (or part thereof) for supply made by the Redemption Partner. The loyalty points therefore may form part of the consideration for the supply made by the Redemption Partner to the customer and will be subject to normal provisions of the UAE VAT Law and will taxed accordingly.

Transaction between Redemption Partner and LPO

• Management or administration fee paid by The Redemption Partner to LPO for the management of the loyalty programme – as mentioned above, this would be considered as supply of service by the LPO in the course or furtherance of the LPO’s business and will therefore be subject to VAT at 5%.
• Redemption cost – the LPO pays the Redemption Partner an amount equal to the value of the loyalty points accepted as payment for the supply of goods or services (redemption cost). The Redemption Partner pays, out of its own pocket, to the extent that the customer redeems loyalty points for goods or services supplied as the loyalty points have no commercial value to the Redemption Partner. In order for the Redemption Partner to convert the loyalty points (accepted as payment) to cash (that is, being compensated for being out-of-pocket), the LPO pays the redemption partner an amount equal to the value of the loyalty points accepted as payment for the supply of goods or services made to the customer. Considering the fact that VAT has already been paid on the value of the supply (including the value of points) and the same is merely an allocation of monies between the LPO and Redemption Partner, VAT implications may not arise.