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Exchange of services/goods: decreased price vs. double taxation?
Article 73 of the VAT Directive provides that “the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply." Taxand's global indirect tax service line examines approaches to this statement. Taxand's global indirect tax service line discusses.
French administrative comments defined the practical consequences of this provision as follows: “an exchange is deemed to be a double sale, the price of which is paid in kind”. For example, the supply of sports equipment to a club or to an athlete by the equipment manufacturer for advertising purposes is deemed to be an exchange of a supply of goods (the provision of the sports equipment) and a supply of services (advertising). In our opinion, such an analysis can in fact be applied to all advertising services that are remunerated by the supply of a good or of a service.
The European Court of Justice (ECJ) ruled on this matter in its 'Naturally Yours Cosmetics' judgement. The Court stated that there is a direct link between the goods supplied for a price that is lower than the normal price, and the value of the service that the purchaser of said goods undertakes to supply to the seller. As the Court observed, “it is possible to ascertain the monetary value which the two parties to the contract attributed to that service”. This value ultimately results from the difference between the normal price and the price charged to the service provider.
Of course, this matter went as far as the ECJ because the service providers, in the case in point, were not taxable persons for VAT purposes but in fact final consumers. Therefore, the neutrality of the VAT in respect of such a transaction could not be guaranteed.
This is in fact the key point of exchanges of services. If these exchanges take place between taxable persons, in principle there are only a few cases in which they would generate VAT adverse incidences. In contrast, exchanges between non-taxable persons or partially taxable persons would inevitably generate VAT traps, notably in connection with VAT recovery rights.
In addition to the advertising sector, another sector that is particularly affected by VAT issues in connection with exchanges is the real estate sector. The Court of Justice ruled on the VAT treatment that was applicable to the fitting-out and furnishing of an apartment. Unsurprisingly, the ECJ found that such a service should be deemed to be for consideration, in so far as the owner of this apartment, in return for the service, loaned the apartment that was being refurbished to the company.
However, the concept of an exchange or of intersecting flows can also be applied in other areas. More recently, the French Tax Authorities turned their attention to industry and scrutinised services supplied for dismantling, decontamination and industrial waste processing operations.
These comments on the French situation are also applicable in Spain, where this type of transaction has been commonly discussed. In particular in real estate transactions.
Also in Belgium, the principle of exchange of services/goods is often applied by the VAT authorities. One of the examples are office rent contracts, where it is common practice to offer free months of rent. The VAT authorities are often trying (in application of the above ECJ court cases) to argue that this is an exchange of services, because the tenant is contractually obliged to refurbish part of the office space. Another example are the so called 'brewery contracts', concluded between breweries and bars. The bar owner signs up for exclusivity with one brewery, and often gets free equipment or even loans as a reward. Also here, the VAT authorities decided that this is an exchange of services, whereby each flow has to be considered separately from a VAT point of view.
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Particular vigilance is still required in this area, especially when drafting contract clauses. The idea is still to identify consideration, whether in the supply of material goods upon completion of these services, or in the existence of an intersecting supply of services. It is advisable to review whether action should be taken to secure the VAT treatment applied and the subsequent incidences in terms of recovery rights for both parties..