Transcript of the episode: https://www.youtube.com/watch?v=Lv8qmLgnkxw
KN: Good evening. On loyalty schemes at night: Katarzyna Nawrocka and, joining me in the studio once again today, Mr Paweł Galiński, a solicitor.
PG: Good evening.
KN: Mr Lawyer, today we will be discussing various tax aspects of premiere sales. We use the term ‘premiere sales’ – is it defined in the legislation?
PG: The shortest possible answer to this question is that the term as a whole – that is, ”bonus sales’ – is not defined in any way. However, the individual elements of this concept do indeed have established legal meanings, so in reality, by applying certain rules of interpretation, we can reconstruct the meaning of this term.
At first glance, we can immediately see that the concept of ‘bonus sales’ consists of two elements: there must be a sales element, and there must be a bonus element, right? Consequently, this means that if we wish to discuss rewards awarded to participants in loyalty schemes in connection with ‘bonus sales’, then, firstly: a civil law contract of sale must be concluded between the person selling the goods or service and the purchaser, and the second element must be an obligation. A sort of guarantee that if the purchaser buys the goods or service, they will receive the said bonus in return for concluding that transaction. In this context, the concept of a ‘bonus sale’ can be understood broadly, as the bonus may relate to a specific transaction; for example, bonus Y is provided for the purchase of product X, correct? For the purchase of service A, bonus B is provided. This may be a cash bonus or a bonus in the form of goods, but it is also permissible for the bonus to be awarded not for the purchase of a specific good or service, but for achieving a certain level of turnover. So, for example, if a programme participant purchases certain goods or services to a minimum value within a month or a quarter, they will then receive the bonus in question. So, in reality, that is how it is structured. It is very important to note that both the tax authorities and the administrative courts agree that this bonus does not necessarily have to be awarded for the purchase of a specific, individualised product, as the Act states that these are rewards granted in connection with bonus sales; in other words, there must indeed be a link between the reward and the sale. However, this link does not have to be direct – absolutely direct.
KN: Let us therefore clarify whether bonus sales to consumers are subject to personal income tax (PIT). And is it possible to avoid having to pay tax in this regard? And what legal regulations apply in this area?
PG: Yes, bonus payments are certainly subject to tax. In this regard, the PIT Act sets out rules which, in my view, are fairly straightforward: essentially, a flat-rate income tax of 10 per cent applies, which should be collected in full by the organiser, who acts as the tax withholder in this respect. However, if the value of an individual prize is up to 2,000 zlotys, it is exempt from tax and this tax does not need to be collected at all. However, we must bear in mind a very important exception, which is that this tax preference – that is, the possibility of exempting a prize resulting from a promotional sale from tax – will never apply to prizes awarded to sole traders. In other words, to put it simply, to entrepreneurs.
KN: Mr Lawyer, I have many friends who boast that they win lots of prizes throughout the year and don’t pay any tax on them. How is that possible?
PG: As for these friends of mine, I can say that they pay no heed to tax law, and the fact that they boast about such prizes and the lack of taxation suggests, with a high degree of probability, that this is entirely in accordance with the law. This stems from one simple rule. This principle states that, during the course of a year, a consumer may win an unlimited number of prizes linked to the launch sales of manufacturers of washing powder, televisions, smartphones, washing-up liquid, mopeds and so on. And provided that the value of each prize its value remains within reasonable limits – and our legislature has defined these reasonable limits at 2,000 zlotys – then they do not have to pay any tax on them, and the tax office will never be able to bring any charges against them on this basis. Therefore, if you have a friend who, for example, has furnished their flat with prizes from a launch sale, they are most likely not a tax offender.
KN: And whilst these were most likely prizes of a lower value, let’s assume that we win a prize worth more than 10,000 zlotys. How does taxation work in that case?
PG: In this situation, we are clearly talking about durable goods of considerable value. So we are dealing with a situation where we exceed the threshold of 2,000 zlotys and, in this case, to put it simply, there’s no leniency, and our legislature states that if someone is lucky enough to receive such rewards – say, through loyalty schemes – then tax must be paid on them. And here we are, as it were, entering a tax territory where, on the one hand, the organiser, as the tax payer, must collect this tax, right? And it should be paid by the person receiving the reward, that is, the participant. And so we need to distinguish between the different types of prize awarded to a participant. The situation is quite straightforward when the reward is financial in nature, because, let’s say, a financial reward from a launch sale is worth 10,000 zlotys; this is simply a cash bonus, as that is the simplest way to describe it. Consequently, 10% tax should be deducted from the entire amount, which in the example I have given amounts to 1,000 zlotys. However, the situation becomes slightly more complicated if the prize is, for example, a professional audio system or a 60-inch television.
KN: So how do we determine the value of such a prize?
