KN: On loyalty schemes at night. Once again, we’re joined in the studio by Mr Paweł Galiński. Good evening. Mr Galiński, today we’ll be discussing some interesting legal and tax aspects of loyalty schemes.
PG: Yes, that is exactly our approach.
KN: So we’re covering a few separate topics.
PG: Yes, these will be topics that aren’t directly related to one another. I don’t think some of them are particularly popular, but I do think they’re important and worth considering.
KN: I’ll start with a more personal question, as it concerns private individuals. We have a situation where a winner has won a trip abroad for two people – let’s say that’s the case. How is such a prize taxed? We know of one winner, but they’re taking a companion with them.
PG: Yes, this sort of situation – it may not be the most popular form of reward, but they do actually happen. A trip abroad this year might not be the most desirable reward given the current circumstances, but generally speaking, rewards of this sort tend to be well received. This is a problem faced by the organiser of the loyalty programme. As we are dealing with a situation where more than one person may be the recipient of this reward – in the case of the voucher mentioned, it could be two people – They may use this reward together, so the organiser begins to wonder. If two people, three, or even a larger group, who actually derives the benefit? Because from the point of view of tax law, particularly personal income tax, the key question is really who receives this benefit; in the case of rewards, it is a benefit of a gratuitous nature.
KN: I’d just like to interject here, because the point of contention is precisely that, although I didn’t take part in this competition, I am nevertheless benefiting from this trip by going on it as an accompanying person.
PG: Yes, exactly. My position on this matter is that the recipient of this benefit – that is, the person who receives it – is solely the individual who actually took part in this loyalty scheme. However, such status cannot be attributed to a partner or any other person – not even a family member – whom the winner invites to share the voucher. What is the basis for this? Undoubtedly, this type of reward constitutes a benefit in kind provided by the organiser to the winner, and there is a vast body of material on benefits in kind in both case law and tax practice. I think that if printed out, they would easily take up most of our studio, and might not even all fit, as gratuitous benefits are a vast subject. However, to summarise this topic briefly, one could say that for something to be considered a gratuitous benefit, it must possess the following characteristics. It must undoubtedly be individualised in terms of content; we must have a specific value for this benefit, and this value should be defined in monetary terms; furthermore, we must know exactly who the recipient of this benefit is. It is accepted in both civil and tax law that, for such a benefit to be provided, there must be at least two parties involved. There must be the party who makes this transfer from their own assets – in our model, this is always the organiser – and there must be the party who benefits from this benefit, which in this case is our winner. And if we examine this issue with this element in mind, it is clear that this type of legal relationship exists solely between the organiser and the winner; we cannot identify such a relationship between other individuals who may potentially take part in this trip. I will set aside the fact that such individuals may be completely unknown at the stage when the voucher is issued; so, in reality, how would the organiser, as the payer, be expected to fulfil this obligation? It would be entirely fictitious. And there is a rule of interpretation to the effect that we cannot interpret legal provisions in a way that would lead to the reconstruction of absurd norms – this is known as ‘interpretation ad absurdum’ – in other words, we cannot reconstruct the content of a general legal provision in a way that would render it unenforceable for those to whom it is addressed. Another point we must certainly bear in mind is the fact that there is no relationship whatsoever between the organiser and this third party—that is, the so-called ‘travel companion’, as we’ll call him for short, there is no relationship whatsoever, which—in legal terms—means that the organiser has no legal basis for making a payment to this third party. These parties are not bound by any legal relationship; consequently, we cannot impose any tax consequences on the organiser. It is also very important to note that tax legislation stipulates that the obligations of a tax payer may only be fulfilled by the entity that makes a payment to the recipient of that payment. In this context, the relationship between the provider and the recipient of the benefit can only be established along the line of organiser–participant in the programme. Consequently, there is no alternative: only the winner of this prize in the form of a voucher can be taxed, regardless of how many people accompany them on the trip.
KN: So it’s good to be a support person in a situation like this.
PG: Yes, that’s true.
KN: Mr Lawyer, it’s usually a purchase that leads us to a reward. We can buy a product that automatically entitles us to a reward, or one that allows us to earn points which lead us to that reward. But there are also other ways to collect points and win prizes. What are these methods?
