Voucher and Loyalty Points VAT Treatment Under UAE Legislation

VOUCHER

Supply Consideration & VAT treatment:

Vouchers serve as a significant element in modern commerce, providing consumers and businesses with flexible options for gift-giving, payments, and promotional activities. They serve as documents that entitle its holders (customers) to redeem them for goods or services from a supplier or group of suppliers. Whether physical or electronic, vouchers are not forms of currency but represent non-monetary considerations, often displaying an equivalent monetary value. 

Issuance of Vouchers: Issuing a new voucher, is not considered a supply for VAT purposes. 

Redemption: When a voucher is redeemed for goods or services, VAT is charged on the underlying supply. The value of non-monetary consideration is determined based on the voucher type: 

• For Face Value Vouchers, VAT is charged on the amount of face value utilized. 

• For non-Face Value Vouchers, the value is determined by the fair market value of the goods and services provided. 

Consideration Exceeding Face Value: If consideration payable exceeds the face value of the voucher, it constitutes a supply of services to the extent the consideration surpasses the face value. 

Specific points to be aware of in respect to Vouchers: 

1.  There is no required specification to the form of the Voucher. A Voucher can be a physical document or an electronic card with a stored monetary amount. 

Example: an electronic gift card or a pre-paid phone card can be qualifying Vouchers, where the other criteria are met. 

Amazon offers electronic gift cards that can be purchased and sent digitally. These gift cards can be used to buy a wide range of products on the Amazon platform, showcasing the flexibility in the form of vouchers, which can be either physical or electronic. 

2.  A Voucher must be an instrument – this means it must be able to be transferred and be able to be redeemed by different persons, or able to be honored by different persons, at the time of the relevant issue or supply. A document that only entitles a specified person to “redeem” it for goods and services with a known supplier is not a qualifying Voucher. 

Example: a fuel card registered to a particular user and available for his exclusive use is not a qualifying Voucher. This is an advance payment for the purchase of fuel by that user. 

VISA gift cards are a type of prepaid debit card loaded with a specific amount of money. These cards can be given as a gift and used by anyone in possession of the card, making purchases up to the card’s balance. Unlike a fuel card registered to a specific user, Visa gift cards can be used by different persons, making them a qualifying voucher under UAE VAT framework. 

3.  Vouchers must be able to be redeemed as Consideration for a supply of goods or services. The holder of the Voucher must be able to elect to redeem the Voucher against a supply of his choosing, and not a specific pre-determined supply. 

Example: a Voucher entitling the recipient to a night’s hotel stay is a qualifying voucher. A “Voucher” entitling the recipient to a stay at a specified hotel on a specific date is not a qualifying Voucher. 

Booking.com offers gift cards that can be used to book accommodations worldwide. Unlike a voucher for a specific hotel stay on a set date, booking.com’s gift cards allow the holder to choose from a vast array of hotels, apartments, and other types of accommodations, providing the flexibility to redeem the voucher against a supply of their choosing. 

4.  A Voucher with an expiry date can still be considered a qualifying voucher, provided that, as at the date that Voucher is issued or supplied, it remains practically able to be redeemed by the recipient for goods and services. 

Example: Starbucks offers gift cards that customers can use to purchase drinks, food, and merchandise at its stores. While these gift cards may have an expiry date, they are generally valid for a considerable period and can be easily redeemed at any Starbucks location, ensuring that the voucher remains practically able to be redeemed for goods and services until its expiration. 

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LOYALTY POINTS

Loyalty Program (Points) and VAT Applicability:

A loyalty program aims to incentivize Customers to make further purchases in the future. This may be achieved by way of discounts, free goods, and services, other rewards, or exclusive benefits. 

Points are issued to Customers upon the Customer purchases of goods and services, or upon other events (for example, the Customer may “earn” bonus points for referring to another Customer). 

The points are generally held on a Customer’s account, and once the Customer acquires sufficient points these may be redeemed for free goods or services. The Customer purchases goods or services as his primary motive and is given points as a consequence. This is a single supply of the underlying goods or services. In these cases, the supplier does not make a separate supply of points. Loyalty points can generally not be traded to other people and have no commercial value unless redeemed by the original Customer under the terms of the program. In these cases, the surrender of points by the Customer for a reward good or service is not a separate Consideration for a supply. Goods or services offered to the Customer as a reward can be either the usual goods or services sold by that supplier or a different type of reward good/service. In either case, the reward item is provided in the course of carrying on the supplier’s usual economic activity and incentivizing future sales. The purchase or manufacture of the reward item is, in principle, eligible for input tax deduction in accordance with other general business costs. The provision of a free good or service is predominantly linked to points acquired for previous purchases from that same supplier for no extra Consideration, does not constitute a Nominal Supply. 

