The Federal Tax Authority (FTA) has issued a new VAT Public Clarification (VATP042) providing detailed guidance on the VAT treatment of barter transactions. This clarification is crucial for businesses engaging in transactions where consideration is provided in non-monetary form, such as goods or services, instead of cash.
Understanding Barter Transactions
In general, taxable persons receive monetary consideration for the supplies they make. However, it is not uncommon for some transactions to involve non-monetary consideration, where one party provides goods or services in exchange for receiving other goods or services. These are known as barter transactions.
A barter transaction involves at least two taxable supplies:
- One supply by Party A to Party B, and
- Another supply by Party B to Party A.
Even though no money may change hands, each supply is separately taxable under UAE VAT law.
VAT Implications of Barter Transactions
The FTA confirms that barter transactions are subject to the same VAT rules as cash-based transactions. Each party must:
- Determine the nature of the supply (standard-rated, zero-rated, exempt, or outside scope),
- Assess the market value of the supply,
- Calculate the VAT due, and
- Issue a tax invoice for the supply.
Where a supply involves both monetary and non-monetary consideration, the total value is the sum of the cash amount and the fair market value of the non-monetary portion, exclusive of VAT.
Determining the Market Value
The FTA outlines a three-tiered approach to determine the market value of non-monetary consideration:
- Market Value Based on Comparable Open Market Transactions:
- The price that the supply would generally achieve in similar circumstances between unrelated parties, in the UAE, on the relevant date.
- Market Value Based on Comparable Supplies:
- If no exact comparison exists, use the price of a similar good or service used under comparable circumstances.
- Replacement Cost:
- If the above two are not feasible, use the cost to replace the item or service, provided by an unrelated third party.
This market value forms the tax base for VAT purposes.
Practical Examples
Example 1: Influencer Marketing Exchange
A VAT-registered social media influencer provides marketing services to a restaurant in exchange for:
- AED 900 in cash, and
- A meal valued at AED 100 (inclusive of VAT).
Total consideration received = AED 1,000
VAT to be accounted for = AED 47.62 (AED 1,000 × 5 / 105)
Both the influencer and the restaurant are required to:
- Account for VAT on their respective supplies,
- Issue tax invoices, and
- Include the total value (inclusive of VAT) in the invoice.
Tax Invoice Requirements
Per Article 65 of the VAT Decree-Law:
- VAT-registered suppliers must issue and deliver tax invoices for all taxable supplies.
- This applies equally to barter transactions, even where no cash is exchanged.
Where both parties are VAT registrants:
- Each must issue a tax invoice to the other.
- The invoice must specify:
- Net value of the supply (exclusive of VAT),
- Applicable VAT rate and amount,
- Gross consideration (inclusive of VAT).
Failure to issue tax invoices in barter transactions may lead to administrative penalties under UAE VAT legislation.
How We Can Help
At XB4, we recognize the importance of understanding and navigating the latest FTA guidelines effectively. Our team of tax advisors is available to help you and ensure compliance with UAT Tax regulations. For assistance, please reach out to our team.
