VAT in Bahrain on Loyalty Points
Loyalty points awarded to customers is a widely accepted marketing tool used by many of the retailers in Bahrain. There are a variety of ways in which the retailers\' award loyalty points to the customers. These schemes mostly include loyalty stamp card, single vendor scheme and multiple vendor scheme.
Now, let us go through the VAT implications on the supplier for the loyalty points awarded to the customers as per the Bahrain VAT Law.
Before going to the details, it is very important to note that, in case the National Bureau for Revenue (NBR) believes that the loyalty scheme has been introduced by the VAT in Bahrain payer in order to take any VAT advantage, the NBR has the right to apply a different VAT treatment than what is mentioned below.
What are the VAT implications of loyalty stamp cards as per the Bahrain VAT Law?
In Bahrain, often the retailers provide a loyalty stamp card to the customers while purchasing the goods or service provided by them. The loyalty stamps are used to award customers with points on each purchase made by them. Once, the customers achieve certain points the retailers might provide their goods free of cost against the point target achieved by the customer.
For Eg., ABC garment shop in Bahrain issued loyalty stamp card to its customers and for every purchase of BD 10, the customers are awarded one point each against the stamp card. Once a customer gets 10 points ( as they make purchases worth BD 100) they will be given materials of their choice worth BD 15 free of cost.
In the above example, the materials given free to the customer on achieving 10 points is clearly linked to the previous purchases made by the customer and hence the provision of deemed supply will not be attracted for the materials given free of cost.
From the VAT point of view, the above purchase will be considered as buying garments at a discounted price over a period of time. Output VAT of BD 5 (BD 100 × 5%) will be charged against the previous purchases and there is no additional VAT liability for the BD 15 worth garments issued at free of cost.
What is the VAT implication of Single vendor scheme under loyalty programs as per the Bahrain VAT law?
Under the single vendor scheme, the retailer operates the loyalty program by themselves and without the involvement of any third party for the operation of the scheme.
This scheme is operated as follows:
- The scheme is set out when the customer enrols themselves to the loyalty scheme initiated by the retailer. The customer buys goods from the retailer against which points will be awarded to the customer.
- The points earned by the customer will be used by the customer against the purchase of goods or services from the retailer.
The VAT implication on the above transactions will be as follows:
- Goods or service purchased by the customer is subject to VAT at the rates applicable as per the Bahrain VAT Law. There is no VAT arising on the award of loyalty points to the customers provided these loyalty points should be redeemed only against the purchase of goods or service from the retailer.
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- When the points are redeemed against goods or services, no VAT arises as these points are rewarded against the previous purchases made by the customer.
- The retailer can also recover Input VAT incurred against such goods or services provided to the customers subject to normal input VAT recovery rules.
What is the VAT implication of Multiple vendor scheme under loyalty programs as per the Bahrain VAT law?
Under the multiple vendor scheme, more than one vendor is involved in the loyalty scheme which is operated and promoted by a separate promoter. Usually, One party (Operator) manages and operates a loyalty program and he acts as a facilitator between all the parties participating in the program. The following are the transactions involved in a multiple vendor scheme:
- Retailers (Grantor) who wish to participate in the scheme initiated by the operator should enrol themselves and pay a fee to the operator which is the consideration for the service provided by the operator for managing the loyalty scheme.
- Customers enrol themselves to the loyalty scheme to earn points on each purchase from the Grantors as per the terms and conditions of the scheme. They pay in full for all these purchases.
- The loyalty points are awarded to the customers by the operator for each purchase they make from the grantor.
- The points earned by the customer are redeemed by a redeemer. The redeemer can be a grantor or a third party.
- The operator pays an agreed amount to the redeemer every time the customer redeems the points earned by them (To recover the cost of goods/services provided by redeemer)
The VAT implication of the above transactions is as follows:
- The fee charged by the operator from the grantor is subject to VAT at the standard rate and this VAT paid can be recovered by the Grantor.
- The goods and services purchased by the customer from the grantor are subject to VAT at their applicable rates as per the Bahrain VAT Law.
- No VAT obligation arises on the points awarded to the customer by the operator.
- No VAT implication arises when the goods or services are provided to the customer solely against the points and also the redeemer can recover Input VAT incurred against such goods or services provided to the customers subject to normal input VAT recovery rules.
- The amount charged by the redeemer to the operator is subject to VAT at the standard rate.
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