Court Rules "Internet and TV Bundle Subsidies Are Not Subject to VAT Deduction"

Under the Value-Added Tax Act, 'Sales Incentives' Not 'Discount Amount'

A court ruling has determined that combined fees, customer support funds, and customer penalty fees provided when customers subscribe to bundled internet and digital TV products managed by CMS are not subject to value-added tax (VAT) deductions.

The ruling states that these should be regarded as 'sales incentives' rather than 'discount amounts' deductible under the VAT law.

Seoul Administrative Court, Yangjae-dong, Seoul.
[Photo by Seoul Administrative Court]

According to the court on the 4th, the Seoul Administrative Court Administrative Division 2 (Chief Judge Shin Myung-hee) ruled against SK Broadband in a lawsuit filed against 10 tax office chiefs seeking cancellation of the refusal to correct VAT assessments.

From January to December 2015, SK Broadband, following its internal marketing policy, refunded some cash under the name of 'customer support funds' to attract customers subscribing to bundled internet and digital TV products.

Individual customers received amounts ranging from 30,000 KRW to 420,000 KRW, and the total amount paid by SK Broadband to customers during that period was approximately 1.7059 billion KRW.

SK Broadband claimed that this amount corresponded to a discount amount excluded from the VAT taxable base and filed correction requests for VAT refunds from July to September 2020, but the tax authorities rejected these claims. They also requested a review by the Board of Audit and Inspection in December of the same year, which was dismissed the following year, leading to the lawsuit.

The key issue in the trial was whether the money paid to customers subscribing to the bundled products qualified as a 'discount amount' excluded from the VAT taxable base under the VAT law.

Article 29 (Taxable Base) Paragraph 1 of the VAT Act stipulates that "the taxable base for VAT on the supply of goods or services shall be the total amount of the supply value of goods or services supplied during the relevant taxable period," and Paragraph 3, Item 1 of the same article states that "in cases where payment is made in money: that payment" must be included in the supply value.

Paragraph 5, Item 1 of the same article defines the amount not included in the VAT taxable base as "the amount directly deducted from the usual price according to the quality, quantity, delivery conditions, payment methods, or other supply conditions of goods or services," i.e., the discount amount.

Conversely, Paragraph 6 of the same article states that "incentives or similar amounts paid by a business operator to the recipient of goods or services, and bad debt amounts under Article 45 Paragraph 1, shall not be deducted from the taxable base," explicitly indicating that sales incentives are not subject to VAT deductions.

During the trial, SK Broadband argued, "By paying this amount to users in advance, the equivalent amount is deducted from future charges," claiming that the amount qualifies as a discount amount.

On the other hand, the tax authorities argued, "This amount corresponds to a sales incentive to increase sales (subscription) demand," and cited precedents where courts ruled that similar cases involving wired internet and gift certificates as promotional items could not be considered discount amounts, asserting that the same should apply here.

The court sided with the tax authorities, ruling that the amount in question cannot be regarded as a discount amount excluded from the supply value.

The court cited Supreme Court precedents, stating, "For an amount to be excluded from the VAT taxable base as a discount amount, it must be directly deducted from the supply value of the goods or services provided by the business operator."

It added, "Even if the same economic effect occurs as when the supply value is reduced by providing certain benefits to the transaction partner, if the benefit is provided for a separate supply transaction of goods or services and cannot be evaluated as a direct deduction from the supply value, it cannot be considered a discount amount."

Previously, the Supreme Court clarified regarding discount amounts under the VAT Act, "The VAT Act excludes 'discount amounts' or 'amounts directly deducted from the usual price' from the taxable base because amounts deducted due to supply conditions related to quality, quantity, or delivery are not amounts actually received from the transaction partner."

Based on this precedent, the court stated, "Discount amounts also have the character of sales incentives or sales promotion effects by providing certain benefits to the transaction partner, and incentives also produce the same economic effect as when the supply value is reduced by that amount. Considering that the VAT law defines the concept of discount amounts but does not define incentives, if the amount does not meet the definition of a discount amount, it should be regarded as an incentive."

Although the distinction between discount amounts and sales incentives is not always clear, the court emphasized that since the law defines discount amounts, any money not fitting that definition should be considered an incentive.

The court further noted, "The amount in question is provided when customers subscribe to bundled internet and digital TV products. When customers subscribe to these products, the plaintiff provides one of the combined fees, customer support funds, or customer penalty fees. The primary party choosing these benefits appears to be the distribution network, not the customer."

"Even though the amount (customer support funds) is paid directly to customers, it is provided as part of a sales strategy to encourage the distribution network to attract more customers, along with combined fees and customer penalty fees paid to the distribution network," the court concluded.

It added, "The distribution network decides whether to retain the combined fees or pay customer support funds or penalty fees to customers."

Finally, the court concluded, "To consider this amount as a discount amount, it must be evaluated as directly deducted from each supply value, but it cannot be seen as directly deducted from the individual services supplied by the plaintiff."