5.3.2 Open market value: only for determining the taxable amount or more?

Under the relevant provisions, Member States are allowed to take measures to ensure that, in specific cases, the taxable amount in respect of the supply of goods or services is to be the open market value. The categories of transactions in respect of which the actual consideration may be replaced by the open-market value of the goods and services supplied are those, in respect of which:

Do these rules imply that Member States can actually force businesses to adjust their pricing? Or does this mean that, where the ‘open market value’ should be applied, businesses cannot agree a price that is lower than the VAT amount due on the open market value?

At first sight it appears possible to agree a (gross) price that is lower than the VAT amount due on the ‘open market value’. In the example, this would occur at any agreed net consideration below Euro 20.80, which equals a VAT-inclusive consideration of Euro 26, being the minimum VAT amount payable to the tax authorities under the ‘open market’ rules. If, under that rationale, the supplier in the above examples would charge Euro 20 excluding VAT (and therefore Euro 24 including VAT) for its supply, he would still have to remit Euro 26 to the tax authorities. In other words, he would have to pay more VAT than the total (net) consideration received for his supply – he would make a loss on this transaction. I will discuss and answer both questions below.

In my view, the VAT rules regarding the use of the ‘open market value’ as taxable amount should not be interpreted as meaning that the actual price as agreed between parties for a transaction should be adjusted. In my view, the relevant VAT rules allow Member States to adjust the VAT consequences of certain types of transactions, but not force businesses to actually change the conditions, such as the agreed price, of a transaction. If businesses feel that they should adjust the actual transaction value, e.g. by adjusting the invoices issued for the relevant transaction, this is up to them. Whether this always has the desired effect may also depend on local rules regarding, for example, the statute of limitations. The actual wording of the provision suggests this as well (underlining by me, JB): “In order to prevent tax evasion or avoidance, Member States may (…) take measures to ensure that (…) the taxable amount is to be the open market value”. The taxable amount is a very specific Union VAT concept, unlike concepts such as ‘price’. Also, the rule states nothing about the consideration, also a specific Union VAT concept, but only mentions the taxable amount.

Even though the relevant provision only allows Member States to ensure that the taxable amount for specific transactions is to be the open market value, two out of the tree situations where Member States are allowed to do so in order to prevent tax evasion or avoidance seem to require that not only the ‘taxable amount’ for the specific transactions, but also their value in the sense of ‘turnover’ for calculating the deductible proportion under Article 174 of the EU VAT Directive. Where the consideration for an exempt supply is lower than the open-market value and the supplier is not entitled to full deduction of input VAT (Article 80(1)(b) of the EU VAT Directive) and the consideration is higher than the open-market value and the supplier is not entitled to full deduction of input VAT (Article 80(1)(c) of the EU VAT Directive), the avoidance or evasion would consist of improving the overall VAT deduction right or pro rata of the supplier.1 Ensuring this does not happen would require the ‘turnover’ from Article 174 to be based on the open market value of the relevant transactions, as mentioned above. In my view, this means that the relevant provisions should be clarified or adjusted accordingly. Also, where a business has the obligation to issue an invoice for its supplies, this invoice will have to include the ‘taxable amount’.2

Back to the questions from the beginning of this Section: can Member States use EU VAT rules to demand that taxable persons change a price that they agreed with other parties to a contract that is binding under civil (or comparable) law? My view is that this is not the case, also because it is not necessary to achieve the specific goal of the provisions. It would, however, be necessary that the adjusted taxable amount, in situations where the agreed consideration is ignored, and the open market value is used as a taxable amount, is used to determine the VAT position of all parties to that transaction. The VAT amount payable should be the same amount that is used as a basis for determining the amount of deductible VAT in order to avoid unjust enrichment of any of the parties involved or the local tax authorities, as the following example will demonstrate:

Also, if the related third party as a customer has a right to deduct input VAT, the result of applying the ‘open market value’ only to the value of the supply made by the supplier that has a limited right to deduct VAT,3 without adjusting the transaction value on the customer side, would be that the deducted VAT amount would exceed the VAT amount actually remitted, which would cost the tax authorities money. In my view, the EU legislator has not intended to introduce a measure aimed at tax evasion or avoidance that can result in the tax authorities collecting less VAT.

Can the agreed value of a supply be lower than the VAT due as a result of applying the ‘open market value’ rules? I think that this is the case. Returning to the original example from the beginning of this section, if the supplier and his customer would agree on a price of 20 excluding VAT, in my view, the supplier would not have to issue an invoice for the agreed net amount of Euro 20 and charge a VAT amount of Euro 26 (the VAT due on the open market value), making the total invoice price Euro 46. In my view, the price actually agreed between the parties is the price paid (in the example: Euro 24) to the business, who will have to remit Euro 26 to the tax authorities. The fact that he makes a loss on this transaction does not change that, although it could mean that from an economic point of view, it would be unwise to agree to a consideration that is not sufficient to cover the VAT that is due on the transaction. But in my view, parties are allowed to decide differently. Just not always for VAT.