PG: The organiser must, of course, know the value of this prize, as they are, so to speak, the only party with full knowledge of the matter. And in this situation, let’s say, perhaps we should stick with this audio system. We have this audio set, which costs 10,000 zlotys, and so we’re faced with a situation where the legislator says: ‘Organiser, you are to award prizes of this value, but before you hand over this prize to the lucky winner, well, that lucky winner must pay tax. So a situation arises – I’m not sure if this is the perfect comparison, but let’s say it’s a bit of a ‘carrot and stick’ approach – where this prize is already waiting for the consumer, but before they can get their hands on it, they first have to pay something out of their own pocket. This sort of situation can sometimes be viewed negatively by consumers – that is, our prize-winners – because, on the one hand, they’re being given something, but on the other, something is being demanded of them,
KN: There’s just one slight snag.
PG: There’s a catch, a bit of a snag. It’s the sort of situation that could be interpreted by the consumer as somewhat ambiguous, isn’t it? And of course, ambiguity or any sort of bad relationship with the customer is the last thing a sponsor expects when they commission a promotional campaign from an organiser, because they commission it to promote their products, build their company’s image, the image of the services they provide, their reputation and prestige, and increase their market share, and so on. So, in our experience, it is a very common market practice to ‘gross up’ the value of a prize in kind. The term ‘grossing up’ sounds, to say the least, rather unappealing when it comes from the accounts department. Yet behind this accounting term lies a process that is very beneficial and very pleasant for the consumer. It works like this: if the prize in question is an audio system, which is quite expensive at 10,000 zlotys, the sponsor comes to an agreement with the organiser and says: ‘I’m funding the prize – an audio system worth ten thousand zlotys, but to look after the lucky winner who secures this prize, I’ll also cover the tax they’d otherwise have to pay before they can pack that audio system into the boot of their car. So, in this case, the prize in kind is actually of a hybrid nature; that is to say, it consists of a physical component – namely, this now legendary audio system – and, in addition to that, there is a cash sum, which is specified in the terms and conditions; this sum is intended to cover the tax, so that our customer can take the audio system home at no cost and start listening to their favourite tracks straight away, without having to bear the cost of that tax.
KN: So this is ideal for us when we want to protect the reputation of our brand or company, as we effectively cover the cost of this tax so that the winner can enjoy their prize without having to bear any costs in this regard.
PG: Exactly. This is, of course, a mechanism which, from the sponsor’s perspective, increases the amount they have to contribute towards funding the prizes provided for under a given programme. However, it is undoubtedly a measure that strengthens the sponsor’s market image and improves their relationship with consumers; for this reason, this method is widely used by organisers of loyalty schemes, and it would not be widely used if sponsors did not agree to fund this ‘tax’. I think it is a kind of market consensus, as I would put it.
KN: I think we can safely say that, for us as a sponsor, this represents a financial cost, but it yields tangible benefits in terms of brand prestige.
PG: Yes, certainly, apart from the tax aspect, the market response to this move is definitely very positive.
KN: And what about bonus sales by businesses? What are the tax implications here?.
PG: You asked a question regarding the taxation of prizes awarded as part of a launch sale to sole traders. In this situation, we really need to discuss two approaches, as there are certain discrepancies between the tax authorities and the administrative courts, which have a very significant impact on the potential tax liabilities of the organiser of the loyalty scheme. The tax authorities take a consistent view that if a business owner receives a reward linked to a promotional sale, they must, without exception, classify the value of that reward as income from business activity and tax it in accordance with the same rules as they do for their business income. In this regard, no exceptions should be made; from the tax authorities’ perspective, this is therefore a fairly standard approach. However, another issue arises here, namely that the business owner must, in fact, consider for themselves what the value of this benefit is, as a wide variety of rewards may be awarded to them as part of a launch sale. And often these are prizes whose value may be completely unknown to them, as they may consist of goods which they do not normally purchase or trade in – in other words, goods that fall outside the scope of their business activities. The tax authorities, however, seem to pay no attention to this and say: ‘Entrepreneur, if you have received a prize, it is your duty to determine its market value – that is to say, its monetary value.’ And the entrepreneur must think very carefully. They must determine this value and treat it as their taxable income. When determining the value of such a prize, the entrepreneur, at least in accordance with the law, should take into account its standard, any degree of wear and tear, and the date on which it was awarded to them. At least, that is the plain text of the regulations. These regulations do not fully translate into practical terms for rewards issued under loyalty schemes, as it is difficult to imagine that the condition of items issued under a loyalty scheme could vary. As a rule, these are new items, so in this respect there is no room for debate. However, organisers of loyalty programmes have developed what is known as ‘best practice’ when it comes to assisting businesses in determining this value. Generally speaking, if a reward is issued to a business, the organiser informs the business of the market value of that reward in any document, simply to facilitate the business’s tax accounting in relation to that reward, thereby relieving the business of a number of obligations. Here, whilst discussing this approach taken by the tax authorities, it is also worth mentioning that the consequence of shifting the tax reporting obligations onto the business owner is that the organiser does