PG: Yes, you are absolutely right. The classic model involves linking a purchase to a reward or a bonus. It is, as it were, the basic, fundamental model. However, as I believe we discussed here during our previous meeting, rewards under a bonus sales scheme may or may not be a direct consequence of the purchase itself, because our legislation states that these are rewards linked to bonus sales.
PG: According to the latest practice of the tax authorities, this means that prizes of this kind may also be awarded in return for so-called non-commercial activities carried out by individual participants. What do we mean by this term? It is a very broad concept and, in reality, has no limits; the only boundaries are set by the ingenuity and innovation of our entrepreneurs. However, to give our viewers some idea of what this entails, we can say that these are most often activities related to online participation in loyalty schemes. These include, for example, taking part in webinars held online, completing various knowledge tests, and participating electronically in consumer group meetings. The range of solutions is, in fact, unlimited, and what is important in our discussion is that the tax authorities have recently begun to agree with us that if we add these non-commercial elements to a traditional programme based on bonus sales, such a modification will in no way affect the tax classification of the scheme. The scheme will still be classified as a sales-based incentive scheme. This is very important. When running this programme, we do not need, to put it simply, to distinguish between the points earned by a participant. This means that a participant, for example, earns points for purchasing goods and, at the same time, earns points for, say, completing knowledge tests on the products we are promoting. And if they log into their dashboard and, for example, check how many points they have earned, these points are in no way divided into points derived from purchasing activities and points derived from non-commercial activities. To put it simply, they all go into the same pot. The consequence of this is that all rewards a participant receives in exchange for the points they collect are classified as rewards derived from launch sales. As a result, we can take advantage of tax preferences: firstly, all these rewards can be taxed at a flat rate of 10 per cent income tax, and, in addition, we can still benefit from a tax exemption up to 2,000 zlotys. It would be an oversimplification to conclude the topic here. To achieve the effect I mentioned – namely, the uniform treatment of this type of scheme – when designing its framework, we must bear in mind that it must, above all, include a mechanism for rewarding the purchase of specific goods or services; however, the elements discussed are not the only ones that are relevant to this issue. In order to benefit from the tax incentives I mentioned earlier, a programme of this kind must, first and foremost, be aimed at increasing the organiser’s sales turnover, and, in addition, it must also include elements of competition, meaning that individual participants must compete against one another. If these elements were absent, we would face a serious problem in classifying such a programme. It is also crucial that the purpose of the programme is to increase the turnover generated by our client, that is, in this case, by the sponsor. As we discussed, this interpretation of tax law, recently adopted by the Director of the National Tax Information Service, is highly significant for business practice, as it allows, first and foremost, promotional activities to be classified in a uniform manner and, as a launch sale, to benefit from a tax exemption up to 2,000 zlotys, as well as to avoid the need to submit a PIT 11 tax return.
KN: Mr Lawyer, introducing a quantitative programme involves a lengthy decision-making process, negotiations and a significant financial outlay for the sponsor. Are there any ways, any possibility of a tax relief for the sponsor?
PG: This is also an important point you have raised, and from a business owner’s perspective it is a matter of no small significance, because, as you mentioned, the loyalty schemes organised by most large marketing agencies cover customers throughout the country, and are therefore organised on a large scale. From my experience, I know that an increasing number of marketing agencies are even organising one-off loyalty programmes aimed at entire regions of Europe. In other words, loyalty programmes run from Poland actually cover the Czech Republic, Slovakia and sometimes even countries further south in Europe; consequently, launching such a programme undoubtedly entails a significant financial burden. A natural consequence of the sponsor bearing the organiser’s expenses is that these expenses consist of remuneration for the services provided by the organiser and the cost of the rewards awarded under the programme. A natural consequence of this is that a sponsor of this kind wishes to be able to classify the entirety of this expenditure as ‘tax-deductible costs’, which directly translates into a reduction in the tax paid by the sponsor in Poland. The first thing we must bear in mind when considering whether a sponsor can treat expenditure on a loyalty programme as a tax-deductible expense is the so-called basic conditions set out in the Income Tax Acts, which determine whether this expenditure can be classified as a tax-deductible expense; and as far as these conditions are concerned, the primary one is that the expenditure must be incurred personally by the taxpayer. The second element is that this expenditure must be strictly related to the taxpayer’s business activities. The purpose for which this expenditure is incurred is also very important. It is generally assumed that this expense must be incurred for the purpose of generating income or securing, or maintaining, a source of income; whilst this does not follow directly from the legislation, it is supported by a wealth of case law. Such an expense must be properly documented and, furthermore, must not feature in the so-called ‘negative list’ of tax-deductible costs; that is to say, it must not be excluded from tax-deductible costs by the legislature.
