Supreme Court Rules VAT Can Be Levied on Affiliate Point Payments From 2018 Onward

▲ Supreme Court of Korea

The Supreme Court has ruled that value-added tax (VAT) can be levied on amounts paid using accumulated affiliate points starting from 2018, when the amended Value-Added Tax Act went into effect.

However, the Supreme Court made it clear that the government's imposition of VAT solely through a 2017 enforcement decree amendment was "invalid as it expanded taxation requirements through administrative legislation in violation of the principle of no taxation without law."

During a full bench hearing presided over by Chief Justice Shin Sook-hee today (July 22), the Supreme Court partially overturned the lower court's ruling in favor of the plaintiff and sent the case back to the Seoul High Court in a lawsuit filed by GS Retail against tax authorities, asking them to cancel the VAT levied on point payments made through affiliated credit card companies from 2017 to 2019.

Applying the same legal principles, the Supreme Court also reversed the lower court's ruling against the plaintiff in a lawsuit filed by automotive parts company AutoN—presided over by Justice Lee Heung-goo—requesting the cancellation of VAT on point payments from 2017, prior to the amendment of the Value-Added Tax Act, and remanded the case to the Suwon High Court.

GS Retail has operated a point accumulation system in partnership with credit card companies.

Under this system, when customers make purchases using affiliated credit cards (first transaction), points are accumulated, and customers can use those points to pay for goods in subsequent transactions (second transaction).

GS Retail was subsequently reimbursed by the card companies for the amount paid using points.

In the case of AutoN, customers who purchased new vehicles from its affiliate Kia received a certain percentage of the purchase price as points, which they could then use to buy goods at a shopping mall operated by AutoN.

AutoN was also later reimbursed for the equivalent amount of points by Kia.

The core issue was whether VAT could be levied on amounts paid using points or mileage accumulated from affiliated credit card companies or partner businesses.

The current VAT Act excludes discounts provided at the time of purchase, known as "enuri" amounts, from taxation.

The dispute arose as the enforcement decree and the Value-Added Tax Act were successively amended following a 2016 Supreme Court full bench ruling that point payments qualify as "enuri" amounts and are therefore exempt from VAT.

To establish a legal basis for levying VAT on "affiliate point payments," the government first amended the enforcement decree in April 2017, followed by the belated amendment of the underlying Value-Added Tax Act in December of that year.

Consequently, the Supreme Court determined that VAT imposed prior to the implementation of the amended VAT Act in 2018 was based on an "enforcement decree that was invalid as it exceeded the scope of legislative delegation" and must therefore be canceled.

The controversial enforcement decree, which took effect in April 2017, stipulated that "self-accumulated mileage" directly accumulated by a company qualified as an "enuri" amount and was thus exempt from VAT. However, it mandated that sales revenue settled using points accumulated by third parties—such as affiliates—must be included in the supply value and subjected to VAT if the corresponding amount was reimbursed by the third party.

This meant that VAT could be levied if the point payment amount was settled by an affiliate.

Nevertheless, the Supreme Court ruled that the relevant enforcement decree provision "violated the principle of no taxation without law because it taxed third-party accumulated mileage that qualifies as an 'enuri' amount, conflicting with higher statutes and expanding the scope of taxation solely through a presidential decree beyond the scope delegated by the law."

However, in December 2017, the National Assembly also amended the parent Value-Added Tax Act to include "transactions settled with mileage and other means" in the supply value, which serves as the tax base.

The Supreme Court explained, "With the legislative amendment, the scope of the supply value—which is the VAT tax base—was expanded within the limits set by the enforcement decree, and conversely, the scope of 'enuri' amounts not included in the supply value was reduced accordingly. Therefore, the enforcement decree provision relying on the said legal provision as a basis for delegation did not exceed the limits of delegated legislation."

It added, "The scope of transactions or supply values subject to value-added tax fundamentally falls within the realm of legislative policy. The legislature manifested its determination to include 'amounts reimbursed by third parties for portions paid with third-party accumulated mileage' in the supply value by granting a new basis of delegation to the enforcement decree provision in question, and legal interpretation should be made in a direction that respects this as much as possible."

Ultimately, the Supreme Court concluded that the imposition of VAT on point transactions involving GS Retail from April to December 2017 must be canceled, while the imposition of VAT on transactions from January 2018 to June 2019 was lawful.

For AutoN, since only the 2017 transactions were at issue in the lawsuit, all of them were ruled to be exempt from VAT.

The Supreme Court stated, "We have reaffirmed that fundamental and essential matters concerning tax obligations, such as the types and tax rates of taxes, must be prescribed by laws enacted by the National Assembly, and that expanding taxation requirements through administrative legislation such as orders or rules without legislative delegation violates the Constitution and laws."

It further noted, "At the same time, it is significant that we interpreted that once a basis for legislative delegation was established regarding a previously invalid regulatory decree, the scope of taxation was lawfully expanded, thereby respecting the legislature's determination on matters falling within the realm of legislative policy."

(Photo: Yonhap News)

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