Provision for obligations from customer loyalty program

The recognition of a provision for obligations arising from a personalised customer loyalty programme, under which a company obliges itself to grant discounts on future purchases, is a regular subject of dispute between the taxpayer and the tax office, particularly in external tax audits. In its ruling of September 29, 2012 (Case No. IV R 20/19), the German Federal Fiscal Court had to deal with a constellation that is very important in practice.

In the case in question, a company issued a loyalty card as part of a customer loyalty programme. The holders of this loyalty card received bonus points on the respective value of their purchase amounting to 3 % or - if they were particularly high-turnover customers – 5 %. One turnover cent corresponded to one point. The bonus points were transferred to the cardholder’s bonus point account and continuously added up. The points credited to the bonus point account could be redeemed from a point balance of 250 points (equivalent to EUR 2.50). If the cardholder’s bonus point account had a bonus point balance of at least 600 points (equivalent to EUR 6.00) at the time of the monthly account settlement, he/she received a voucher in the amount of the actual balance. Bonus points not converted into vouchers (less than 100 points) remained on the customer’s account and were carried over to the next billing period. The tax office did not see the redemption obligation from the bonus point system as a basis for recognising a provision as a liability. Both the tax court of first instance and the German Federal Fiscal Court disagreed.

Accordingly, the company issuing the loyalty card must recognise a provision for the obligation to redeem bonus points granted or vouchers issued as a means of payment to customers participating in the bonus system. Contrary to the opinion of the tax office, the obligation to grant discounts on further sales from the bonus point system did not arise after the balance sheet date. Rather, from an independent legal relationship established before the balance sheet date, the customer has a claim to discounts on past sales that arose before the balance sheet date and a legal claim - also existing before the balance sheet date - to use the bonus points or vouchers for a new purchase. In short, the economic cause of the discount granted under the customer loyalty programme already lies in the first purchase made, i.e. in the period before the balance sheet date, and not in the subsequent purchase required for the discount to be granted.

The first purchase of goods is not only the cause for the granting of the bonus points or vouchers, but also the benchmark for the determination of the number of bonus points to be credited, as this is based on the respective purchase price of the goods. From an economic point of view, this first purchase of goods is therefore discounted. This is because the cardholder does not only receive the goods for the purchase price paid at the time, but also - depending on the purchase price of those goods - bonus points or vouchers, which he/she can use as a means of payment for a further purchase.

With the further purchase of goods, the purchase price of the goods remains unchanged. This merely forms the framework for the fulfilment of the crediting obligation of the company issuing the loyalty card and thus the realisation of the advantage already earned by the cardholder; however, it neither brings the advantage of the cardholder into being nor does it have any influence on its amount. Ultimately, the subsequent purchase is to be regarded merely as an economically insignificant factual feature with regard to the creation of the offsetting obligation.

In addition, it was possible to prove through empirical values from previous years that in the case in question, the company would very likely be called upon to meet its obligations. However, the amount of the obligations was uncertain because it depended on the future purchasing behaviour of the customers. Therefore, no liability from the granting of bonus points or vouchers not redeemed on the balance sheet date had to be recognised, but a provision for contingent liabilities. Neither the principles of non-accounting of pending transactions nor the prohibition of liabilities under § 5 para. 2a of the German Income Tax Act on the accrual of future income or profits preclude the formation of a provision.