The Inland Revenue Authority of Singapore (IRAS) issued a draft e-Tax Guide titled “GST: Digital Payment Tokens” on 5th July 2019 (hereafter referred to as “draft tax guide”) to update its stance regarding the treatment of digital payment tokens under the Goods and Services Tax (GST) Act.
In 2014, the IRAS posted on their website that the supply of virtual currencies will be treated as a taxable supply of services. This is because virtual currencies are not considered as “money” for GST purposes and as such, it does not qualify for GST exemption. While the term “virtual currencies” was not explicitly defined by the IRAS, the understanding was that all type of digital tokens and cryptocurrencies were treated the same for GST purposes. Hence, there was a need to provide a concession in the case of virtual currencies used in the gaming world i.e. if virtual currencies are used to exchange for virtual goods or services within the gaming world, GST need not be charged until they are exchanged for real monies, goods or services. (Click here to read our earlier article on the current GST treatment)
In the draft tax guide, the IRAS has made a distinction between digital tokens or cryptocurrencies that function or are intended to function as a medium of exchange (referred to as “digital payment tokens”) and digital tokens or cryptocurrencies that do not qualify as digital payment tokens. This distinction is made because the new GST treatment only applies to digital payment tokens. The GST treatment for digital tokens and other crypto assets that do not qualify as digital payment tokens remains unchanged.
In this article, we provide an overview of some of the proposed changes as outlined in the draft tax guide.
CURRENT AND PROPOSED GST TREATMENT
With effect from 1 January 2020 where digital payment tokens are provided as consideration in a transaction other than for a supply of money or digital tokens, the supply of those tokens will no longer be treated as a supply of goods or services.
In addition, the exchange of digital payment tokens for fiat currency or other digital payment tokens will be treated as an exempt supply.
How these rules shall apply in practice is discussed below under different scenarios. As explained earlier, the existing GST treatment refers to virtual currencies whilst the proposed treatment in the draft tax guide makes reference to digital payment tokens.
1. Making Payments using Virtual Currencies/Digital Payment Tokens
When a business buys goods or services using virtual currencies, the transaction will be considered as a barter trade. In a barter trade, two supplies are made – one by the supplier who supplies the goods and services, and another for the supply of virtual currencies by the business who pays the supplier using virtual currencies.
GST should be accounted for on each supply (i.e. the supply of goods or services and the supply of virtual currencies) if the respective supplier is GST-registered.
Proposed Treatment with effect from 1 January 2020
The use of digital payment tokens as payment for anything other than for fiat currency or other digital payment tokens shall be disregarded as a supply for GST purposes. This means that no output tax needs to be accounted for if digital payment tokens are used to pay for goods and services.
A GST registered supplier of goods and services who receives digital payment tokens as payment will need to account for output tax on the value of the supply of goods or services as per the current GST treatment.
2. Selling Virtual Currencies/Digital Payment Tokens as a Principal
For a GST-registered intermediary that sells virtual currencies as a principal, it will have to charge GST on the sale of the virtual currencies, unless the sale qualifies as international services whereby GST is charged at 0%.
A supply of services to overseas persons that meets the following conditions will qualify as international services:
Proposed Treatment with effect from 1 Jan 2020
The supply of digital payment tokens in exchange for fiat currency or other types of digital payment tokens will be treated as an exempt supply or a zero-rated supply if the conditions for zero-rating (as stated above) are met. The draft tax guide provides a list of indicators to determine if a person is acting as an agent or as a principal. The GST treatment for the supply of virtual currencies that do not qualify as digital payment tokens remain the same.
3. Selling Virtual Currencies/Digital Payment Tokens as an Agent
If a GST-registered business acts as an agent for another party to facilitate the sale of virtual currencies, it will need to charge GST on the commission fees or margin that it receives, unless the services are considered as international services and hence, zero-rated.
There is no change in the GST treatment. The draft tax guide provides a list of indicators to determine if a person is acting as an agent or as a principal.
4. Initial Coin Offering
When a GST-registered business in Singapore issues digital tokens/virtual currencies to the public in exchange for fiat currency or cryptocurrencies such as bitcoin, it must account for output tax on the supply of the digital tokens/virtual currencies unless the supply is zero-rated or it is an exempt supply (i.e. it falls under the prescribed list of exempt financial services under the Fourth Schedule of the GST Act).
The proceeds received from an ICO can be treated as exempt supplies if the digital tokens/cryptocurrencies issued via the ICO qualify as digital payment tokens. The GST treatment for the supply of virtual currencies that do not qualify as digital payment tokens remain the same.
The new GST rules is good news for issuers of digital payment tokens via an ICO and is likely to make Singapore more attractive for blockchain innovation. However, it is important for would-be issuers to ensure that the tokens they are issuing qualify as digital payment tokens.
The new GST treatment will also mitigate the problem of buyers of digital payment tokens suffering GST twice i.e. at the point of purchase and at the point of redemption.
With the new rules, digital tokens/cryptocurrencies can be classified into 3 groups: (1) qualifying as digital payment tokens as defined by the IRAS (2) not qualifying as digital payment tokens and falling under the prescribed list of exempt supplies under the GST Act; and (3) not falling within the first two categories. The GST treatment can then be applied according to this classification.
In the draft tax guide, it is mentioned that hybrid tokens may potentially fall within the definition of digital payment token if certain conditions are met. Hybrid tokens as defined in the draft tax guide are digital tokens issued via an ICO to fund the development of certain products, services or infrastructure that will eventually give access to products and services on the funded ecosystem to the holders of the tokens. Such tokens may also be traded on exchanges.
The draft guide stipulates that the hybrid token will qualify as a digital payment token if the hybrid token has all the characteristics of a digital payment token and it can still potentially be used as a medium of exchange even after it has been used to obtain a product or service on the ecosystem. We find this stipulation somewhat restrictive as the value of digital tokens that are used as a medium of exchange may be fully extinguished when such tokens are exchanged for a product or services on the funded ecosystem.
The effective date of the new GST rules coinciding with the effective date for the Overseas Vendor Registration scheme ensures that no unnecessary hurdles are placed to limit the progress Singapore has made in the past few years as a blockchain and cryptocurrency innovation hub.
The IRAS is seeking feedback on the draft tax guide from businesses dealing in digital payment tokens. The feedback is to be completed by submitting a template available here before 26th Jul 2019.