There are ongoing developments in loyalty programs used in Estonia’s retail sector aimed at improving the consumer experience. Apart from bonus money that can be earned from purchases and used for subsequent purchases, there is now the possibility to convert deposit refund money into bonus money and then use it for subsequent purchases.
Previously, the money received from returning deposit containers could either be donated or a receipt could be taken from the machine to be exchanged for cash at the cashier or used to pay for a purchase. Now, several reverse vending machines offer an option to automatically transfer the money received for the deposit containers to the respective retail chain’s loyalty program account, which can be used alongside bonus money earned from purchases for future purchases.
Undoubtedly, all new solutions are welcome, but the question arises whether deposit refund money is treated the same way as bonus money in VAT accounting or not.
What is considered taxable value under the VAT Act?
According to § 12 (1) of the Estonian VAT Act (VATA), as a general rule, the taxable value consists of the sale price of goods or services and and anything else which is deemed to be a payment that the seller receives from the buyer or a third party for the goods or services. A discount given at the time of purchase reduces this payment and thus the taxable value (§ 12 (8) of the VAT Act).
The use of bonus money earned from purchases i.e. redemption of bonus money is generally considered a discount within the meaning of § 12 (8) of the VAT Act. The purpose of bonus money collected through a loyalty program is to influence consumer behaviour (to buy more or more frequently) by providing a larger discount equivalent to the amount of bonus money collected.
The use of bonus money earned from purchases i.e. redemption of bonus money is generally considered a discount within the meaning of § 12, (8) of the VAT Act.
Deposit as money belonging to the consumer, not a discount
On the other hand, deposit refund money is the consumer’s statutory right to get back the deposit previously paid (Packaging Act § 21 (10)). It is not a discount granted by the retailer, but money belonging to the consumer, which has been given a new form in loyalty programs — bonus money. As is well known, when making a purchase using a deposit refund receipt, the value of the goods does not change, meaning the retailer receives full payment for the goods, partially in cash/card and partially based on the deposit receipt. Therefore, it does not seem correct that redeeming deposit refund money converted into bonus money for purchases could reduce the taxable value of goods, since in this case it is not a discount given by the retailer.
When making a purchase using a deposit refund receipt, the value of the goods does not change, meaning the retailer receives full payment for the goods, partially in cash/card and partially based on the deposit receipt.
If any retail chain already converts deposit refund money into bonus money and reduces the taxable value of sales accordingly, or intends to do so, it is advisable for them to consult with their auditor, tax advisor, or directly with the tax authority to ensure VAT compliance with the relevant provisions of the VAT Act and to avoid disputes with the tax authority.
