Decrypting the law: Proposed VAT Act amendments affecting cryptocurrencies

If one considers the provisions of the Value Added Tax Act, No 89 of 1991 (VAT Act), it defines ‘money’ as any coins or paper currency issued by the South African Reserve Bank (SARB) as a legal tender, or any coin or paper currency of any country other than South Africa which is used or circulated as currency. A cryptocurrency is not issued by the SARB or by any other country, and it is therefore not ‘money’ as defined.

The question is then whether a cryptocurrency comprises ‘goods’ or ‘services’ for VAT purposes. The term ‘goods’ is defined in the VAT Act to mean corporeal movable things. Accordingly, cryptocurrency does not comprise ‘goods’ for VAT purposes. The term ‘services’ is, however, widely defined in the VAT Act to include the granting or assignment of any right or the making available of any facility or advantage. In the absence of any exclusion or exemption in the VAT Act, a cryptocurrency will most probably fall within the ambit of the definition of a ‘service’ for VAT purposes.

It seems that National Treasury concurs with the view that cryptocurrency transactions comprise the supply of a ‘service’ for VAT purposes. It has therefore now proposed in the draft Taxation Laws Amendment Bill, 2018, that the activities involving the issue, acquisition, collection, buying or selling or transfer of ownership of a cryptocurrency are deemed to be ‘financial services’ as defined in s2 of the VAT Act.

If the proposal by National Treasury to treat the activities involving cryptocurrencies to be ‘financial services’ is accepted, then these activities will be exempt from VAT in terms of the provisions of s12(a) of the VAT Act.

If the cryptocurrency transactions are exempt from VAT, then no VAT will of course be payable on the sale or supply of cryptocurrencies. The supplier of the cryptocurrency will then also not be entitled to register for VAT purposes even if the trading income therefrom exceeds the R1 million VAT registration threshold, and no VAT may also be deducted in respect of expenses incurred in relation to such activities. The exemption also has further implications which require consideration.

If a person uses a cryptocurrency as mechanism to pay for goods or services, then the payment itself will not have any VAT consequences. A VAT registered person may, however, deduct the VAT charged by the supplier of the goods or services if the goods or services are acquired for the purpose of making taxable supplies.

Where a supplier of goods or services accepts cryptocurrency as payment for a supply of goods or services, the supplier must convert the value thereof into South African Rand and must issue a tax invoice in Rand to the recipient. The VAT amount reflected in Rand on the tax invoice, must then be accounted for as output tax by the supplier. Any movement in the value of the cryptocurrency between the date of the tax invoice until the date of payment is expected to be treated in the same manner as foreign exchange differences, i.e. any movement in the value is ignored for VAT purposes, but SARS would need to clarify this aspect.

The trading of cryptocurrency through traders or on an exchange platform, will be exempt from VAT. However, any fees or commission payable in respect of such trades will be subject to VAT, and the persons buying or selling the cryptocurrencies will not be entitled to deduct such VAT as input tax.

Where a VAT registered supplier uses the services of an intermediary to accept a cryptocurrency as payment for the supply of goods or services, and the intermediary agrees to pay a Rand amount into the supplier’s bank account, then two transactions would take place, ie the supply of the goods or services to the customer and the supply of the cryptocurrency to the intermediary. The supplier is required to account for output tax on the supply of the goods or services on the value of cryptocurrency received as payment. However, the supply of the cryptocurrency to the intermediary in exchange for the Rand amount received, is exempt from VAT, but any fee or commission payable to the intermediary will be subject to VAT. The supplier would not be entitled to deduct such VAT as input tax if the fee or commission is payable for the acceptance and acquisition by the intermediary of the VAT exempt cryptocurrency.

Although the proposal is to treat transactions involving cryptocurrencies as being VAT exempt financial services, to the extent that the counterparty is a non-resident, the supply of cryptocurrencies may qualify for VAT at the rate of zero per cent. This is because the zero-rating provisions of the VAT Act take precedence over the exemption provisions. In such case the cryptocurrency trader may be required to register for VAT and may deduct the VAT incurred on expenses attributable to the zero-rated cryptocurrency transactions.

What seems to be lacking is a definition of what exactly is meant by a ‘cryptocurrency’ for VAT purposes. In the absence of a clear definition, it could be considered that electronic loyalty points awarded by retailers to customers for redemption for goods or services specified in a loyalty scheme, or digital tokens or vouchers entitling the holder to acquire specific goods or services, could also be ‘cryptocurrency’. Hopefully National Treasury will still clarify the meaning of ‘cryptocurrency’ for VAT purposes.

The exemption of cryptocurrency transactions from VAT is no doubt the preferred route. If they are taxable, then all taxable supplies for which cryptocurrencies are used as payment mechanism will be barter transactions, and both the supplier and recipient would need to account for VAT on the same transaction. Also, most countries with a VAT system have opted for the exemption. The clarification of the treatment of cryptocurrencies eliminates any uncertainty regarding their VAT status and is certainly welcomed.