Legal | Tax | Compliance
Legal | Tax | Compliance
The FTA has published its practice adjustments for VAT on supplies in connection with blockchain and distributed
The published practice adjustments on supplies in connection with blockchain and distributed ledger technology have undergone some important and correct changes compared to the revised first practice draft of 29 January 2019 on crypto currencies. However, from our point of view, unfortunately, they still do not fully reflect the economic, accounting and cybernetic, self-governing aspects of a decentralized, public open-source blockchain system. These would have to be considered for the legal effect of transactions on the blockchain. The VATability of a token transaction depends strongly on whether the token is synchronized with relative or absolute rights or not. If the transmission of a token in a cybernetic system does not trigger a synchronous transmission of an underlying legal relationship, the transaction should be irrelevant for VAT purposes.
Crowdfunding activities such as Initial Coin Offerings (ICOs), with which companies raise funds (in legal currency or crypto currency) for a specific entrepreneurial or open source project, are to be distinguished from these. An ICO usually consists of a bunch of contractual or factual obligations promised by the fundraiser. These can be related to the token function but can also exist independently of it. If, for example, the fundraiser also provides various supplies (e.g. production order/software development or transfer of ownership of an intellectual property right), the transaction may be relevant for value-added tax, irrespective of the token function.
Unfortunately, the published practice adjustments in these areas are incomplete. The following is a brief summary of the most important points.
According to FTA VAT DEP, the following three main types of cryptocoins/token can be distinguished:
The categories discussed are very narrowly defined, disregard the dual function of DLT-based tokens (i.e. always existing technical function that may be synchronized with a legal function) and show large gaps. In our view, comments on ""native tokens"" or tokens with voucher, equity, debt or investment fund character are missing. In addition, mixed forms are insufficiently covered.
In an Initial Coin Offering (ICO), Token Generating Event (TGE), Initial Token Offering (ITO) or Security Token Offering (STO), a company raises funds (in legal or crypto currency) for a specific business or open source project. The donors are usually assigned blockchain-based coins/token, which are generated on a newly developed blockchain or by means of a digital, self-executing computer program (so-called Smart Contract) on an existing blockchain and stored decentrally. This can happen step by step or only at the start of a new blockchain (so-called Genesis block) or application.
The FTA VAT DEP qualifies ICOs in the practice adaptations as follows:
The concrete design of an ICO (hereinafter also referred to as TGEs and lTOs) and the coins/token created in this way differ substantially in technical, functional and legal respects. However, the focus is usually on raising capital for the project. In return, the fundraiser enters into a bunch of contractual or factual obligations, which are related to the token function, but can often exist independently of it. The VAT assessment of an ICO, therefore, depends to a large extent on its individual structure. The respective tax consequences must be examined on a case-by-case basis and are difficult to describe in general terms.
In general, we believe that the same VAT rules should apply as for crowdfunding in general. Therefore, the close link between the VAT consequences and the token qualification falls short.
A link to the bookkeeping of ICOs according to the Q&A of the Commission for Financial Reporting of ExpertSuisse (German / French) which has published the following positions (as of April 30, 2019), would have been particularly recommended here:
The decentralized character of DLT-based systems must also be taken into account when verifying the place of supply.
FTA VAT DEP distinguishes between block reward and transaction fee and links different tax consequences to these qualifications. This can also influence the right to deduct input tax.
The decentralized character of blockchain protocols is also insufficiently considered when it comes to mining / staking. An analysis of the corresponding tax consequences must be carried out on a case-by-case basis.
Settlement must be carried out in the local currency. The supplier must convert the remuneration for supply rendered on the reporting date into a legal (domestic or foreign) currency at the current rate for a fee in cryptocoins/token at the time the remuneration is received or invoiced (art. 40 of the VAT Act).
According to FTA VAT DEP, the invoice must show the fee for the supply separately and the VAT amount divided according to tax rates in a legal currency. Reporting the remuneration for individual supplies only in cryptocoins/token does not constitute separate invoicing under VAT law. The conversion can be carried out using suitable conversion portals, whereby the selected conversion source must be kept constant. For certain cryptocoins/token the FTA publishes daily courses (course lists of the FTA). It should be possible to check the documentation of the conversion easily and immediately at any time.
This procedure according to the VAT Act must also be applied to the declaration of supplies subject to acquisition tax (art. 45 para. 1 of the VAT Act). Further information on acquisition tax can be found in the VAT information on acquisition tax.
Losses suffered in the sale of cryptocoins/token against legal currency or in the use of cryptocoins/token to obtain services may not be deducted from the fee.
A ""prohibition"" of invoicing in crypto currency diametrically contradicts the qualification of a ""payment token"" as a means of exchange and payment. If such a token is assigned a payment function, it must also be possible to issue a corresponding invoice. Anything else seems impractical.
In addition, Bitcoin, for example, is in several countries already equal to the legal national currency, so that a statement of the remuneration would only have to be permissible in Bitcoin accordingly. Equal treatment with foreign currencies is therefore necessary.
Finally, example c) under ""2.4.5 Invoices in foreign currency"" illustrates the difficulties of implementation in a vivid way: 2 pizzas are sold as of 22 May 2019 for BTC 10,000 and a receipt for USD 30 is issued, which should be relevant for Swiss VAT. It is not comprehensible how the conversion was carried out. At a BTC rate of around USD 8,000 per invoice date, the equivalent of BTC 10,000 BTC would have been around USD 80 million! An invoice with USD 30 does not only seem wrong to us under these circumstances, but also latent criminal. The example is, therefore, useless in practice and should be changed.
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