To tax or not to tax? Questioning customer loyalty programmes

• Jurisdiction: South Africa
• Citation: (2020) 32 SA Merc LJ 75
• Published date: 19 January 2021
• Date: 19 January 2021
• Pages: 75-98

JOBNAME: SAMLJ Vol 31 Part 1 PAGE: 1 SESS: 59 OUTPUT: Mon Nov 9 15:26:37 2020 SUM: 3ACAC92E

/first/JUTA/SA−Merc−2020/SAMLJ−2020−V32−pt1/04_Pidduck

TO TAX OR NOT TO TAX? QUESTIONING

CUSTOMER LOYALTY PROGRAMMES

SUMARIE SWANEPOEL*

TERESA PIDDUCK

†

Senior lecturers in the Department of Taxation, University of Pretoria

Abstract

South Africa, like many other countries, needs additional sources of tax

revenues. Recent debate indicates that one potential source of revenue

is the taxation of customer loyalty rewards in the hands of customers.

The arguments for the taxation of these rewards have been put forward

from a principled perspective and not from a legal basis. We argue that

while the taxation of these rewards would increase tax revenue,

legislative reform is required as there are strong arguments that the

rewards are actually not taxable. We suggest tax reforms that attempt

to provide certainty and equity in the treatment of such rewards as a

whole in order to provide additional revenue for the fiscus.

I INTRODUCTION

‘My job is to make the f‌iscus stronger’,

1

said the Minister of Finance

when delivering his ‘Medium term budget policy statement’ in 2018.

Notably, the content and title of his speech, ‘The economy at a cross

roads’, ref‌lect that weak economic performance and revenue shortfalls

have contributed to some slippage in f‌iscal projections in South Africa.

2

In this context, it is evident that South Africa, like many other countries,

needs to broaden and protect its tax base to combat weak economic

performance and revenue shortfalls. In an attempt to f‌ind additional

sources of tax revenue, proposals have been made for taxing customers

* CA(SA) MCom South African & International Tax, BCom (Hons) CTA, BCom (Acc).

†

PhD (Taxation) CA(SA), MCom South African & International Tax, BCom (Hons),

CTA, BBusCom (Acc).

1

National Treasury: Republic of South Africa, Minister of Finance TT Mboweni, ‘Medium

term budget policy statement 2018’ page 12, available at http://www.treasury.gov.za/

documents/mtbps/2018/speech/speech.pdf, accessed on 18 October 2019.

2

National Treasury: Republic of South Africa, ‘National budget: Fiscal policy’ page 25,

available at http://www.treasury.gov.za/documents/National%20Budget/2019/review/Chapter

%203.pdf, accessed on 9 October 2019.

002 - SA Mercantile Law - November 3, 2020

75

(2020) 32 SA Merc LJ 75

© Juta and Company (Pty) Ltd

JOBNAME: SAMLJ Vol 31 Part 1 PAGE: 2 SESS: 61 OUTPUT: Mon Nov 9 15:26:37 2020 SUM: 55629B3E

/first/JUTA/SA−Merc−2020/SAMLJ−2020−V32−pt1/04_Pidduck

on the rewards derived from their participation in customer loyalty

programmes (CLPs).

3

Brief‌ly, a CLP is used by businesses to offer customers incentives to

remain loyal. These incentives take the form of f‌inancial and non-

f‌inancial rewards.

4

Interestingly, 75 per cent of customers who are

economically active subscribe to CLPs.

5

Growth in the CLP sector has

been experienced both locally and internationally,

6

and research indi-

cates that customers have become more discerning and selective than

they were in the past about the CLPs to which they subscribe.

7

These

CLPs now have the power to change customer behaviour by incentivis-

ing customers to work harder toward receiving these rewards.

8

The above observations regarding the prevalence of CLPs in South

Africa have raised questions regarding the taxation of the rewards

received by customers.

9

Some authors argue that, while businesses are

currently able to reduce their taxable income by deducting the costs

related to providing CLP rewards (or to reduce taxable income by

accounting for cash discounts), there is no specif‌ic model to tax the

3

Odendaal & Pidduck, ‘Avoiding Tax in South Africa’s Retail Industry via Customer

Loyalty Programs’ (2014) 2(5) Journal of Economic and Financial Studies 6; Pidduck &

Odendaal, ‘Customer Loyalty Programmes: The Loss to the Fiscus in South Africa’ (2013)

12(12) International Business and Economics Research Journal 1521; Pidduck et al, ‘Progressive

Tax: A Proposal for Customer Loyalty Programmes’ (2019) 31(4) Pacific Accounting Review

626.

4

Breugelmans et al, ‘Advancing Research on Loyalty Programs: A Future Research

Agenda’ (2015) 26(2) Marketing Letters 127 at 129; Consumer Protection Act 68 of 2008;

Olivier & Burnstone, ‘South African loyalty rewards survey 2014’ page 3, available at

http://www.eighty20.co.za/valuenettwork-south-african-loyalty-and-rewards-survey-2014/,

accessed on 18 October 2019; SARS, 2014 ‘Discussion paper on the VAT treatment of loyalty

programmes’, available at https://www.sars.gov.za/AllDocs/LegalDoclib/DiscPapers/LAPD-

LPrep-DP-2014–01%20-%20Discussion%20Paper%20on%20VAT%20Treatment%20of

%20Loyalty%20Programmes.pdf, accessed on 17 October 2019.

5

Claasen, ‘How retailers are cashing in on customer loyalty’ page 1, available at

https://www.businesslive.co.za/fm/features/2019–04–04-retailers-cashing-in-on-customer-

loyalty/, accessed on 18 October 2019; Cromhout & Netto, ‘South Africa loyalty landscape

2018/9’ page 2, available at https://truth.co.za/articles/whitepapers/, accessed on 9 October

2019.

6

Cromhout et al, ‘The current state of loyalty in South Africa’ page 2, available at

http://truth.co.za/wp-content/uploads/Truth-2016-Loyalty-Whitepaper-WEB_FINAL1.pdf,

accessed on 11 June 2018.

7

Cromhout & Netto, ‘South Africa loyalty landscape 2018/9’ page 5, available at

https://truth.co.za/articles/whitepapers/, accessed on 9 October 2019.

8

Claasen, ‘How retailers are cashing in on customer loyalty’ page 1, available at

https://www.businesslive.co.za/fm/features/2019–04–04-retailers-cashing-in-on-customer-

loyalty/, accessed on 18 October 2019; Cromhout et al, ‘Consumer loyalty behaviour in South

Africa’ page 5, available at https://truth.co.za/articles/whitepapers/, accessed on 9 October

2019.

9

Odendaal & Pidduck, (2014) 2(5) Journal of Economic and Financial Studies 6; Pidduck &

Odendaal, (2013) 12(12) International Business and Economics Research Journal 1521;

Pidduck et al, (2019) 31(4) Pacific Accounting Review 626.

002 - SA Mercantile Law - November 3, 2020

(2020) 32 SA MERC LJ

76

© Juta and Company (Pty) Ltd