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How is the timing of VAT payment determined in barter transactions and mutual set-off of debts?
How is the timing of VAT payment determined in barter transactions and mutual set-off of debts?
In mutual trade transactions, in many cases taxpayers develop accounts receivable and payable. One of the main issues of concern in such situations is whether the transactions should be classified as barter transactions and how the moment of determining VAT is defined. The topic is explained by Altay Jafarov using practical examples.
Example 1: At the beginning of November 2025, LLC “AA” sold goods to LLC “SS” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “SS”. At the same time, in mid-November, LLC “SS” sold goods to LLC “AA” with a total value of 11,800.00 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “AA”.
Example 2: At the beginning of November 2025, LLC “AA” sold goods to LLC “SS” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “SS”. At the same time, in December, LLC “SS” sold goods to LLC “AA” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats). LLC “AA” did not pay for the goods either. In both cases, should the transactions between the parties be considered barter transactions? How is the time of taxation regulated for VAT purposes in such cases?
Article 662 of the Civil Code of the Republic of Azerbaijan states that under an exchange (barter) agreement, each party undertakes to transfer ownership of one item to the other party in exchange for another item. The provisions on sale and purchase apply accordingly to an exchange agreement. Each party to an exchange agreement is considered the seller of the item it undertakes to transfer and the buyer of the item it receives.
At the same time, Article 159.4 of the Tax Code of the Republic of Azerbaijan provides that the transfer of goods, performance of works or provision of services by a taxpayer to its employees or other persons for consideration or free of charge, as well as a barter transaction, is considered a taxable transaction.
In addition, the determination of the time of VAT taxation is directly regulated by Article 166 of the Tax Code. According to Article 166.1 of the Code, unless otherwise provided by this article, the time of a taxable transaction is the time when payment is made for the supplied goods (works or services). Payment is deemed to have been made at the following time:
when carried out in kind, as well as in the case of barter – at the time the assets are received (the barter is executed).
Considering the requirements of both the Civil Code and the Tax Code, it can be concluded that exchange (barter) transactions must be agreed upon by the parties in advance within the framework of a contract. A barter agreement is usually governed by a single contract, within which the parties agree on the goods, works and services to be mutually provided. For tax purposes under a barter agreement, the date of the barter transaction is considered the time of taxation.
As a continuation of the transactions described in the examples, let us consider two scenarios:
As the first scenario, let us assume that the parties agreed, within the framework of a single contract, to supply goods to each other with a total value of 11,800 manats and to treat this transaction as an exchange (barter) transaction. In this case, in the first example, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for November in Appendix 3, line 301.1.1.6 (barter transactions), both in the section for goods supplied and in the section for goods received.
In the second example, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for November in Appendix 3, line 301.1.1.6 (barter transactions), in the section for goods supplied. Since goods are received from the other party, LLC “SS”, within the framework of a barter transaction, and the barter is therefore considered completed, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for December in Appendix 3, line 301.1.1.6 (barter transactions), in the section for goods received.
What happens to the VAT amounts in these cases?
The LLCs must transfer the VAT amounts to each other’s VAT deposit accounts so that, for both parties, the amounts are recorded both as accrued VAT and as a credit (offset). As a result, no additional VAT assessments or payments to the state budget should arise in the VAT return.
As a second scenario, let us assume that the parties did not conclude any agreement on conducting barter transactions. One party simply sold goods to the other party under a contract, and the other party subsequently supplied goods to the first party. In other words, there was no prior agreement on conducting a barter transaction.
In this case, the provisions of the Civil Code and the Tax Code relating to barter transactions no longer apply. Thus, in its accounting and tax records, LLC “AA” will record the goods supplied in November in the amount of 10,000 manats + 18% VAT of 1,800 manats, totalling 11,800 manats, as accounts receivable. In the VAT return, the amount of 10,000 manats (principal amount) will be reflected in Appendix 3 in the section for supplied goods. The liability of 11,800 manats for the goods received from LLC “SS” will be recorded in the accounting and tax records as accounts payable, formed in respect of the goods supplied in November in the amount of 10,000 manats + 18% VAT of 1,800 manats, totalling 11,800 manats.
As a result, if the parties do not settle their mutual liabilities, debts will remain on both sides in both accounting and tax records. No entries will be made in the VAT returns as receipt or offset.
Suppose that when LLC “SS” supplies goods with a total value of 11,800 manats, the parties agree to offset their mutual liabilities. In this case, reference should be made to Article 166.1.2 of the Tax Code. This article states that when settlements are carried out through mutual offset, payment is deemed to have been made at the moment the obligation is terminated or settled. It follows from this provision that if the parties offset their mutual liabilities, this moment is considered the taxable moment for VAT purposes.
Therefore, in the first example in November, and in the second example in December, although the transactions are not barter transactions, if the parties agree to a mutual offset of liabilities, the VAT taxation moment will be the month in which the mutual offset is formally documented. The VAT amounts must be transferred by the parties to each other’s VAT deposit accounts so that, for both parties, they are recorded both as accrued VAT and as an offset. As a result, they will prevent additional VAT assessments and payments to the state budget in the VAT return.
Thus, it becomes clear that for tax purposes, in barter transactions, the date on which the barter takes place is the moment of taxation. After the supply of goods, performance of works or provision of services (in non-barter transactions), the moment of taxation is the date on which the mutual obligations (debts) are terminated.