not, under any circumstances, act as a tax withholder, so, in reality, no one withholds tax or fulfils these obligations towards the tax office themselves. However, we should now discuss another perspective on the same issue, namely the one promoted by the administrative courts for several years. To my knowledge, this dates back to around 2015, that is, about five years ago. The administrative courts have taken the view that the provision of the PIT Act stipulating a flat-rate income tax on prizes awarded for sales promotions and competitions should be applied uniformly, whether the prize is awarded to a consumer or a business. Why do the courts take this view? They take this view because the provision in question makes no distinction between its recipients, does it? And if there is no distinction between the addressees, the courts consider that it should be applied equally to every participant in economic transactions. This practice of the administrative courts has very significant implications for the scope of the obligations incumbent on the organiser of a loyalty scheme. We must bear in mind that the court is addressing the organiser in this way. Organiser, regardless of who you award this prize to – be it a consumer or a business – it is your duty to collect this flat-rate tax. And whilst, as we have already agreed, this is a fairly natural consequence in the case of consumers, a problem arises when it comes to businesses, which are required to account for this tax themselves. So this tax cannot be settled twice: once by the organiser as the payer, whom the courts order to collect this tax, and a second time, potentially, by the business receiving this prize derived from a source classified as business activity. So this kind of conflicting interpretation – one approach taken by the tax authorities and another by the administrative courts – is certainly not a positive development for the organisers of loyalty schemes. And, to the best of my knowledge and experience, they are doing everything they can to eliminate this risk. There are these two conflicting approaches: that of the tax authorities and that of the administrative courts. This places organisers in a difficult position, and they must therefore give very careful consideration to how to proceed so that, whilst running programmes on a massive scale, they can limit or mitigate this tax risk to a minimum. Fortunately, our legal system provides instruments that also enable organisers of loyalty programmes to effectively limit this risk. The primary such instrument is individual tax rulings issued by the Director of the National Tax Information Service. Any organiser of a loyalty programme may submit such a request for an interpretation; in this case, they approach the tax authority to seek clarification on tax law provisions and act in the capacity of a tax payer. This means that the organiser may ask the tax authority how they should account for tax on rewards issued to business owners. If such a programme is well-structured and then clearly described in the application, there is a very good chance that the tax authority will reply that the organiser has no obligations as a tax withholder, and that the entire tax must be accounted for by the business owner. This allows us, one might say, to completely rule out the risk that the organiser will ever be deemed a withholding agent in this specific set of circumstances. This is a very, very important point, as it allows us to increase the certainty of our business operations and avoid a situation where, years later, the tax authority identifies a tax arrears on our part.
KN: We wouldn’t want that.
PG: Exactly.
KN: Loyalty schemes are increasingly being targeted at staff who are responsible for taking orders, for example in restaurants or hotels. Let’s talk about this.
PG: Yes, that’s true. This is an example of the sort of rather unconventional loyalty schemes that do not fit into these basic models. They are, one might say, campaigns of an undefined nature. And when considering and designing this type of loyalty programme, the business owner must focus on this first and foremost: correctly defining the target audience for the loyalty programme. We must remember that, in this situation, we are, in a sense, dealing with a hybrid arrangement. The sponsor funding this programme is keen to increase its market share – which, in reality, means boosting the turnover generated by hotels, restaurants, bars, pubs and other such commercial establishments, isn’t that right? So, in reality, it is this turnover that is key: the ordering of goods or services; however, the target audience for this programme consists of individuals employed by entities that are completely unrelated to the sponsor, is that correct? So it’s very important here that, when drafting the terms and conditions, we describe this in very specific terms, because if we make a mistake and fail to exercise sufficient due diligence, the result could be that we end up directing this programme at a company, at that shop, yes, which is not at all what we mean – that’s not the point at all – so first and foremost we need to define this correctly, don’t we? Once we’ve defined this correctly, we then need to consider how the rewards earned by the sales employee might be taxed. Unfortunately, we are faced here with a situation where this employee cannot benefit from tax relief, as these rewards are not classified as being awarded as part of a sales incentive scheme. This simply rules out tax relief. The inability to classify these rewards as being awarded as part of a sales incentive scheme stems from the fact that someone else is purchasing the goods or services – as the purchasers are, for example, the aforementioned restaurants – whilst the bonus in this respect is received by an employee or a contractor employed by that commercial entity. A further consequence of this is that income of this nature must be taxed by that employee and is taxed in accordance with general rules. Consequently, it may well be the case that it is taxed at a rate of 32%; that is how it stands. Here, too, we must bear in mind that the organiser, when awarding this type of prize, does not act as a tax withholder, i.e. they do not deduct any tax at the stage of awarding the prize.
KN: Mr Galiński, thank you very much for meeting with us today and for sharing your knowledge. Our guest today was Mr Paweł Galiński. Thank you.
PG: Thank you very much for the invitation. I would also like to thank you all for your attention, and I hope we’ll meet again in future issues.
