Abstract
The use of virtual currencies and tokens has dramatically risen recently and regulations in force could appear to do not be able to follow the technology’s path. However, when it is time to consider the tax treatment of transactions involving Distributed Ledger Technologies (DLT), it is necessary to refer to existing provisions, case-law and principles of law, as well as to the nature of the activities, the status of the parties involved and the specific facts and circumstances of the case.
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Notes
- 1.
Article 14 VAT Directive provides that a supply of good shall mean the transfer of the right to dispose of tangible property as owner.
- 2.
Supply of service is defined in Article 25 VAT Directive on a residual basis and means any transaction which does not constitute a supply of goods. As regards determining whether a supply of services is affected for consideration, the ECJ recalled that it is settled case law that the concept of the “supply of service effected for consideration” requires the existence of a direct link between the service provided and the consideration received, see Bastova, C- 432/15 and Terra and Kajus (2017).
- 3.
It is settled case law that VAT exemptions shall be strictly interpreted as exceptions to the general principle according to which VAT is to be levied on supplies, see Nordea, C-350/10.
- 4.
According to Article 9 of VAT Directive a taxable person is anyone, wherever in the world, who performs economic activities whatever the purpose or result, not acting as final consumer. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.
- 5.
In this latter case, territoriality rules will be subject to the qualification given to the supply—good or service—and to the persons involved—taxable persons and/or final consumers. As it is known, in a supply of goods the place of supply depends whether the goods are dispatched/transported or not. If the goods are not dispatched/transported, the place of supply shall be the place where the goods are located at the time when the supply takes place (Article 31 VAT Directive); if the goods are dispatched or transported, the place of supply shall be the place where the goods are located at the time when dispatch or transport of the goods to the customer begins (Article 32 VAT Directive). As well as, in the supply of services, the place of supply depends whether the supply is between taxable persons (B2B) or between a taxable person and a consumer (B2C). In the former (B2B), the place of supply shall be where the receiver has established his business (Article 44 VAT Directive); in the latter (B2C), the place of supply shall be where the supplier has established his business (Article 45 VAT Directive).
Furthermore, it should be taken into consideration that the general rules could be subject to exceptions. For instance, the VAT Directive provides that in certain circumstances the place of supply could be where the consumer has his permanent address or usually resides (as the case may be with supply of electronic services to non-taxable persons provided by Article 58 VAT Directive).
Finally, it should be also considered that European Union is changing the territoriality rules, where the final scope is to tax the supply of goods and services in the place where they are consumed (see Towards a single EU VAT area - Time to act: COM(2017) 566 final and COM(2017) 567 of European Commission). In this way, the VAT would be declared and collected in the Member State where the supplier is established (via a one-stop-shop mechanism). This will entail that taxation would cover all cross-border supplies of goods and services (and therefore the supplier, and not the customer, would be liable for the VAT on all goods and services purchased from other Member States) so that all supplies of goods and services within the single market, either domestic or cross-border, will be treated the same way.
- 6.
Working paper No. 811, 29 July 2014.
- 7.
According to the VAT Committee bitcoin should be distinguished from electronic money, as defined by Article 2 of Directive 2009/110/EC: “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions”. According to Article 1(1) of that same directive, only certain categories of electronic money issuers are recognized, mainly credit institutions, electronic money institutions, post office giro-institutions, the ECB and national central banks, and Member States or their regional or local authorities under certain conditions. It seems that in electronic money schemes, the link with traditional money forms is preserved. The VAT Committee referred that no Member State has expressed a view which envisages the option of treating bitcoins as electronic money.
- 8.
Considering the functions of traditional currencies outlined by the European Central Bank (ECB) (see http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf – p. 10), the VAT Committee concluded that bitcoins could not be considered a currency due to the lack of supervision, potential technical problems and high volatility.
- 9.
It would imply the applicability of Article 135(1)(d) of the VAT Directive, whereby Member States shall exempt “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and other negotiable instruments, but excluding debt collection”. The VAT Committee concluded that, although bitcoins could fall within the meaning of “other negotiable instruments” certain concerns may arise as regards negotiability of bitcoin. In this respect, the VAT Committee outlined that according to the opinion of the Advocate General (AG) in Granton Advertising (C-462/12), “other negotiable instruments” shall be seen as instruments which confer the right to claim a sum of money. Bitcoin can be exchanged for currency only to the extent that another private party is willing to buy them on an exchange or in a peer-to-peer transaction.
- 10.
