Tax, crypto and a potential loophole in South Africa
With the crypto market on full display, particularly the trading of NFTs for often staggering sums of money, tax authorities around the world have raised eyebrows at the potential tax implications of the NFT market, notes Baker McKenzie Johannesburg.
Before discussing the taxation of NFTs, it is important to understand what they are. In short, an NFT, or non-fungible token, is a unique blockchain-based digital asset.
Being unique in its properties, an NFT cannot be duplicated and the content linked to it can take any digital form, for example an image, piece of music, video or any other digital content that could be traded or traded on an NFT market. Arguably, an NFT is defined by its value, not its unique properties.
Some NFTs have also been created to be used as access tokens to exclusive social clubs, such as the Bored Ape Yacht Club (BAYC). These NFTs act as access tickets, allowing their owners to access exclusive digital services and spaces.
With the crypto market often booming, particularly the trading of NFTs for often staggering sums of money, tax authorities around the world have raised eyebrows at the potential tax implications of the NFT market.
NFTs in the global tax framework regulating digital services
Currently, a globally accepted and comprehensive solution to NFT taxation remains uncertain. This is because the tax treatment of NFTs would require various considerations as to their qualification and application under existing global tax rules.
Another potential problem is the valuation of NFTs for tax purposes, as there is little guidance in this regard. As a result, the tax authorities seem to be caught catching up. In some cases, however, some tax authorities believe that current legislative measures are sufficient to cover the taxation of NFTs.
In determining whether VAT would apply to the supply of NFTs, it is important to first establish whether the supply of NFTs would include a supply of electronic services, as defined.
Globally, existing definitions of electronic services, in accordance with European Union Council Directive 2006/112/EC, Council Implementing Regulation (EU) No 282/2011 and the Model Convention 2021, can potentially be broad enough to include NFT as part of the definition of electronic services, particularly with regard to the taxation of automated digital services that involve minimal human interaction.
It is unlikely that lawmakers had any explicit intention to respond to NFTs when these provisions were made, however, the wording of these provisions has been expanded to the extent that it took into account future developments in the economy. digital.
An overview of the Spanish tax treatment of NFTs
The Spanish tax authorities (STA) recently ruled on this after considering that NFTs, being essentially “digital certificates of authenticity”, create two different digital assets after minting, namely: – the digital asset underlying asset (i.e. image, music, video, etc.) that may be presented digitally, and the NFT itself, which represents digital ownership of certain rights in the underlying digital asset.
In its justification for this conclusion, the STA pointed out that NFTs could not fall within the scope of the supply of goods because they did not give the purchaser any rights in tangible goods. Therefore, there has been no supply of a real good and therefore the supply should be subject to VAT.
Could South Africa take a similar approach?
South African VAT legislation defines electronic services, subject to certain specific exclusions, as any service supplied by means of an electronic agent, electronic communication or the Internet, in any capacity. It is obvious that a supply which is dependent on information technology, which is automated and which involves minimal human intervention would fall into this definition.
However, before concluding that the supply of an NFT would fall within this definition for South African VAT purposes, it is necessary to consider whether, for the purposes of the Value Added Tax Act 1991 (the VAT), it would be considered as a supply of services.
According to the VAT law, goods are tangible personal property, immovable property and any interest in rem in such immovable property, while immovable property is specifically defined as land, section title units and shares in a action block system.
Services means anything done or to be done, including the granting, assignment, assignment or waiver of any right or the making available of any facility or benefit. In view of these very precise definitions, it is clear that the supply of an NFT, not being a tangible and movable thing, cannot be considered as a supply of goods, but rather that it constitutes a supply of services.
Considering that it is supplied electronically, it can be concluded that the supply of NFT should fall within the scope of the definition of electronic services and would therefore be subject to South African VAT.
As simple as that sounds, we caution that it gets more complex, especially when considering how blockchains work.
For a non-resident supplier to be considered to be providing electronic services in South Africa, that supplier would have to provide to a South African resident customer, or a customer with a residential, postal or business address in South Africa, and payment would be made by that client from a South African bank account.
A major consideration in this regard is the anonymity of blockchain transactions and therefore the difficulty, if not impossibility, for the seller to determine the identity and location of the buyer of the NFTs in question.
In essence, this makes it extremely difficult, if not unlikely, for VAT obligations to apply to non-resident NFT suppliers, and therefore currently creates a loophole. Given the staggering amounts for which NFTs are sold in digital markets, this is certainly an area where tax authorities could focus more, rather than having to catch up with innovative digital transformation.
- By Jana Botha, Senior Tax Advisor, and Francis Mayebe, Candidate Lawyer, Tax Practice, Baker McKenzie Johannesburg
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