Digital Assets: Value added tax and digital services tax implications
INSIGHT ARTICLE |
As digital assets continue to grow in number and popularity, the global value-added tax (VAT) treatment of asset exchange services continues to evolve while tax authorities around the world review their position and publish new guidance. Unfortunately, the global VAT landscape can be unclear in instances relating to digital assets. This lack of clarity can present challenges for businesses in this space.
Additionally, many countries have either recently implemented or proposed the introduction of a new digital service tax (DST). The DST is typically a ‘gross receipt’ type of tax. Governments in various jurisdictions implementing DST measures generally target technology companies that derive revenue from digital activities (e.g. online advertising, sales from user data, digital intermediary services, etc.) into a jurisdiction without a physical presence. The DST essentially creates a taxing right for the country from which revenue is derived whereas no tax would be payable under existing tax legislation.
VAT and digital asset exchanges
In 2014, the Court of Justice of the European Union (CJEU) ruled in the landmark Skatteverket v. Hedqvist case (C-264/14) that the services of a Bitcoin exchange were VAT exempt on the basis that Bitcoin should be treated as a ‘currency’ for VAT purposes. Therefore, companies providing such services were not required to collect or remit VAT on the services that they were providing.
While this approach simplifies the revenue side, it does present a potential VAT cost for businesses established in VAT jurisdictions, as they cannot recover all of the VAT that they incur (input tax). For companies that are incurring significant costs, including items such as inter-company recharges (i.e. management fees, licensing of IP or technology), there could be a 20% plus cost of irrecoverable VAT. As such, careful consideration and planning to manage any irrecoverable VAT is recommended.
Outside of the European Union (EU), countries like Australia and Switzerland take a similar approach. In Australia, prior to July 1, 2017, the purchase and sale of digital currencies was subject to goods and services tax (GST). For example, a supply of digital currency in exchange for goods or services was treated as a ‘barter transaction’ for GST purposes (i.e. there were two suppliers and therefore GST was due on both sales). The Australian government implemented rule changes in 2017 to be in line with the ruling set forth in Hedqvist. These changes have clarified that the use of digital currencies to purchase an item would be treated in line with payments in fiat currencies not subject to double taxation.
Prior to 2019, the Canadian government took a similar position. However, in 2019, draft legislation was proposed exempting the supply of virtual payment instruments (VPIs) to bring them in line with traditional financial instruments. VPIs would generally include payment tokens such as Bitcoin, but would exclude tokens that operate in a manner similar to a gift card.
Singapore changed its legislation with respect to Digital Payment Tokens (DPT), effective on Jan. 1, 2020. To qualify as a DPT, the token must have various characteristics. It needs to be fungible, not pegged to any currency, transferrable, stored or traded electronically, and is (or is intended to be) a medium of exchange accepted by the public, or a section of the public, without any substantial restrictions on its use. The exchange of DPTs for fiat currency or other DPTs should therefore qualify as a VAT exempt exchange. However, fees charged by an exchange to customers trading DPTs may qualify as taxable digital services under Singapore’s overseas vendor registration scheme and could lead to a non-resident exchange being liable to register for GST purposes.
Digital service taxes
One of the hottest topics in the tax world is currently the introduction of digital service taxes (DST).
A DST is essentially a tax on a nonresident company deriving profits from the supply of digital services without the need to have a physical presence, or permanent establishment in that jurisdiction. As mentioned above, these taxes are generally a gross receipts tax on a company’s revenue relating to digital services (e.g. online advertising, sales from user data, digital intermediary services, etc.) in that country, at a low rate of tax (generally around 2% or 3%).
The Organization for Economic Co-operation and Development (OECD) is currently working on an initiative to discuss and come to an agreement regarding the pillars of a global DST framework. Until then, countries around the world are taking unilateral action to implement their own DSTs.
The majority of countries that have implemented a DST target a specific group of companies, which is in line with the general EU framework. These are primarily companies that generate revenue through the provision of social media platforms, search engines, or online marketplaces.
Most jurisdictions have relatively high dual thresholds in order for a company to be liable for DST. For example in France, a company must exceed €750 million of worldwide income and over €25 million of in-scope digital service revenue from France. While high now, these thresholds may be lowered in the future.
Certain jurisdictions have sought to introduce a DST as a very broad non-resident income tax for companies in the digital services space. This includes the ‘equalization levy’ that India has recently implemented, which is a 6% tax on certain nonresident providers with revenues of more than approximately $260,000 U.S. dollars from Indian customers.
Additionally, Turkey’s version of the DST applies to a very broad scope of digital services. While there is a worldwide revenue threshold of €750 million and a local threshold of ₺20 million (c. $2.4 million U.S. dollars), the DST rate is 7.5%.
The potential application of both VAT and DST on certain exchange related services can have a significant impact on companies in the digital asset space, particularly due to the thin margins many companies operate on in a competitive environment. The complex global landscape presents many potential challenges for companies that can serve customers all over the world in the digital age. Companies with a potential exposure should consult their tax advisors to ensure global compliance is maintained.