It would imply the applicability of Article 135 (1)(f) of the VAT Directive, whereby Member States shall exempt “transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2)”. According to the VAT Committee, the holder of bitcoin neither has any rights of ownership against the bitcoin organization nor has any claims against any company or organization, nor any similar right, Lambooij (2014).
- 11.
At the time of the Working paper was drafted, VAT treatment of vouchers was not harmonized at EU level. Since 1 January 2019 the Voucher Directive (2016/1065/EC) has been implemented (see Working paper No. 983/2019). According to the VAT Committee it is difficult to treat bitcoin as a voucher for VAT purposes. Indeed, bitcoin does not embed the obligation for the supplier to provide goods or services in exchange.
- 12.
In this respect, Article 7(1) of the VAT Implementing Regulation states that: “electronically supplied services as referred to in Directive 2006/112/EC shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology”. Also, Article 7(2)(c) considers “services automatically generated from a computer via the Internet or an electronic network, in response to specific data input by the recipient” to be an electronically supplied service.
Due to its digital character, bitcoin could fall within the definition of electronically supplied services. Indeed, bitcoin is delivered over the Internet or an electronic network, and it is generated from a computer via the Internet or an electronic network in response to specific data input by the recipient. However, in the VAT Committee’s view, while it is undoubtedly so that bitcoin is transferred electronically, the question is whether there is a supply of services, in the terms of the VAT Directive. Notably, the classification of transfers in bitcoin as supplies of services may be controversial in cases where its functioning and purpose is equal to that of a means of payment because for VAT purposes payments are not consumption but measure the consumption (see section 3.1.6, Working paper No. 811/2014).
- 13.
Working paper No. 854, 30 April 2015.
- 14.
Skatterveket v. David Hedqvist, C-264/14 (Hedqvist).
- 15.
Para. 24 Hedqvist.
- 16.
Para. 14–17 AG’s Opinion.
- 17.
Para. 37 Hedqvist.
- 18.
It provides that “transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest”.
- 19.
Para. 49 Hedqvist.
- 20.
Para. 51 Hedqvist.
- 21.
Para. 52 Hedqvist.
- 22.
For sake of completeness, the ECJ deemed that both the exemptions laid down in Article 135(1)(d) and in Article 135(1)(f) of the VAT Directive could be applied.
- 23.
Para. 39 and 40 AG’s Opinion in Hedqvist.
- 24.
Para. 44 AG’s Opinion that recalled GfBk (C-275/11), para. 32.
- 25.
For sake of completeness it should be referred to the Opinion rendered by the European Central Bank (ECB) on 12 October 2016—“on a proposal for a directive of the European Parliament and the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing and amending Directive 2009/101/EC”. In this respect, according to ECB it would be more accurate to regard cryptocurrencies as means of exchange, rather than as means of payment. Moreover, Article 1, lett. d) Directive 2018/843/EU transposed the ECB’s opinion and provided that “virtual currencies means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically”. In this scenario, it should be wonder which is the purpose of such Directive. In particular, if the scope is related to anti-money laundering and countering the financing of terrorism (see eighth whereas), the substantial nature of cryptocurrencies as means of payment should not be affected by external laws as so affirmed by the AG’s Opinion in Hedqvist and the recalled ECJ case-law.
- 26.
Working paper No. 892, 4 February 2016.
- 27.
Redmar (2014).
- 28.
In Regina v. Ernest George Thompson, Brian Albert Johnson and Colin Alex Norman Woodiwiss (C-7/78) the ECJ observed that, although doubts may be entertained as to the question of whether krugerrands are to be regarded as legal means of payment, it should nevertheless be noted that, on the money markets of those Member States which permit dealings in these coins, krugerrands are treated as being equivalent to currency.
- 29.
Section 5.2.2 of Working paper No. 892/2016 and Section 3.6 of Working paper No. 854/2015.
- 30.
Kroll et al. (2013).
- 31.
Bal (2018a).
- 32.
Working paper No. 892/2016, Section 5.2.4.
- 33.
However, if the service is carried out for the miner’s private use, the transaction would be treated as a supply of services for consideration according to Article 26(1)(b) of the VAT Directive.
- 34.
Redmar (2014).
- 35.
In Tolsma case (C-16/93), ECJ was asked to determine whether donations in a tin received from passers-by for playing music had to be treated as consideration for a service, since the payments were not stipulated. ECJ held that the playing of music for which no consideration was stipulated did not constitute a supply of services effected for consideration. There was no agreement, i.e. no legal relationship, between the parties and there was also “no necessary link between the musical service and the payments to which it gives rise”, see para. 17.
- 36.
Para. 53, SDC.
- 37.
Para. 43. Nordea.
