Public Clarification: Value of Supply for Barter Transactions

The Federal Tax Authority (FTA) has released a Public Clarification providing guidelines on the VAT treatment and value of supply for barter transactions. The key aspects for the clarification are summarized below:

1. Barter Transactions

• Transactions involving exchange of goods and/or services in exchange of other goods and/or services instead of settling in cash. Under a barter, the supply of goods/ services by each party are considered as separate transactions. Accordingly, unlike a monetary transaction, barter transactions involve at least two supplies, i.e. each party makes a supply to the other.

2. VAT Applicability

• Each party making the supply under Barter shall charge the VAT at applicable rates (5%,0%, exempt or out of scope) depending on the nature of the supply. Since there is no/ only part consideration involved, special valuation rules apply for the goods/services exchanged as a part of the barter.
• The value of supply is the sum of any monetary consideration received for the supply and the market value of the non-monetary part of the consideration (excluding the tax amount)

3. Market Value

• The following principals shall apply in order of priority to determine the market value of non-monetary part of the consideration:
• Same Supply: Monetary consideration which the supply would generally achieve if supplied in similar circumstances at that date in the UAE, being a supply made between unrelated persons. For example:
  1. Marketing services provided by a social media manager valuing AED 1,000 to a restaurant against a monetary consideration of AED 900 and a meal coupon of AED 100 from the restaurant
  2. The value of supply for the social media manager would be AED 1,000 (to be considered inclusive of VAT) for the value of services
  3. The value of supply for the restaurant will be AED 100 (to be considered inclusive of VAT) for the value of meal voucher
• Similar Supply: Monetary consideration which a similar supply would achieve if supplied in similar circumstances at that date in the UAE, being a supply freely offered and made between unrelated persons. For example: A farmer bartered seeds for a tomato crop from another farmer. The specific tomato type is not sold in the market. However, a similar tomato variant is commonly used as a substitute and is sold by another farmer at AED 50,000. The market value of the barter supply is AED 50,000.
  1. Replacement cost: Market value shall be determined by reference to the replacement cost of identical goods or services, with such supply being offered between unrelated persons

4. Tax Invoice:

• All the parties to the barter are required to comply with the tax invoice requirement i.e., issue and deliver a valid tax invoice to the recipient of goods/services
• The businesses should carefully examine the nature of barter transactions undertaken (like product/ service swap transactions with or without a consideration) and impact of VAT on such transactions.