While a borderless world is a pipe dream that might never come true, borders have been blurred by the new age phenomenon cryptocurrencies. In the absence of a clear policy to regulate the Blockchain ecosystem, issuers of ICOs are sidestepping the rules laid down by regulators. However, it is not just the securities regulators that are having a tough time ruling over the Blockchain tokens, the taxmen are as perplexed as their regulatory counterparts.
Tax considerations for Cryptocurrency companies in today’s digital era, when digital services and product can be offered globally from a single location, is really a tough ask. Today, when the location of the company that provides the digital service/product almost has no significance with respect to the operations of the business, it is tough to even determine the jurisdiction where it will be taxed. Tax wise, the location of the company that owns, operates or deliver the services, has a significant impact on the overall tax the company will need to pay an to whom.
The last decade saw a significant number of companies using off-shores tax havens (e.g., Bermuda, Gibraltar, Vanuatu, the Channel Islands, and many more) as the place of incorporation, many of them fin-tech companies. However, in this era of information, the information got out. Global leaks that happened in recent years (HSBC, UBS, Panama leaks) exposed many companies and individuals. Alongside, the limited tax paid by multinational companies in the countries from which they generated most of their income became a hot topic of discussion.
All these aspects resulted in the member countries of Organisation for Economic Co-operation and Development (OECD) adopting legislation that aligns profits with activities (where the value is created) and also to increase reported transparency. In a nut shell, recent tax regulations follow the OECD’s Base Erosion and Profit Shifting (BEPS) initiative which allow tax authorities to allocate limited profits to off-shores where without significant activity (no employees), and to allocate the reminder of the profit to the other entity, where the (key) employees are located.
Tax experts believe that Cryptocurrency companies may be even more under scrutiny from tax authorities and other governmental agencies due to the alleged criminal and money laundry associated with the trade of cryptocurrencies. This scrutiny will result in a close analysis of the token being offered and that will be the game changer as far as taxation goes.
Most of us are assuming that our tokens are utility tokens as they promise a participation in a product or a service. If that is the case, what about the revenue from sales taxes, value-added taxes (VAT) and goods and services taxes (GST)? Are the companies making provision for it in their plans? Will you be ready a 24% tax in Finland?
Now we come to another question — Which jurisdiction is going to levy them? It is a complex analysis and a contentious fight between the “bill to,” “ship to,” “ship from” and “consumer resident” jurisdiction. Each would want a piece of the pie. So, the next time you want to want to understand the threats facing your crypto business don’t just walk up to a stock market expert, also walk up to a tax expert.
Sinha Santos
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