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Tax risks in barter agreements: common mistakes
Tax risks in barter agreements: common mistakes
Barter, i.e., the provision of goods and services based on mutual exchange without monetary payment, is a widely used tool in the business environment, especially during periods of liquidity problems. However, in some cases, entrepreneurs approach such transactions with the principle “no money, no tax.” In fact, according to tax legislation, barter transactions, like other sales, also create tax obligations. So, what tax obligations arise for a company in this case? How are barter transactions accounted for? Nurlan Mustafayev clarifies these issues.
Barter transactions are among the most risky areas in terms of value-added tax (VAT), profit tax, and transfer pricing. Therefore, proper accounting and documentation of barter transactions are essential to prevent tax risks. In this context, we will explain the most common mistakes companies make in this area and the tax risks they cause.
1. Not recognizing the barter transaction as a sale
Many companies view a barter transaction simply as an “exchange of goods” and do not consider it a sales transaction. However, according to Article 67.13 of the Tax Code, for tax purposes, barter transactions are treated as the sale of goods (works, services) at market prices. In other words, barter is also a taxable transaction. In this case:
- Income is calculated for income tax or profit tax purposes;
- Turnover arises for VAT purposes.
- Ignoring this can lead to additional taxes, interest, and penalties.
2. Artificially undervaluing exchanged goods and services
During barter, companies often try to reduce their tax burden by undervaluing their products. However, legislation requires market prices to be applied in barter transactions. Artificially reducing the price is also considered a transfer pricing violation.
According to Article 67.13 of the Tax Code, if the amount indicated in the electronic invoice for a barter transaction is reduced, the tax authority adjusts the tax base considering market prices, recalculates the tax, and applies the sanctions provided by law. In such cases, the tax authority determines the price itself and imposes additional tax.
3. Incorrect determination of the VAT liability moment in barter
One of the most serious mistakes companies make in barter transactions is incorrectly determining when the VAT liability arises. According to Article 166.1.4 of the Tax Code, if payment is made in kind or through barter, the taxable transaction is considered to occur at the moment the assets are received (exchanged). Many companies make settlements not at the contract date, but after delivery.
- VAT liability arises at the earliest of the following:
- delivery of goods / provision of services;
- preparation of the delivery-acceptance report;
- issuance of the electronic invoice.
- Failure to calculate VAT on time leads to penalties and significant financial loss.
4. Not issuing an electronic invoice
Issuing an electronic invoice is mandatory in barter transactions. Some entrepreneurs believe that if no money is exchanged, invoices are not needed. However, according to Article 159.4 of the Tax Code, the delivery of goods, performance of work, or provision of services by a taxpayer to employees or third parties for payment or free of charge, as well as barter transactions, are considered taxable transactions.
In practice, both parties must issue an electronic invoice for the goods they provide and accept an e-invoice for the goods they receive. The absence of an invoice means the transaction is not recognized and increases tax risk.
5. Incomplete terms in the barter contract
- Typical deficiencies:
- quantity and quality of goods not clearly specified;
- deadlines for obligations not stated;
- value not specified or not in line with market price.
As a result, the tax authority may consider the documents invalid and determine turnover based on market prices.
6. Incorrect recognition of income and expenses in accounting
Some companies record barter income as an intangible transaction, which distorts profit indicators.
- Correct accounting principles:
- the value of goods and services received should be recorded as income;
- the value of goods and services provided should be recognized as expenses.
Example 1: Assume a company receives barter services worth 7,000 manats. However, since the contract does not specify the value, the tax authority does not recognize the expense. As a result, during a tax audit, the company’s profit increases by 7,000 manats, and an additional tax of 1,400 manats is calculated.
7. Improper handling of partial barter transactions (money + goods)
Some contracts are not fully barter, i.e., they involve both goods and monetary payment. Companies often fail to account for the non-monetary part. According to the law, the barter part of the transaction should be recorded as separate turnover, and the monetary part should be recorded as a separate sale.
Example 2: Company “A” provides services worth 10,000 manats to company “B.” According to the agreement, company “B” must provide goods worth 6,000 manats (barter), and pay the remaining 4,000 manats via non-cash payment. This transaction is considered a partial barter.
In conclusion, barter transactions are useful for companies in terms of liquidity but carry significant tax risks. The main risks include price distortion, documentation gaps, incorrect determination of VAT obligations, and accounting errors. Therefore, each barter transaction should be carefully documented like a normal sale, evaluated at market prices, and properly recorded for tax purposes.