In mutual trade transactions, in many cases taxpayers develop accounts receivable and payable. One of the main issues of concern in such situations is whether the transactions should be classified as barter transactions and how the moment of determining VAT is defined. The topic is explained by Altay Jafarov using practical examples.
Example 1: At the beginning of November 2025, LLC “AA” sold goods to LLC “SS” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “SS”. At the same time, in mid-November, LLC “SS” sold goods to LLC “AA” with a total value of 11,800.00 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “AA”.
Example 2: At the beginning of November 2025, LLC “AA” sold goods to LLC “SS” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats), and the value of the goods was not paid by LLC “SS”. At the same time, in December, LLC “SS” sold goods to LLC “AA” with a total value of 11,800 manats (10,000 manats + 18% VAT of 1,800 manats). LLC “AA” did not pay for the goods either. In both cases, should the transactions between the parties be considered barter transactions? How is the time of taxation regulated for VAT purposes in such cases?
Article 662 of the Civil Code of the Republic of Azerbaijan states that under an exchange (barter) agreement, each party undertakes to transfer ownership of one item to the other party in exchange for another item. The provisions on sale and purchase apply accordingly to an exchange agreement. Each party to an exchange agreement is considered the seller of the item it undertakes to transfer and the buyer of the item it receives.
At the same time, Article 159.4 of the Tax Code of the Republic of Azerbaijan provides that the transfer of goods, performance of works or provision of services by a taxpayer to its employees or other persons for consideration or free of charge, as well as a barter transaction, is considered a taxable transaction.
In addition, the determination of the time of VAT taxation is directly regulated by Article 166 of the Tax Code. According to Article 166.1 of the Code, unless otherwise provided by this article, the time of a taxable transaction is the time when payment is made for the supplied goods (works or services). Payment is deemed to have been made at the following time:
when carried out in kind, as well as in the case of barter – at the time the assets are received (the barter is executed).
Considering the requirements of both the Civil Code and the Tax Code, it can be concluded that exchange (barter) transactions must be agreed upon by the parties in advance within the framework of a contract. A barter agreement is usually governed by a single contract, within which the parties agree on the goods, works and services to be mutually provided. For tax purposes under a barter agreement, the date of the barter transaction is considered the time of taxation.
As a continuation of the transactions described in the examples, let us consider two scenarios:
As the first scenario, let us assume that the parties agreed, within the framework of a single contract, to supply goods to each other with a total value of 11,800 manats and to treat this transaction as an exchange (barter) transaction. In this case, in the first example, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for November in Appendix 3, line 301.1.1.6 (barter transactions), both in the section for goods supplied and in the section for goods received.
In the second example, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for November in Appendix 3, line 301.1.1.6 (barter transactions), in the section for goods supplied. Since goods are received from the other party, LLC “SS”, within the framework of a barter transaction, and the barter is therefore considered completed, LLC “AA” will reflect the amount of 10,000 manats (principal amount) in its VAT return for December in Appendix 3, line 301.1.1.6 (barter transactions), in the section for goods received.
What happens to the VAT amounts in these cases?
The LLCs must transfer the VAT amounts to each other’s VAT deposit accounts so that, for both parties, the amounts are recorded both as accrued VAT and as a credit (offset). As a result, no additional VAT assessments or payments to the state budget should arise in the VAT return.
As a second scenario, let us assume that the parties did not conclude any agreement on conducting barter transactions. One party simply sold goods to the other party under a contract, and the other party subsequently supplied goods to the first party. In other words, there was no prior agreement on conducting a barter transaction.
In this case, the provisions of the Civil Code and the Tax Code relating to barter transactions no longer apply. Thus, in its accounting and tax records, LLC “AA” will record the goods supplied in November in the amount of 10,000 manats + 18% VAT of 1,800 manats, totalling 11,800 manats, as accounts receivable. In the VAT return, the amount of 10,000 manats (principal amount) will be reflected in Appendix 3 in the section for supplied goods. The liability of 11,800 manats for the goods received from LLC “SS” will be recorded in the accounting and tax records as accounts payable, formed in respect of the goods supplied in November in the amount of 10,000 manats + 18% VAT of 1,800 manats, totalling 11,800 manats.
As a result, if the parties do not settle their mutual liabilities, debts will remain on both sides in both accounting and tax records. No entries will be made in the VAT returns as receipt or offset.
Suppose that when LLC “SS” supplies goods with a total value of 11,800 manats, the parties agree to offset their mutual liabilities. In this case, reference should be made to Article 166.1.2 of the Tax Code. This article states that when settlements are carried out through mutual offset, payment is deemed to have been made at the moment the obligation is terminated or settled. It follows from this provision that if the parties offset their mutual liabilities, this moment is considered the taxable moment for VAT purposes.
Therefore, in the first example in November, and in the second example in December, although the transactions are not barter transactions, if the parties agree to a mutual offset of liabilities, the VAT taxation moment will be the month in which the mutual offset is formally documented. The VAT amounts must be transferred by the parties to each other’s VAT deposit accounts so that, for both parties, they are recorded both as accrued VAT and as an offset. As a result, they will prevent additional VAT assessments and payments to the state budget in the VAT return.
Thus, it becomes clear that for tax purposes, in barter transactions, the date on which the barter takes place is the moment of taxation. After the supply of goods, performance of works or provision of services (in non-barter transactions), the moment of taxation is the date on which the mutual obligations (debts) are terminated.