What is VAT?
Value Added Tax (VAT, also known as GST in some countries) is a tax typically imposed on a “supply”. VAT systems are effectively a transaction tax — a tax liability arises when you enter into some kinds of transactions (although, economically, tax is imposed on the “valued added” in a supply chain, hence the name).
In effect, a tax liability arises where an entity makes certain kinds of “supplies”. This includes common forms of “supply” like buying petrol, or paying your accountant’s fees.
But as we explained previously, VAT can apply to a much wider range of “supplies” than is commonly thought: insurance products, certain kinds of financial derivative products, and some vouchers for example — although precisely what constitutes a “taxable supply”, and therefore which transactions attract VAT, varies between jurisdictions.
VAT & ICOs: What position are regulators taking?
Most regulators have not yet published their formal position on the VAT treatment of tokens or coins issued by ICO projects. But there is a real chance that ICO tokens sales could constitute “supplies” and be subject to VAT. Rates vary from around 5% to 25% in most OECD countries, and are around 20% on average.
Recent legal changes to the way that VAT is imposed (and administered) can mean that operations in one country can potentially give rise to a tax liability in another — in short, this is because VAT is increasingly imposed on a ‘destination’ principle (essentially where the end user is), rather than based on where the supplier was located.
What should my ICO do about VAT?
VAT obligations should definitely be taken into account — without considering the impact of VAT, you may wake up one morning to a large VAT bill from a country half-way across the world. This could put a damper the success of your ICO.
Most major countries (except the US) impose VAT, so it is likely to be a consideration in many jurisdictions that your ICO may sell to.
Additionally, VAT is widely referred to as a ‘high compliance cost’ tax, as this administrative requirements can be very involved. This is particularly so when running an international ICO, as the VAT obligations could potentially require your ICO to engage with and remit VAT to dozens of agencies around the world. As with many areas of law, compliance for ICOs and cryptocurrency projects can be higher still, as there is little guidance on how the law will apply.
If you haven’t planned on it, facing a tax bill of what could be around 20% of your ICO proceeds could be catastrophic. This, plus the man hours of compliance required for multiple jurisdictions, could be crippling in the early stages of the post-ICO project.
However, exactly what you need to do about VAT will vary.
Is there a ‘way out’?
The VAT treatment of ICO tokens may be different in each jurisdiction, so you may not have a liability in every country your ICO sells to. Further, there are exceptions to the general VAT rules mentioned above.
Certain “supplies” are exempt. Some types of entity are exempt in certain countries. Many countries have thresholds which effectively exempt suppliers that make “supplies”, or have revenue under certain thresholds. These thresholds vary significantly — from $0 to SGD1 million.
There may also be ways that tokens sales could be structured so that a VAT liability does not arise when the ICO occurs.
Fundamentally though, whether your ICO tokens are supplies subject to VAT is likely to depend on exactly how your ICO tokens & arrangements are structured, so getting advisors involved early on is likely to be the best way of helping you determine likely tax outcomes from an early stage.