Barter, i.e., the provision of goods and services based on mutual exchange without monetary payment, is a widely used tool in the business environment, especially during periods of liquidity problems. However, in some cases, entrepreneurs approach such transactions with the principle “no money, no tax.” In fact, according to tax legislation, barter transactions, like other sales, also create tax obligations. So, what tax obligations arise for a company in this case? How are barter transactions accounted for? Nurlan Mustafayev clarifies these issues.
Barter transactions are among the most risky areas in terms of value-added tax (VAT), profit tax, and transfer pricing. Therefore, proper accounting and documentation of barter transactions are essential to prevent tax risks. In this context, we will explain the most common mistakes companies make in this area and the tax risks they cause.
1. Not recognizing the barter transaction as a sale
Many companies view a barter transaction simply as an “exchange of goods” and do not consider it a sales transaction. However, according to Article 67.13 of the Tax Code, for tax purposes, barter transactions are treated as the sale of goods (works, services) at market prices. In other words, barter is also a taxable transaction. In this case:
- Income is calculated for income tax or profit tax purposes;
- Turnover arises for VAT purposes.
- Ignoring this can lead to additional taxes, interest, and penalties.
2. Artificially undervaluing exchanged goods and services
During barter, companies often try to reduce their tax burden by undervaluing their products. However, legislation requires market prices to be applied in barter transactions. Artificially reducing the price is also considered a transfer pricing violation.
According to Article 67.13 of the Tax Code, if the amount indicated in the electronic invoice for a barter transaction is reduced, the tax authority adjusts the tax base considering market prices, recalculates the tax, and applies the sanctions provided by law. In such cases, the tax authority determines the price itself and imposes additional tax.
3. Incorrect determination of the VAT liability moment in barter
One of the most serious mistakes companies make in barter transactions is incorrectly determining when the VAT liability arises. According to Article 166.1.4 of the Tax Code, if payment is made in kind or through barter, the taxable transaction is considered to occur at the moment the assets are received (exchanged). Many companies make settlements not at the contract date, but after delivery.
- VAT liability arises at the earliest of the following:
- delivery of goods / provision of services;
- preparation of the delivery-acceptance report;
- issuance of the electronic invoice.
- Failure to calculate VAT on time leads to penalties and significant financial loss.
4. Not issuing an electronic invoice
Issuing an electronic invoice is mandatory in barter transactions. Some entrepreneurs believe that if no money is exchanged, invoices are not needed. However, according to Article 159.4 of the Tax Code, the delivery of goods, performance of work, or provision of services by a taxpayer to employees or third parties for payment or free of charge, as well as barter transactions, are considered taxable transactions.
In practice, both parties must issue an electronic invoice for the goods they provide and accept an e-invoice for the goods they receive. The absence of an invoice means the transaction is not recognized and increases tax risk.
5. Incomplete terms in the barter contract
- Typical deficiencies:
- quantity and quality of goods not clearly specified;
- deadlines for obligations not stated;
- value not specified or not in line with market price.
As a result, the tax authority may consider the documents invalid and determine turnover based on market prices.
6. Incorrect recognition of income and expenses in accounting
Some companies record barter income as an intangible transaction, which distorts profit indicators.
- Correct accounting principles:
- the value of goods and services received should be recorded as income;
- the value of goods and services provided should be recognized as expenses.
Example 1: Assume a company receives barter services worth 7,000 manats. However, since the contract does not specify the value, the tax authority does not recognize the expense. As a result, during a tax audit, the company’s profit increases by 7,000 manats, and an additional tax of 1,400 manats is calculated.
7. Improper handling of partial barter transactions (money + goods)
Some contracts are not fully barter, i.e., they involve both goods and monetary payment. Companies often fail to account for the non-monetary part. According to the law, the barter part of the transaction should be recorded as separate turnover, and the monetary part should be recorded as a separate sale.
Example 2: Company “A” provides services worth 10,000 manats to company “B.” According to the agreement, company “B” must provide goods worth 6,000 manats (barter), and pay the remaining 4,000 manats via non-cash payment. This transaction is considered a partial barter.
In conclusion, barter transactions are useful for companies in terms of liquidity but carry significant tax risks. The main risks include price distortion, documentation gaps, incorrect determination of VAT obligations, and accounting errors. Therefore, each barter transaction should be carefully documented like a normal sale, evaluated at market prices, and properly recorded for tax purposes.