Introduction

In his budget review of 21 February 2018, the former minister of finance stated that existing South African tax law addresses the income and value added tax (VAT) treatment of cryptocurrencies. However, as the supply of cryptocurrencies can cause administrative difficulties with regard to the VAT system, the minister proposed that VAT legislation be amended. In the interim, the South African Revenue Service (SARS) has stated on its website that it will not require persons to register for VAT for the supply of cryptocurrencies until there has been policy clarification in this regard.

Classification of cryptocurrencies

The VAT Act (89/1991) defines 'money' as:

  • any coins or paper currency issued by the South African Reserve Bank (SARB) as legal tender; or
  • any coins or paper currency of a country other than South Africa which are used or circulated as currency.

Cryptocurrencies are not issued by the SARB or any other country and therefore do not fall within the act's definition of 'money'. Thus, the question arises as to whether cryptocurrencies constitute goods or services for VAT purposes. The term 'goods' is defined in the VAT Act to mean corporeal movable things. Accordingly, cryptocurrencies do not constitute goods for VAT purposes. However, the term 'services' is 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, cryptocurrencies will most likely fall within the ambit of the definition of 'services' for VAT purposes.

The National Treasury appears to concur with the view that cryptocurrency transactions constitute the supply of a service for VAT purposes. It therefore proposed in the draft Taxation Laws Amendment Bill 2018 that activities involving the issue, acquisition, collection, buying, selling or transfer of ownership of cryptocurrencies are deemed to be 'financial services' as defined in Section 2 of the VAT Act.

If the National Treasury's proposal to treat activities involving cryptocurrencies as financial services is accepted, such activities will be exempt from VAT under Section 12(a) of the VAT Act.

VAT treatment

If cryptocurrency transactions are exempt from VAT, no VAT will be payable on the sale or supply of cryptocurrencies. The supplier of the cryptocurrency will also not be entitled to register for VAT purposes even if the trading income therefrom exceeds the R1 million VAT registration threshold. Further, no VAT may 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 a mechanism to pay for goods or services, the payment itself will not have any VAT consequences. However, a VAT-registered person may deduct the VAT charged by the supplier of the goods or services if they are acquired for the purpose of making taxable supplies.

Where a supplier of goods or services accepts a cryptocurrency as payment for a supply of goods or services, it must convert the value thereof into rand and issue a tax invoice in rand to the recipient. The supplier must then account for the VAT amount reflected in rand on the tax invoice as output tax. Any movement in the value of the cryptocurrency between the date of the tax invoice and the payment date is expected to be treated in the same manner as foreign exchange differences (ie, any change in the value will be ignored for VAT purposes); however, SARS needs 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, two transactions will occur (ie, the supply of the goods or services to the customer and the supply of the cryptocurrency to the intermediary). The supplier will then have to account for output tax on the supply of the goods or services on the value of cryptocurrency received as payment. The supply of the cryptocurrency to the intermediary in exchange for the rand amount received will be exempt from VAT, but any fee or commission payable to the intermediary will be subject to VAT. The supplier will 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 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 0%. This is because the zero-rating provisions of the VAT Act take precedence over the exemption provisions. In such case, cryptocurrency traders may have to register for VAT and may deduct the VAT incurred on expenses attributable to the zero-rated cryptocurrency transactions.

A definition of what constitutes a 'cryptocurrency' for VAT purposes is lacking. In the absence of a clear definition, electronic loyalty points awarded by retailers to customers for the redemption of goods or services specified in a loyalty scheme, and digital tokens or vouchers entitling the holder to acquire specific goods or services, could also constitute cryptocurrencies. The National Treasury will hopefully clarify the meaning of 'cryptocurrency' for VAT purposes.

Comment

The exemption of cryptocurrency transactions from VAT is undoubtedly the preferred route. If they are taxable, all taxable supplies for which cryptocurrencies are used as a payment mechanism will be barter transactions and both the supplier and recipient would need to account for VAT on the same transaction. Further, 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.

For further information on this topic please contact Gerhard Badenhorst at Cliffe Dekker Hofmeyr by telephone (+27 11 562 1870) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.

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