UAE corporate tax: Considerations with barter

The monetary value of any barter deal concluded today can be calculated with a high degree of accuracy thanks to a common medium of exchange

The tax implications are different depending on whether you are considering corporate tax or VAT. Silvia Razgova / The National

Before money, we bartered using vegetables and meat. We swapped an agreed amount of one for the other and both sides consumed a balanced meal. Win, win.

Over time, we created a common medium of exchange, in multiple forms – all limited in availability and in themselves, not necessary for regular living. People started using precious stones and metals, especially gold, as money to buy goods.

Gradually, their quantities became insufficient to allow for a fluid economy and fiat currency evolved. It is the paper money we use today, which is not backed dirham for dirham against limited-quantity precious stones or metals. There are some people who call for a return to those times, which you might know as the gold or silver standard, but this is unworkable due to the tiny amounts available compared to the sum value of the global economy.

Some say the fractional functionality of digital currency can deal with that problem. However, there are the questions of control at national level, and, again, what tangible assets underpin its value. Given that the barter system was replaced by a common medium of exchange, the monetary value of any barter deal concluded today can be calculated with a high degree of accuracy.

The UAE's corporate tax law explained: Business Extra

12:56

Are there any tax treatment considerations with barter? Yes, and the implications are different depending on whether you are considering corporate tax or VAT.

Let us consider a swap of goods between two judicial entities. By way of example, a lorry for a truck. Party A gives Party B a lorry, and are given in return a truck and Dh50,000. Does one invoice the other for Dh50,000 and both sign over ownership of the respective vehicles?

The corporate tax position here would be to increase the revenue of Party A with no impact at all on Party B. The VAT position, assuming both are registered, would be neutral, thus allowing for a transitional cash impact caused by timing differences.

Let us take a step back. In any transaction there has to be a buyer and a seller. In our example, which party is which?

The simplistic approach is that the party parting with cash is the buyer, in itself on first appearances not an unreasonable assumption to make. It is, however, incorrect. The two parties are both buyers and sellers, therefore each must invoice the other. The correct approach is to complete these transactions as if they were to any third or related party.

What would be the value of these invoices? Both may have different values for the vehicles in their accounts. Is this where the Dh50,000 comes into play? Not necessarily. Imagine one party has an accounting difference of Dh100,000. In our example, Party A accepts a loss on the book value of their lorry.

Some might argue that the profit and loss on disposal of an asset is not revenue, but an overhead line item contributing towards net profit. In that regard it would not have an impact on the calculation of whether an entity breached the threshold from which an election for small business relief (SBR) can be made.

This thinking is incorrect. The net position on the sale of the asset is part of revenue. It is called other income, and yes, it can be negative.

Given the differing levels of complexity and time to complete a corporate tax filing, not being able to make this election may increase a business’s costs, either in internal time or with external supporting tax consultants.

From a risk perspective, a complete filing requires decisions to be made on a line by line basis as to what expenses, and in what quantities, to deduct against taxable revenue. Given the questions outstanding and amount of information we are still awaiting, one might naturally gravitate to the safer position of this election.

SBR only requires you to be certain of one number. If you have not got confidence in the value of the sales you have made, you have altogether very different and material problems in your business.

We have not talked about profitability. If a loss was made by the business in the reporting year, there is then the decision about whether to carry this forward and write it off against future profits. This would require a full, detailed tax return. Now a call needs to be made between the value of the future deduction and immediate time and cost consumption.

As is often the case, today’s journey through the barter rabbit warren comes from an innocuous question a customer posed to me. Thousands of these conversations are happening every day.

I highlight this because I want those of you having these reviews to tease out all the possibilities and not just blithely accept what at first may appear to be common sense.