Specific points to be aware of in respect of Loyalty Program: 

1.  Points Accumulation through Varied Purchases: Similar to vouchers being issued in different forms, loyalty points can be accumulated through various types of purchases or activities. For example, a customer might earn points by purchasing goods, using a service, or engaging in promotional activities like referring to new customers. It is part of the incentive for the original purchase, with VAT applied to the transaction generating the points, not the points themselves. 

Example: 

Company: Starbucks 

Loyalty Program: Starbucks Rewards 

Customers earn Stars (points) by purchasing drinks, food, or merchandise. Additionally, Starbucks sometimes offers ways to earn bonus Stars through special promotions or activities, like purchasing specific items or during certain times. 

2.  Transferability and Redemption Flexibility: Loyalty points, like vouchers, may not generally be tradable or have commercial value outside the loyalty program. However, within the program's structure, points can sometimes be transferred between participants or accounts within the same loyalty program, enhancing the program's attractiveness. An example would be a family account where points earned by individual family members accumulate collectively, allowing for redemption against more significant rewards. 

• Redemption without Additional Payment: When loyalty points are redeemed for goods or services without any additional payment, this redemption is typically not considered a taxable supply, and therefore, no further VAT is charged.  
• Redemption with Additional Payment: If the redemption of loyalty points requires an additional payment (e.g., the customer uses points and pays an extra amount to receive a higher-value good or service), the additional payment portion may be subject to VAT. 

Example: 

Company: Marriott International 

Loyalty Program: Marriott Bonvoy 

While Marriott Bonvoy points are not transferable in the way cash is, members can transfer points to other members, allowing families or friends to pool points for redemptions. The program offers flexibility in redemption options, including hotel stays, flight bookings, and experiences. 

3.  Elective Redemption for Goods or Services: Loyalty points differ from non-qualifying vouchers in that they typically allow customers to choose from a variety of rewards, rather than being tied to a specific, pre-determined item. For instance, a customer may choose to redeem points for a free product, a service discount, or an exclusive experience. This flexibility in redemption choice is a key feature of loyalty programs, mirroring the characteristic of vouchers that can be redeemed for a choice of supplies. 

Example: 

Company: American Express 

Loyalty Program: Membership Rewards 

American Express allows cardholders to earn points on purchases that can be redeemed for a wide range of rewards, including travel, shopping, dining, and gift cards. This flexibility ensures that cardholders can choose rewards that best suit their preferences. 

4.  Expiry and Practical Redeemability: Just as a voucher can remain qualifying even with an expiry date, provided it's redeemable for goods and services at issuance, loyalty points too can have expiry dates but still incentivize future purchases if they are practically redeemable throughout their validity period. An example is points that expire annually, pushing customers to make additional purchases or engage with the brand regularly to utilize their points effectively. 

The management of expiry dates and redeemability does not directly impact VAT treatment but affects the customer's perception and utilization of the loyalty program, indirectly influencing purchasing behavior and, by extension, VAT revenue from sales. 

Example: 

Company: Emirates 

Loyalty Program: Emirates Skywards 

Emirates Skywards miles have an expiry policy, but the program is designed to make it practical for frequent flyers to redeem their miles for flights, upgrades, and other rewards before they expire. The program encourages ongoing engagement with Emirates’ services. 

Here are a few points for consideration: 

1.  Loyalty Programs as Marketing Tools: These are designed to incentivize further purchases by offering rewards, discounts, or exclusive benefits. This is a common marketing strategy aimed at enhancing customer retention. 

2.  Single Supply vs. Separate Supply: The analysis of loyalty points as not constituting a separate supply is consistent with VAT treatment principles in many jurisdictions. The primary transaction is the sale of goods or services, and the issuance of loyalty points is incidental to this primary transaction. Therefore, it’s treated as a single supply of the underlying goods or services, not a separate supply of points. 

3.  Non-Tradability and Commercial Value of Points: Highlighting that loyalty points generally cannot be traded and have no commercial value unless redeemed under the program's terms is crucial. This characteristic influences their VAT treatment since points without standalone value do not constitute a taxable supply. 

4.  Input Tax Deduction: Purchase or manufacture of reward items, which are used to fulfill loyalty program promises, should be eligible for input tax deductions as general business costs. This aligns with VAT principles that allow businesses to recover VAT on costs related to their economic activities. 