KN: In this case, can we consider that these conditions have been met?
PG: In my view, yes, but there is no guarantee that the tax office will always agree with our – or my – opinion. Why do I believe that, in this case, these conditions are met? First and foremost, the costs of organising the loyalty scheme are undoubtedly borne by the sponsor, so this condition is met. The expense borne by the sponsor is final in nature; that is to say, what they pay for organising the programme and for issuing the rewards is not reimbursed to them in any way, meaning it effectively constitutes a charge against their assets. To achieve the effect I mentioned – namely, the uniform treatment of this type of programme – when designing its framework, we must bear in mind that it must, first and foremost, include a mechanism for rewarding the purchase of specific goods or services; furthermore, the objective why the sponsor decides to commission the organisation of this loyalty programme is aimed at increasing their company’s turnover; so, undoubtedly, the sponsor does so in order to increase the revenue of the company they manage. If the contract is correctly drafted, then we also have this fundamental element relating to the documentation of the service; these are the requirements, and furthermore, this expenditure is undoubtedly not regarded by the legislator as excluded from tax-deductible costs, so in reality these elements are fulfilled. The devil is in the detail, so any sensible business owner interested in commissioning a loyalty programme should, in my view, when speaking with potential organisers of such a programme, first and foremost analyse in great detail the documentation proposed by the organiser in relation to the implementation of the loyalty programme. The fundamental element of this organisational process is, in fact, a well-drafted contract for the operation of the loyalty programme, and we simply cannot do without it. It is worth knowing what is meant by proper documentation of the fact that the loyalty programme has actually been carried out by the sponsor on behalf of the organiser. The fundamental elements we cannot do without are the contract and invoices; however, given that a loyalty programme is an intangible service, the consequence of this is that the tax authorities have quite stringent expectations regarding the taxpayer’s ability to prove that they have actually purchased the service in question. In recent years, we have seen tax authorities raising their expectations regarding the evidence a taxpayer must present during a potential audit or tax investigation to demonstrate that a given service was in fact provided to them. And this is where we enter a very practical realm – namely, what the tax authority actually expects from a taxpayer when it approaches them and asks „Please explain to us why you spent X on a nationwide loyalty scheme and how you can prove that this scheme was actually carried out on your behalf by that marketing agency.” If we were to present a contract – even the most comprehensive one – along with 12 invoices, because the programme ran for a year, and was therefore invoiced monthly, I fear that this type of documentation would not be fully accepted by the tax authorities, as they might question whether these services were actually provided on your behalf. So what documents do you need to have? First and foremost, every aspect of the loyalty scheme’s implementation must be documented. You must document the contract negotiation stage and the content of the contract; once the contract has been signed, the process of implementing the loyalty scheme should also be documented, right from the stage of developing the concept itself. Next, you must have evidence in the form of work carried out to draw up the terms and conditions. It is also worth having evidence confirming the distribution of rewards to individual participants – specifically, the documents generated in connection with the distribution of these rewards. In my professional experience, sponsors sometimes even require the organiser to produce a photo report confirming that these rewards have been issued; for example, if the reward is of a more spectacular nature – such as a car – then, traditionally, photojournalists or a film crew, and this is used to produce video footage. We always advise our clients to ensure they have as comprehensive a range of evidence as possible, as this subsequently makes it easier for us, us – the sponsor – to deal with the tax office and significantly minimises the risk that the tax office will rule that these expenses cannot be treated as tax-deductible costs, which would have unfavourable tax consequences for us.
KN: And we all want to be on good terms with the tax office.
PG: Of course.
KN: Mr Lawyer, thank you very much for those interesting facts about the world of taxation and loyalty schemes. We’ll say goodbye for today and hope to see you again.
PG: Thank you very much for the invitation; I’d also like to thank you all for your attention, and I hope we’ll meet again in future series of the programme.
