Influencers Bring Value-Added Tax Questions to the Marketing Mix

Influencer marketing is a common tool to elevate brand awareness and increase sales. It involves a collaboration with social media influencers—people who have built a reputation for their expertise on a specific topic and have gathered a large number of followers by posting regular messages on their preferred social media channels. Influencer recommendations and endorsements help businesses reach a targeted audience that is likely to buy products promoted by social media stars.

Influencer marketing may trigger value-added tax obligations for both influencers and the companies that engage them. This article investigates two VAT questions that commonly arise in connection with influencer marketing campaigns: the tax consequences of rewarding influencers with merchandise for their services; and the deductibility of input tax incurred on the costs of such campaigns.

Non-Monetary Rewards

Companies often reward influencers with products and services such as hotel stays, merchandise, tickets to events, and restaurant meals in return for writing a review or discussing their experiences on social media.

Scenarios where no money changes hands, but goods or services are swapped, are referred to as barter transactions. From a VAT perspective, a barter deal consists of two separate supplies: the supply of (advertising) services by the influencer to the company, and the supply of products or services by the company to the influencer. For example, if a vlogger receives a camera in return for reviewing it in a vlog, the camera constitutes consideration for the vlogger’s advertising services, and for the company the vlog is consideration for the supply of the camera.

If the influencer isn’t VAT-registered, only the company must account for VAT on the products that it gives to the influencer. However, if the influencer is VAT-registered, both parties must account for VAT on the amounts they would each have paid for the goods or services if there had been no barter and they had been paid for with money. Both parties are also required to issue invoices and report the supplies in their respective VAT return.

One of the main problems of barter deals is how to determine the value of the consideration. In Naturally Yours Cosmetics (C-230/87) and Empire Stores (C-33/93), the Court of Justice of the European Union held that the value of the consideration received for the supply is determined subjectively by reference to the value assigned to the supply by the recipient of the supply.

Generally, this will be the value of the payment which the recipient of the supply would have expected to make if the consideration for the goods or services which he or she receives had been in money. If consideration is in the form of goods, the taxable amount is the price which the supplier paid to acquire these goods, including any incidental expenses, such as delivery costs.

This approach raises some practical difficulties, as it is the supplier who must account for VAT but the value that the recipient assigns to the supply should be used for tax calculation purposes. This means that the vlogger would have to ask the company about the value of the camera, and the company would have to ask the vlogger to determine the value of the vlog.

To resolve the problem that each party must know the value that the other party assigns to the supply, it’s recommended to confirm the value of each party’s contribution in a written contract. However, the question of value in barter transactions between two VAT-registered persons is less relevant if both parties have the full right to deduct input VAT, as the VAT amount paid to the other party can be deducted immediately.

Input Tax Deductibility

Companies that perform taxed transactions are generally entitled to deduct input tax on any legitimate costs incurred to promote their business. While influencer marketing campaigns seek to elevate brand awareness and increase sales, occasionally the anticipated benefits may fail to materialize. Are tax authorities allowed to deny input tax deduction if it isn’t clear whether the influencer endorsements had any positive impact on the business performance?

In 2021, the CJEU was asked whether tax authorities could refuse a deduction of VAT on advertising services if they considered that the services were overpriced or didn’t result in an increase in sales revenues (Case C‑334/20). The question arose in a dispute between Amper Metal Kft. and the Hungarian tax administration. Amper Metal Kft. purchased advertising services from another Hungarian company and deducted VAT of 13 million Hungarian forint ($38,000) which was indicated on the invoices issued to it by the service provider.

The Hungarian tax administration didn’t agree with the deductibility of the VAT in question, claiming that expenses connected to the advertising services didn’t qualify as costs related to the taxable revenue-generating activity of Amper Metal Kft. Additionally, the tax authorities considered the advertising services to be too expensive and not beneficial to Amper Metal Kft.

The CJEU didn’t agree with these arguments. It ruled that the lack of an increase in the taxpayer’s sales revenues can’t affect the right to deduct input VAT. Similarly, the fact that the price paid was higher than the market price or any potential reference value defined by the tax authorities as the price for similar advertising services couldn’t justify the refusal to allow input tax deduction. However, the CJEU confirmed that the advertising campaign had to be related to Amper Metal’s economic activity for the right to deduct to exist.

Conclusion

Once considered as something just nice to have, influencer marketing has become a key advertising strategy. Whereas in the past companies tended to collaborate with well-known celebrities, the current trend is to engage micro-influencers—less well-known people who are often rewarded with merchandise for their services. Such scenarios give rise to barter transactions which are more complex from the VAT perspective than sales for monetary consideration.

Companies engaging influencers may deduct input tax on the relevant costs even though the influencer marketing campaign fails to boost sales or may be perceived as too expensive, as long as it’s related to their economic activity.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aleksandra Bal is indirect tax technology and operation lead at Stripe. The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.