Barter exchange in UAE liable to VAT
The ABC Company has provided services to a XYZ Media company. In return of the services provided, the XYZ Media company has agreed to provide advertisement space in their magazine to the ABC Company.
The ABC Company is desirous to understand that VAT implications on the aforesaid arrangement.
Barter Exchange is a system of exchange where participants in a transactions exchange goods or services for other goods or services without using the money as a mode of consideration. Barter exchange may include:
1. Exchange of goods in return of services,
2. Exchange of goods in return of goods or
3. Exchange of service in return of service.
In other words, where price is not a sole consideration for supply i.e. consideration is either fully or partially on non-monetary terms, the value of supply should be arrived at as per the guidelines provided in the UAE VAT Law. In this article, we will be discussing the valuation of supply of goods or services where the consideration is not wholly in money.
For the purpose of understanding applicability of VAT on Barter Exchange in UAE, we should analyze do goods or services transferred in exchange qualify as a taxable supply?
A taxable supply is defined in the UAE VAT Decree Law as “a supply of goods or services for a consideration by a person conducting business in the State and does not include an exempt supply”.
Taxable Supplies: Important features of taxable supplies are:
- There should be “supply of goods” or “supply of service”
- Such supply should be for consideration.
- The supply must have been made in the course of business.
- The supply must have been made by a person in the State wherein he is conducting business. The law makers have specifically chosen the word “person” instead of “taxable person” as there could be supplies where liability arises irrespective of registration status of supplier.
- Exempted supplies are not included within the definition of taxable supplies. However, zero rated supplies (i.e. Supplies rated “ZERO” may be eligible to recover input tax) would be taxable supplies.
Analyzing the conditions
Conditions for taxable supply
There should be “supply of goods” or “supply of service”
Since barter exchange involves the transfer of goods or services from one person to another, it falls under the supply unless it is an exempt supply.
Such supply should be for consideration. The Decree Law of UAE Vat defines consideration as below:
Consideration: All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment. i.e. Consideration can be monetary, All or part consideration can be non-monetary.
Since barter exchange offers another good or service in return, it qualifies as consideration received in non-monetary form.
The supply must have been made in the course of business.
Barter exchange if made in the course of business by the person then it will qualify as a taxable supply.
Considering all the above three conditions, it can be said that if the barter exchange is for the purpose of conducting business in UAE, VAT will be applicable on such supply.
Value of Supply – Article (34) of Decree Law
The Decree Law of UAE Vat defines the Value of Supply:
The value of supply of Goods or Services for Consideration shall be as follows:
1. If the entire Consideration is monetary, the value of the supply shall be the Consideration less the Tax.
2. If all or part of the Consideration is not monetary, the value of the supply is calculated as the overall monetary part plus the “market value of the non-monetary part of the Consideration”, and shall not include the Tax.
Therefore, the non-monetary value of goods or service received in barter exchange will be taken as consideration received for the purpose. The VAT will be charged on this consideration.
Value of Supply
Barter exchange within UAE
The market value of goods or services exchanged will be taken as a consideration. VAT will be charged on consideration.
Barter exchange from outside UAE
In addition to the above, reference can be made to other FTA publications where it has clearly stated that the barter transaction shall be taxable:
Awareness session on Consumer Business: Slide 30 of the FTA presentation clearly provides that the goods/services are exchanged, and consideration is received in kind, VAT should be accounted for on the value of the barter transaction.
Real Estate VAT Guide: para 10.2 of the Guide provides example of barter transaction: if a tenant undertakes to provide anything to the landlord in return for the rent-free period, this would represent a barter transaction. For example, a landlord may grant a rent-free period to a tenant in return for the tenant agreeing to refurbish the property. In such cases, both supplies will be of equal value, but will not necessarily have the same VAT liability (for example, where the landlord is supplying residential property). Where VAT is charged on the value of the barter transaction this would be recoverable subject to the normal rules.
The above example further clarifies that barter transactions are taxable.
From the above, it is clear that for determining the value of supply, you need to arrive at the market value of non-monetary portion. But how do you arrive at the market value? Again, the UAE VAT law has provided the following guidelines for determining the market value:
Market Value – Article (25) of Executive Regulations:
- The market value of a supply of Goods or Services at a given date is the Consideration in money which the supply would generally achieve if supplied in similar circumstances at that date in the State, being a supply freely offered and made between Persons who are not connected in any manner.
- Where the market value of a supply of Goods or Services at a given date cannot be determined as mentioned under Clause (2) of this Article, the market value is the Consideration in money which a similar supply would achieve if supplied in similar circumstances at that date in the State, being a supply freely offered and made between Persons who are not connected in any manner.
- Where the market value of any supply of Goods or Services cannot be determined as mentioned under Clauses (2) and (3) of this Article, the market value shall be determined by reference to the replacement cost of identical Goods or Services, with such supply being offered by a supplier who is not connected to the Recipient of Goods or Recipient of Services in any manner.
In view of the above, the ABC Company would be required to raise a Tax Invoice on the XYZ Media Company for the market value of services provided and charge VAT at 5% on the same. Further, the ABC Company should request the XYZ Media company to raise a Tax invoice on the ABC Company for the market value of services provided to the ABC Company. The VAT charged by the XYZ Media company would be eligible for input tax recovery for the ABC Company.
Thanks, and Best Regards
For ASSA Advisors DWC-LLC
CA Amit Suri
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