The Impact of Crypto on International Tax Compliance

6th June 2022

The impact of Crypto on international tax compliance

Currency transactions involving crypto assets are increasingly coming under the spotlight as governments around the world seek to ensure that tax revenues from this growing market are collected. The tax treatment of digital currencies continues to be a top priority for bodies such as the Organisation for Economic Cooperation and Development (OECD) who want to create a harmonised set of tax rules that are applied consistently. For recruitment businesses placing international contractors, due care must be taken to ensure they meet any tax liabilities for crypto transactions.

India is an example of one country looking to clamp down hard on the taxation of digital currencies. The government wants to broaden the scope of its indirect taxation powers, notably regarding its goods and services tax (GST), to increase its hold on the crypto market. Some politicians are calling for the highest rate of 28%, normally reserved for luxury goods, gambling and lotteries, to be applied. The Indian government already imposed a 30% tax rate on virtual digital asset (VDA) transactions earlier in 2022 on top of a 1% salary tax deduction at source for those individuals dealing in crypto transactions.

According to a Hindustan Times report, these proposals will be reviewed by law committees before being submitted to the GST Council, the country’s regulatory tax body, chaired by the finance minister and other state finance ministers.  Sources from the English language broadsheet’s report confirmed the desire of politicians to raise crypto taxes to the level of other industry sectors, stating, “Several MPs demanded to raise the GST on cryptocurrencies to 28% like gambling and lotteries. As parliament is an apex body, their demands will also be examined by the law committee.”

The increased verve of the Indian government to tighten its grip on convertible virtual currencies is a clear message of its intention to ensure that trading in crypto, which is growing in popularity, is subjected to greater regulation and falls in line with other industry sectors. Unsurprisingly, trading volumes plummeted in April 2022 following the changes, and should the other measures be approved, this will discourage the trading of crypto even further. Clearly, not only will the end consumers be hit hard by the increasing taxes, but there will also be a greater administrative burden for crypto exchanges.

In stark contrast, Portugal seems to have little or no regulation on the trading of cryptocurrencies, with profits not taxed as they are not deemed to be assets for tax purposes. That could soon change, however, as the government is coming under increased pressure to adopt more stringent European regulations amid fears that the country could be considered a tax haven. “It’s hard to justify other financial assets being taxed at around 28% but not cryptocurrencies,” said Pedro Borges of Lisbon based CriptoLoja, the first cryptocurrency exchange in Portugal, which was registered in June 2021.

Portugal has long been a top destination for tech companies thanks to the favourable tax breaks and treatment on offer to entice foreign businesses, has also introduced several visas for digital nomads. It remains one of the most attractive countries for investors and ex-pats, as well as being one of the safest countries to work and live in. Yet despite the current tax system, companies have to be aware that the rules could change quickly (as happened to the golden visa programme in early 2022) so must make sure that they meet their tax obligations in what is still a complex and evolving market.

International tax compliance and digital currencies

Meanwhile, the OECD published it’s Crypto Asset Reporting Framework (CARF) in March 2022, a public consultation document on the growing digital assets – cryptocurrency and cryptography-based tokens –  market. As reported by the International Tax Review, the CARF consists of three parts, covering the rules (crypto assets affected, intermediaries, information and due diligence) and the impact on domestic legislation, bilateral and multilateral agreements surrounding the exchange of information and IT solutions. Those interested were invited to send in their comments by 29th April.

A detailed document of over 100 pages, the CARF follows all the key requirements of the common reporting standard (CRS), based on the guidelines and rules provided by the Financial Action Task Force (FATF), the intergovernmental body founded in 1989 to combat anti-money laundering (AML) and countering financial terrorism (CFT). In theory at least, as the report author notes, this should diminish the compliance burden for those intermediaries facilitating cryptocurrency transactions. This would also ensure that the rules were applied consistently across global jurisdictions.

Crypto’s impact on international tax compliance

There is still work to be done in terms of producing clear guidelines and legislation on the tax treatment and reporting obligations relating to the buying, holding and selling of crypto assets. As Raffaele Russo, a senior fellow at the University of Amsterdam and formerly of the OECD has previously explained, “We are potentially at a turning point with regulations being introduced covering taxation and other fields. It would be important for the ecosystem to show maturity and willingness to engage, and for policymakers to approach subjects with balance, an open mind and without prejudice.”

We are yet again reminded that the tide continues to turn with transactions for crypto and digital currencies falling ever more under the scrutiny of local governments and international bodies. It remains an evolving and complex field to navigate, so recruiters placing international contractors in the EU and beyond must be very aware of the tax rules surrounding crypto trading and payments. The implications for tax purposes are far-reaching so recruiters must be careful not to break any tax rules, the consequences of which could lead to fines or even possible prosecution.

If you need country-specific tax legislation, risk or contractor compliance advice for any of the territories where you currently have a presence or want to expand into, our 6CATSPRO experts are always available for a confidential discussion and to answer your questions.

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