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Supreme Court Reconfirms Characterization of Mileage Settlement Payment in Favor of Taxpayer


On February 27, 2020, the Supreme Court upheld the Seoul High Court’s decision that if an airline has executed a business partnership with a partner, such as a credit card company, and a customer purchases a flight ticket of such airline by using mileage points that he/she earned based on transactions with the partner, the amount of such discount should be deemed as sales allowance and, even if the airline received certain payments (settlement payment) from the partner in proportion to the earned mileage points, such payment should not be included in the value-added tax (“VAT”) base.

The main issue of this case was whether the settlement payment made by the partner to the airline can be viewed as purchase price for transactions between the airline and the customer.  Because customers earned mileage points from the partner but used such points for airline services, and the partner made a unilateral settlement payment to the airline in proportion to the mileage points earned from the partner, the Korean tax authorities (the “Tax Authorities”) asserted that in substance the partner indirectly paid a consideration for airline services on behalf of the customer. 

In order for a payment to be included in the VAT base, the payee also needs to receive consideration for such payment.  However, unlike the trial court which accepted the Tax Authorities’ argument, the appellate court denied existence of consideration (i.e., the payment should not be included in determining the tax base) on the following grounds, which was eventually upheld by the Supreme Court:

  • The settlement payment by the partner was made based on an agreement separately executed between the airline and its partners, and not as a consideration for the supply of airline services;
  • The airline and partners’ objective and intent specified in the above agreement is not to pay a consideration on behalf of the customer; and 
  • The substance of the settlement payment is to have the partners share a portion of the expenses incurred to promote common benefits between the airline and the partners. 

This Supreme Court case re-confirms its previous 2016 en banc decision on the scope of sale allowance in connection with use of mileage points.  While the Tax Authorities attempted to narrow the scope of sale allowance after the 2016 Supreme Court decision, the Court confirmed that it is illegal for the Tax Authorities to impose VAT because the supplier was seen as receiving a payment from a third party to cover such discount partially (or entirely) on grounds that the third party has paid a consideration “on behalf of” the customer.  Further, this decision has a significant impact on the issue of self-earned mileage which has been controversial after the amendment of Article 61 of the Enforcement Decree of the VAT Act.  

Kim & Chang’s Tax Practice team, representing the taxpayer of this case, performed thorough fact-finding and legal research throughout the proceeding to prepare and submit persuasive briefs and supporting documents, and thereby won the case at both the High Court and Supreme Court.  In particular, unlike the previous en banc decision that only focused on the “characteristics of sales allowance,” we devised a creative argument/logic focused on whether consideration existed, which is one of the basic principles of VAT.  The Court’s acceptance of this logic opens a broader interpretation of “sales allowance.”  As accumulation and use of mileage points become complicated and diversified, we expect that a more reasonable taxation will be possible due to this decision.