5.  Reward Redemption and Nominal Supply: Surrender of points for a reward does not constitute a separate consideration for a supply and that providing a reward for no extra consideration does not constitute a nominal supply. This is because the transaction does not involve a new payment or consideration but is an execution of the loyalty program's terms. 

Different companies structure their loyalty programs to encourage repeat business, enhance customer retention, and provide value to customers in line with the VAT treatment principles discussed here. Each program is tailored to the company's specific business model and customer engagement strategy, highlighting the diversity and adaptability of loyalty programs across industries. 

 This treatment of Loyalty Program for VATability matches with the principles outlined in the legislation (Federal Decree-Law No. 18 of 2022 and its Executive Regulation issued vide Cabinet Decision No. 99 of 2022).  

However, it's crucial to ensure that the specific provisions of the UAE VAT law and its interpretation by the UAE tax authority fully support these positions, especially since VAT laws and their application can be nuanced and subject to interpretation. Our suggested treatment does not directly contradict any VAT principles and seems to align well with common interpretations of loyalty program treatments under VAT. 

Linking the Vouchers and Loyalty Program: 

It's important to note that vouchers and loyalty points, while similar in their goal to promote future purchases, are treated differently under UAE VAT laws. Vouchers have explicit provisions regarding their issuance, redemption, and the point of VAT charge, which are clearly outlined in the VAT Legislation.  

Loyalty points, however, as explained, follow a more general interpretation of VAT principles regarding rewards for customer loyalty. Both treatments aim to accurately reflect the economic reality and purpose behind these mechanisms. 

Relevant Extracts of the Provisions of the UAE VAT Legislation: 

Note: Following Articles of Federal Decree-Law No. 18 of 2022 – Issued 26 Sep 2022 (Effective from 1 Jan 2023) [“DL”] and its Executive Regulation issued vide Cabinet Decision No. 99 of 2022 – Issued 21 Oct 2022 (Effective from 1 Jan 2023) [“ER”] have been taken into consideration for deciding the “applicability of VAT on Vouchers issued and used.” 

Any instrument that gives the right to receive Goods or Services against the value stated thereon or the right to receive a discount on the price of the Goods or Services. Vouchers do not include postage stamps issued by the Emirates Post Group. (A1 DL) 

The sale or issuance of any Voucher is not a supply unless the Consideration received in respect thereof exceeds its advertised monetary value. (A7 DL) i.e. outside the scope of VAT (to the extent the voucher is not sold above face value). 

The value of supply of a Voucher is the difference between the consideration received by the supplier of the Voucher and the advertised monetary value of the Voucher. (A40 DL) 

(A28 ER) 

2. The value of supply may be reduced in the case of a discount if the following conditions are met:  

a. The customer has benefited from the reduction in price.  

b. The supplier funded the discount.  

3. The value of a discount shall be the amount by which the Consideration is reduced.  

4. The value of a discount shall not include the value of any Voucher used, and any such reduction will be ignored unless that Voucher was provided for no Consideration.  

5. Where the Voucher was issued and sold by the Supplier for Consideration that is less than the value stated on the Voucher, the value of a discount shall be the difference between the value of the Voucher and the Consideration paid for that Voucher.  

6. “Voucher” shall not include an instrument that gives the right to receive Goods or Services or the right to receive a discount on the price of the Goods or Services unless the monetary value for which the Voucher may be redeemed is identifiable at the time the Voucher is issued.  

The date of a supply of a Voucher shall be the date of issuance or supply thereafter. (A26 DL) 

 Disclaimer: Content posted is for informational and knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice. 

Contributor

CA Hemant Mundhra is a highly experienced Chartered Accountant and Management Accountant with over 15 years of expertise in the field. He is currently working as CFO on Demand at The Total CFO Management Consultancy in Dubai, UAE. Hemant helps clients solve their financial management needs by providing actionable documents like business plans, valuation and budget documents, with additional services in compliance, corporate governance, and taxation matters.

Neetu Jose is a Partner at Stuart & Hamlyn Chartered Accountants and a Fellow member of the Institute of Chartered Accountants of India. With over 20 years of professional experience in both India and the UAE, she is a seasoned finance professional. Neetu has accumulated over a decade of industry experience in the UAE, demonstrating proficiency in accounting, auditing, financial advisory services, and UAE VAT. Her diverse background includes working in various sectors such as retail, manufacturing, health & hospitality, and shipping.