7.4.4 The value of the consideration for a supply is the amount paid by the supplier for making that supply?

As a result of what I consider the CJEU’s confusion about how to qualify barter transactions, the taxable amount for supplies made by taxable persons in a barter transaction is the cost price or purchase price of these supplies.

The rationale behind this is that, because the supply is also a payment for the (supply of) goods and/or services received by the supplier, this value (of his supply, i.e. the payment) is the price that this taxable person is willing to spend on the supply he gets in return. The CJEU literally describes this as follows:

To me this looks a lot like the ‘chicken-and-egg’ problem.

Under the normal EU VAT rules, the taxable amount (or consideration) is everything received by the supplier in return for his supply.2 The supplier will have to determine the value of what he obtains (or will obtain) in return for his supply, if what he obtained is not money. He will have to decide what the ‘payment in kind’ (even though I argue that from a VAT perspective there is no such thing) that he receives is worth.

Since a supplier usually has no way of knowing what his customer paid for the goods or services that he uses as payment in kind for the supply by the supplier, the supplier cannot use that value as taxable amount. In my view, imposing rules to make the buyer (the person ‘paying with goods or services’) disclose the purchase price of the goods or services he uses as ‘payment in kind’ is not desirable, because this would take away (part of) the economic benefit of bartering: parties enter into a bartering contract because they perceive the goods and/or services that they receive to be more valuable than the goods or services they offer ‘in return’. Also, it may be hard to determine the cost price or purchase price of goods or services received, for example if these goods or services were produced internally by the party using them as payment, or if the goods were purchased a long time ago.3 Besides all that, using the value of the supply for the value of the payment received for the supply assumes that no profit is made on barter transactions. I cannot believe that that should be a general rule, because this does not properly reflect the economic and commercial reality of ‘normal’ business transactions. Therefore, in my view, cost price or purchase price of the goods or services received in return for the supply cannot and should not be used for determining the taxable amount, despite the practical attractiveness of this method.

In the above diagram, the good supplied by B (▲) is supposed to have the same value as the good supplied by C (٭), both being the purchase price of the good (▲), i.e. 80 (including VAT), because if parties would not consider the two supplies of equal value, an additional payment would be expected under normal economic and commercial circumstances. If B were a better bargainer, he might be able to obtain not one but two of the same goods from C (٭٭) and still only supply one goods himself (▲) with a value of 80 including VAT. If that were the case, the value of those two goods received by B would still be the same (for VAT purposes) as in a situation where B would have only managed to get one of those goods as ‘payment’ for his supply.

The CJEU’s ‘chicken-and-egg’ solution, using the value of the supply made by the supplier as the value of the consideration received for that supply, as developed in its case law seems the easiest and most practical way for determining the taxable amount:

I object against this method, for the following reasons (two of which I elaborated on above).

First, in my view, from a VAT perspective a supply cannot simultaneously be a payment. It is not possible to, in one single supply concerning one whole good or service as the object of that supply, consider that single whole good or service to be the object of a taxable supply as well as a payment for a ‘return supply’ at the same time. There are, in my view, two supplies where the considerations are settled by offsetting the amounts against each other.

Second, under the EU VAT rules, the cost price or purchase price of the goods or services supplied is specifically used to determine the taxable amount in cases where no consideration is received, where and insofar as VAT was deducted on these costs.4 The supplies for which this taxable amount is used, are considered an adjustment system, as described in Chapter 6. Consumption should be taxed, and therefore deducted VAT must be repaid in case of consumption where no consideration is paid. For that purpose, it makes sense to charge VAT on the purchase price or the cost of what it is that is provided free of charge.

However, this mechanism (using the purchase price or cost price of goods and/or services as taxable amount for the supply of those goods or services) should not be applied to transactions that are made for consideration. This would assume that, as a general rule, no profit is made on barter transactions. This goes against common economic sense, as well as the ‘economic benefit’ as a reason for bartering, both reflections of ‘economic and commercial reality’.

When goods or services are not given away for free but sold at a very low price, even at a symbolic price, the taxable amount is the amount received by the supplier.5 There can be reasons for a supplier to agree with a price that is (well) below the original cost of his products or services, such as relational ties between the supplier and the recipient, charitable reasons etc. The fact remains that in VAT, a subjective taxable amount is used. Member States have the possibility to revalue the taxable amount in certain cases, but that is a specific exception to the rule that the taxable amount is subjective.6

VAT is, in its essence, a tax on consumption. The fact that it is an indirect tax makes it hard to determine the taxable amount, as I demonstrated above, but this does not mean that the consumption tax principle should be ignored. In my view, the consumption element of VAT is more relevant than the indirect element, even though the amount of the consideration has to be determined by the recipient of this amount.

Third, if the ‘consideration received’ has the (same) value of (as) the price of the goods or services provided, it seems that ‘bad debt relief’7 cannot occur in cases where any goods or services were received ‘in return for the supply/supplies’. I will use my earlier example, where I considered B to be a ‘good bargainer’. It may become even more clear if I turn that example around: let’s assume that B and C have agreed that B will supply one good (▲) and that ‘in return’, he will receive two goods (٭٭). Based on CJEU case law, the VAT due on the supply by B (the one good (▲)) is the value of the cost price of the good supplied (▲), which is 80 (including VAT). Now let’s assume that it was agreed that C was to supply the two goods consecutively and that before C is able to supply the second good (٭), he goes bankrupt and he will not supply it. In that case, B has received only one good (٭) in return for his supply (of the one good (▲)), but because the value or taxable amount of his supply of his goods (▲) does not depend on (the value of) what he gets in return,8 the taxable amount is still the value of (▲), which is still 80 (including VAT). Even though B received only half of what was agreed in return for his supply, it seems difficult to argue that this amount should be lowered because of what B has received in return has less value than agreed – for that value does not depend on the value of what he receives in return. Or does it?9^,10

In my view, there are two options for solving this dilemma that are more in line with the general principles underlying the EU VAT system, as well as with the economic and commercial reality of barter transactions, neither of which is explicitly included in the EU VAT Directive or mentioned in any CJEU case law. However, the second option is positive law in at least two non-EU countries (New Zealand and Australia). I will elaborate on this in the next Section.