- 38.
Terra and Kajus (2017).
- 39.
The requirement that a taxable person acts in an “independent” capacity excludes, according to Article 10 of the VAT Directive, employees from an obligation to charge value added tax on services provided to their employers.
- 40.
Terra and Kajus (2017). See also Gmina Wrocław (Case C-276/14).
- 41.
Lastly, if miners/validators were considered VAT taxable persons and the validation activity felt within the VAT scope, the territoriality topic would have to be analysed. In this respect, it should wonder whether the presumptions provided for electronic services (see Article 58 VAT Directive and Article 24(a) of Implementing Regulation to VAT Directive) could transposed.
- 42.
See Section 5.2.3 of Working paper No. 892/2016.
- 43.
See Loyalty Management UK and Baxi Group in C-53/09 and Tolsma in C-16/93.
- 44.
- 45.
Section 5.2.5. Working paper 892/2016.
- 46.
OECD (2019), Initial Coin Offering (ICOs) for SME Financing, www.oecd.org/initial-coin-offerings-for-sme-financing.htm.
- 47.
Bal (2018b).
- 48.
Fairpo (2018).
- 49.
Rompelman (C-268/83) and INZO (C-110/94).
- 50.
Terra and Kajus (2017).
- 51.
Bal (2018b).
- 52.
Ibid.
- 53.
In case of the client is final consumer, Article 58 VAT Directive could be applicable.
- 54.
Bal (2018b).
- 55.
In this regard, it should be noted that according the European Securities and Markets Authority (ESMA), where crypto-assets qualify as transferable securities or other types of MiFID financial instruments, a full set of UE financial rules are likely to apply to their issuer (or firms providing investment services/activities to those instruments. See, https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf.
- 56.
Kretztechnik (C-465/03).
- 57.
See Article 30(a)(3) and Article 30(b)(2), VAT Directive.
- 58.
Working paper No. 983, 13 November 2019.
- 59.
Bal (2018b). Monitor, 2018 (Volume 29), No. 2, published online on 15 March 2018, IBFD.
- 60.
Gesley J (2018) Germany: Federal Ministry of Finance Publishes Guidance on VAT Treatment of Virtual Currencies. In: BITRSS Crypto and Bitcoin World News. https://bitrss.com/news/89216/germany-federal-ministry-of-finance-publishes-guidance-on-vat-treatment-of-virtual-currencies.
- 61.
See: https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-tax-for-businesses. HMCR also published a guideline for individuals; see https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals. In this latter, HMRC points out that the guideline does not consider the tax treatment of crypto-assets held for the purposes of a business carried on by an individual.
- 62.
The Cryptoassets Taskforce report lays out the UK’s policy and regulatory approach to cryptoassets and distributed ledger technology in financial services. See: https://www.gov.uk/government/publications/cryptoassets-taskforce.
- 63.
See Item 5, Schedule 9, Group 5 of the Value Added Tax Act 1994.
- 64.
- 65.
- 66.
Vat Act, item 3(4), Part Two, 5th Schedule.
- 67.
- 68.
On August 27, 2019, the Federal Tax Administration (FTA) published a working paper entitled: “Cryptocurrencies and initial coin/token offerings (ICO/ITO) as the subject of wealth, income, and profit tax, withholding tax, and stamp duties”.
- 69.
- 70.
- 71.
Working paper 983/2019.
- 72.
Regarding the qualification of cryptocurrencies, it should refer also to: Law Decree 90/2017 (that transposed Directive 2018/843/EU); Final Report of Consob “Le offerte iniziali e gli scambi di crypto-attività”, published on 2 January 2020; Tribunale Amministrativo Regionale per il Lazio, judgement no. 01077/2020, published on 27 January 2020.
- 73.
See also answer to the tax ruling No. 72/2016.
- 74.
- 75.
Allessie D et al., Blockchain for digital government: An assessment of pioneering implementations in public services, 2019.
- 76.
van der Bosch et al. (2018).
- 77.
OECD (2019), Initial Coin Offering (ICOs) for SME Financing, page 49:
- 78.
In this regard, see the public consultation launched by the European Commission in order to the EU Regulation proposal on crypto-asset: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12089-Directive-regulation-establishing-a-European-framework-for-markets-in-crypto-assets. In the third quarter of 2020 a response could arrive.
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Ferrari, M. (2021). Are VAT Rules Really Inadequate for Distributed Ledger Technology’s Transactions?. In: Cappiello, B., Carullo, G. (eds) Blockchain, Law and Governance. Springer, Cham. https://doi.org/10.1007/978-3-030-52722-8_9
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