5.3.1 The open market value – reassessing the agreed consideration

Discounts and rebates decrease the price of transactions. In some cases, related parties may want to lower the prices of the transactions as performed between them in order to optimise their VAT position. Examples are lowering the agreed price of a supply to a related party that cannot (fully) deduct VAT in order to minimize the amount of non-deductible VAT or increasing the price of a taxed supply made by a business that cannot fully reclaim VAT in order to improve its VAT recovery right.

The only thing that Member States can do if they want to avoid the risk1 that businesses charge symbolic prices2 for supplies where they would then have to remit VAT only on the low (symbolic) consideration (i.e. where there is not also a consideration in kind), is to implement the provisions from the EU VAT Directive that allow them to use the ‘open market value’ as the taxable amount for certain specific transactions.3,4 In this respect, ‘open market value’ shall mean the full amount that, in order to obtain the goods or services in question at the time of the supply, a customer at the same marketing stage at which the supply of goods or services takes place, would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax. Where no comparable supply of goods can be ascertained, ‘open market value’ shall mean an amount that is not less than the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time of supply. Where no comparable supply of services can be ascertained, ‘open market value’ shall mean an amount that is not less than the full cost to the taxable person of providing the service.5 This means that the ‘open market value’ as used for determining the taxable amount for specific supplies for consideration is the same (or at least as high) as the taxable amount for deemed supplies (or supplies where (part of) the consideration is in kind). Most EU Member States implemented provisions to apply ‘open market value’ to certain transactions.6

The above can be shown in the two diagrams below, where I compare a situation where a Member State that has not implemented the ‘open market value’ provisions to a Member State that has done so. In both examples, the applicable VAT rate is 20%, there is a supply of goods which would cost the business, at the time of the supply, Euro 100 (ex VAT) and which would have an ‘open market value’ of Euro 130 (ex VAT). In the tables, the horizontal axis represents the agreed amounts payable, which are increased by steps of Euro 10 (and continue after reaching the Euro 100 and Euro 130 amounts, to demonstrate the workings of the provisions. The vertical axis represents the amount of VAT due. The first diagram shows the VAT amounts due in the Member State that hasn’t implemented the ‘open market value’ provisions. In this Member State, in situations where a very low consideration is agreed and received, a relatively low amount of VAT is due:

In the second diagram, representing the Member State that has implemented the ‘open market value’ provisions, the VAT amount due on a transaction for no consideration is the same as in the other Member State: 20% of the cost price of the good, i.e. Euro 20. The VAT amount due on every other transaction where a consideration is agreed and received is Euro 26 (20% of Euro 130), until the point that the consideration agreed and received actually exceeds the ‘open market value’. Only from that point, the VAT due is actually 20% of the agreed and received consideration: