July 8, 2019 | AtoZ Markets - In the latest news about digital assets and the regulatory framework they fall under so far, Singapore suggests exempting crypto transactions from VAT.
The Inland Revenue Authority of Singapore (IRAS) has suggested exempting cryptocurrencies that are intended to function as a medium of exchange from Goods and Services Tax (GST), which is the term of the local equivalent for the Value-Added Tax (VAT).
The taxation exemption the IRAS suggested to take effect on January 1, 2020, came in a draft that outlined new rules for overhauling the currently applied system, which dictates that digital payment tokens are regarded as taxable supply of services.
“Under the current rules, the supply of digital payment tokens is treated as a taxable supply of services. Therefore, the sale, issue or transfer of such tokens for consideration by a GST-registered business is subject to GST. When the tokens are used as payment for the purchase of goods or services, a barter trade resulting in two separate supplies arises — a taxable supply of the tokens and a supply of the goods or services.
From 1 Jan 2020, to better reflect the characteristics of digital payment tokens, the following changes will take effect:
(i) The use of digital payment tokens as payment for goods or services will not give rise to a supply of those tokens; and
(ii) The exchange of digital payment tokens for fiat currency or other digital payment tokens will be exempt from GST.” As the IRAS published.
The IRAS identified digital payment tokens as Bitcoin, Ethereum, Litecoin, Dash, Monero, Ripple and Zcash.
To qualify as a digital payment token, a digital token/cryptocurrency must be designed as fungible, that is, it must be designed to be used interchangeably as consideration, as the draft outlines the characteristics of what digital payment token can be like.
To differentiate, the IRAS said that Gaming credits and virtual collectibles such as gaming assets and digital artwork are not fungible as they are not fully interchangeable for the purposes of their use as consideration. Therefore, they will not qualify as digital payment tokens.
Furthermore, the IRAS outlined that Digital tokens that are not designed in a way such as to function, without substantial restrictions, as a medium of exchange accepted by the public or a section of the public, are not digital payment tokens. Examples of digital tokens with substantial restrictions on their use as a medium of exchange (and thus, would not qualify as digital payment tokens) include:
- Game credits or “currencies” that cannot be used outside of the context of the online game under the terms under which the game credit/ ‘currency’ is made available.
- Tokens issued on private blockchains. Such tokens cannot be used outside of the context of the permissioned networks.
- Loyalty points issued by retailers, merchants or online platform operators as such points can only be used to redeem products by the issuer of the points or merchants who have agreed to participate in the loyalty programme.
Mining and Digital Payment Token Intermediaries
Under article 10.1 of the draft, the IRAS pointed out In the mining process, there is generally no sufficiently close nexus between the service provided by the miner to the persons whose transactions are verified, and the mined tokens that the miner received from the blockchain ecosystem. The parties paying the mined tokens are also not identifiable. Therefore, the mining of digital payment tokens does not constitute a supply for GST purposes.
If a miner, however, performs services to an identifiable party or parties, in return for a consideration, this constitutes a taxable supply of services. The miner, if GST-registered has to charge and account for GST (unless zero-rating applies).
Subsequently selling or transferring the mined digital payment tokens to a customer belonging in Singapore by the miner will be an exempt supply if the supply takes place on or after 1 Jan 2020.
On the other hand, as for the intermediaries of Digital Payment Tokens, the IRAS looked said in its new rules draft that services provided by intermediaries remain taxable even if these are in relation to digital payment token transactions. These intermediaries may also trade in digital payment tokens. Whether these intermediaries (if GST-registered) have to report the sales of the digital payment tokens as their supplies in their GST returns would depend on whether they have acted as an agent or a principal.
The regulator noted that “If you are a GST-registered intermediary selling digital payment tokens as a principal, you have to report the sale as your supply in your GST return. On the other hand, if you are selling the tokens as an agent on behalf of your customer, you should not report the sale as your supply. Instead, you should report the fee or margin that you earn on the transaction as your supply and account for output tax on the fee/margin (unless your supply can be zero-rated).”