In Focus

Taxable amount and taxable event in establishment of building rights in exchange for construction services (barter)

April 10, 2013

With two similar decisions on disputes raised in Bulgaria the Court of Justice of the European Union (ECJ) confirmed its position on the disputable provisions in the Bulgarian Value Added Tax Act (VAT Act), which concern barter transactions (case С-549/11 from 19 December 2012 and case С-19/12 from 7 March 2013).

The two cases concern the way of determining the taxable amount and the date of chargeability of VAT in the case where an owner of a real estate establishes building rights in favor of a construction company while the latter engage to compensate the owner of the real state with future construction services. The ECJ is addressed with questions, whether the provisions of the VAT Act (Art. 130 and Art. 26, para 7) regarding such transactions contradict to Directive 2006/112/EC.

 The arguments of ECJ in the quoted decisions could be summarized, as follows:

1. Date of chargeability of VAT

According to the provisions of Art. 130, para 3 of the VAT Act, in the case of barter transactions, the supply with the earlier taxable event shall be viewed as advance payment for the second transaction. Therefore, at the moment when the owner of the real estate establishes the building rights in favor of the construction company, the latter shall charge VAT on the future construction services as it has received an advance payment in kind.

The position of ECJ in the quoted decisions is that the provisions of VAT Act regarding the moment of chargeability of VAT (in particular Art. 130) do not contradict to the provisions of Directive 2006/112/EC and therefore the VAT on the future construction services in such a barter transaction properly becomes chargeable at the moment when the building right is established, as far as the latter represents an advance payment for the future supply of construction services.

However, in the quoted decisions the ECJ expressly specifies that VAT on the advance payment becomes chargeable only after (i) all the elements of the future supply (construction services) are already known and (ii) the value of the transferred rights can be expressed in monetary terms. The last specification is based on the ECJ practice regarding the advance payments on supplies (decisions on case C-40/09 (Astra Zeneca UK)) according to which the tax on the specific advance payment becomes chargeable only if the payment corresponds to a specific supply.

2. Taxable amount

According to Art. 26, para 7 the taxable amount in barter transactions shall be equal to the market price of the goods and services supplied.

In the quoted decisions ECJ draws the attention to the following:

(1) The cases where the taxable amount is determined as market value of the goods/services supplied are expressly listed in Art. 80, para 1 of Directive 2006/112/EC - transactions between related parties where the supplier or the recipient does not have the right to full deduction of input VAT. The conditions in this provision are exhaustive and the national legislation may not provide that the market value shall be used for determination of the taxable amount in cases that do not fall in the said provision (decision from 26 April 2012 on case Balkan and Sea Properties and case Provadinvest, C-621/10 and C-129/11). Therefore, ECJ concludes that Art. 26, para 7 of VAT Act contradicts to Directive 2006/112/EC.

(2) According to Art. 73 of Directive 2006/112/EC and ECJ practice in the above quoted decisions (C‑621/10 и C‑129/11) the taxable amount shall be the amount of the consideration actually received by the supplier. If the consideration is paid in kind, then the value of the consideration actually received shall be determined as:

• the value, which the recipient would attribute to the supplies obtained by him, and
• the value that corresponds to the amount, which the recipient is prepared to pay for the supply.

In other words, according to ECJ, the taxable amount in barter transactions should rather be the market price of the goods/services received than the market price of the goods/services supplied. In this regard Art. 26, para 7 of VAT Act is not in line with Art. 73 of Directive 2006/112/EC.

(3) In addition ECJ clarifies that according to the accumulated practice (decisions on cases) Pfeiffer C‑397/01—C‑403/01 and case Vodafone España, C‑55/11, C‑57/11 and C‑58/11) the persons may refer directly to the provisions of a given EU Directive in disputes against their member state, when those provisions are unconditional and sufficiently clear, but their transposition in the national legislation is made incorrectly or it is not made within the time-limit.

It could be concluded that the taxable persons have the right to refer directly to the provisions of Art. 73 of Directive 2006/112/EC (when it is more favorable than the national legislation) in eventual disputes related to the determination of the taxable amount in barter transaction, i.e. the taxable persons have the rights to claim that the taxable amount shall be determined on the basis of the market price of the goods/services received.

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