Why the Revamp of GST Policy on Virtual Currencies Will Strengthen Singapore as a Global Blockchain Hub
All you need to know about the Proposed Update of Singapore GST Policy
Written by Zann Kwan, Treasurer of ACCESS
1.1 The Inland Revenue Authority of Singapore (IRAS) has recently issued a draft tax guide on 5th July 2019 to update its stance regarding the treatment of digital payment tokens (DPT) under the Goods and Services Tax (GST) Act. This proposed change perfectly coincides with the impending “Digital” Tax effective 1st Jan 2020, that will have immense implications for the cryptocurrency ecosystem in Singapore.
Ever since IRAS issued an initial GST guidance for virtual currency in 2014, the cryptocurrency ecosystem in Singapore, through the tireless efforts of ACCESS, has been working behind the scene for four years to suggest changes to Singapore’s treatment of virtual cryptocurrencies — in order for it to remain competitive and relevant as a cryptocurrency and blockchain hub.
To get you up to speed on the recent developments, let’s walk through the current GST policies and the impending changes effective from 1st Jan 2020.
1.2 Why is GST even in the picture?
When Bitcoin Exchange started selling bitcoin via over the counter (OTC) means five years ago in 2014, few cryptocurrency sellers were aware that their transactions were subject to Goods and Services Tax (GST) in Singapore.
A large majority of OTC traders and agents assumed that transactions involving cryptocurrencies simply constituted the purchase and sale of ‘currencies’ — which was not subject to GST as a financial service. And of those who knew that it was a GST taxable supply were confused as to what amount was deemed as a taxable supply: the entire traded quantum or the commission charged by the supplier/seller/agent?
At the same time, merchants that accepted payments in cryptocurrencies did not realise that accepting virtual currencies and converting it to fiat currencies or other cryptocurrencies trigger off a GST event. They were actually making a standard supply of services, on which 7% of input GST had to be collected and paid to IRAS.
1.3 What are the Key Proposed Changes?
In Singapore, good and services are categorised into four groups for GST considerations, as listed in Table 1 (Proposed Changes to GST for Virtual Currency After 1st Jan 2020) below. The proposed change in the GST treatment of virtual currencies is summarized in the highlighted yellow boxes below.
GST Treatment (Before and After 1st Jan 2020)
2.1 (Before 1st Jan 2020) — Virtual Currency as a Standard Supply of Service For GST Purposes
IRAS had clarified in 2014 that the supply of virtual currencies shall be treated as a supply of services and not as a supply of goods. This is an important distinction as there are different GST rules that apply to goods and services, particularly when you seek exemption (zero-rate a supply) of GST from selling to persons outside Singapore. To “export” a service, it must fall within the definition of “international service”.
The IRAS has also further clarified in 2014 that virtual currencies will not be considered as “money” for GST purposes. That is, to be treated as a financial service that is exempted from GST in accordance with the Fourth Schedule of the Goods and Services Tax Act. As such, it does not qualify for GST exemption.
If you have carried out any of the following activities in Singapore before 1st Jan 2020 in the amount of more than SGD1 million, please account for GST appropriately:
- Selling virtual currency as a principal for fiat currency or other virtual currency. Eg, Trading via an online exchange, P2P OTC platform, etc.
- Earning commission by selling virtual currency as an agent for fiat currency or other virtual currency. Eg, Matching trade as an OTC agent or broker. (and the commission exceeds SGD1 million)
- Accepting virtual currency as payment and subsequently converting it to fiat currency or other virtual currency. Eg., an E-commerce platform accepting virtual currency as payment and converting/selling the virtual currency into Singapore dollars.
- Issue native tokens through an Initial Coin Offering (ICO) and selling them for fiat currency or other virtual currency.
The above assumes that you are not a GST registered entity. If you are a GST registered entity, you need to account for GST from the first dollar.
Please also note that different GST treatments (in 1 and 2 above) apply for the supply of virtual currencies as a principal (i.e. sale of virtual currencies in the business’s own capacity) and as an agent (i.e. the business merely facilitates the sale of virtual currencies transaction). IRAS has issued further guidance on this in the proposed guidelines.
2.2 GST Considerations in Buying and Selling Virtual Currencies
Before 1st Jan 2020
For a GST-registered business 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 an international service:
- It is supplied under a contract with a person who belongs in a country outside of Singapore;
- It directly benefits a person who belongs in a country outside of Singapore and who is outside of Singapore at the point in time during which the services are performed; and
- It is not supplied directly in connection with land or goods in Singapore.
With respect to condition 1 & 2, it will be difficult to establish the belonging status of the buyer if the sale is made through a cryptocurrency exchange. Under doubtful circumstances, the location of the exchange will be deemed as a proxy for the location of the buyer. That is to mean, if you hyptothetically sell bitcoins from a Singapore-based exchange, your buyer would be deemed to belong to Singapore.
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 that it receives, unless the services are considered as international services and hence, zero-rated.
For example, if you are acting as an agent to sell 100 bitcoins (currently valued at S$1.5 million) in Singapore before 1st Jan 2020 and your commission charged is 1 bitcoin (S$15,000), you are liable to pay GST at 7% of the commission charged, equating to S$1,050.
Assuming you bought 110 bitcoins from a supplier in order to complete the trade and sold only 100 bitcoins leaving 10 bitcoins as your holdings, you are deemed to have supplied the entire batch of 110 bitcoins as a principal and not as an agent. The entire sale of S$1.5 million is therefore subject to GST, and you are liable to collect and pay S$105,000 in GST.
GST registered virtual currency exchange located in Singapore will need to charge GST on the trading fees that it charges.
After 1st Jan 2020
In the case that the virtual currency that you are selling qualifies as a “Digital Payment Token” (DPT), the supply will be deemed an exempt supply and not be subject to GST. For example, if you sell bitcoin via a OTC platform for Singapore dollars, you are no longer required to pay GST on the transaction.
A DPT has the following characteristics:
- “it is expressed as an unit
- it is fungible
- it is not denominated in any currency, and it is not pegged by its issuer to any currency; and
- it is, or is intended to be, a medium of exchange accepted by the public, without any substantial restrictions on its uses as consideration.”
2.3 GST Considerations in Making/Receiving Payments Using Virtual Currencies
Before 1st Jan 2020
When a business purchases 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 if the respective supplier is GST-registered.
For example, if a cafe sells coffee for bitcoin, the cafe will have to account for GST twice. Once when the coffee was sold and another time when the cafe coverts the bitcoin into fiat currency.
After 1st Jan 2020
The conversion of virtual currency into fiat currency does not account for another supply. Hence, there will no longer be an issue of “double taxation” for accepting virtual currency as a form of payment.
3. GST Considerations on Issuance of Non-Securitised Tokens (ICO, TSO, etc)
Before 1st Jan 2020:
Table 2: GST Implications for Transactions Relating to Non-Securitised Tokens
After 1st Jan 2020
Non-securitized tokens including ETOPs will be exempt supplies if they possess all the characteristics of DPTs.
Most of the implications and issues listed above in Table 2 above will no longer impede Singapore’s development into a global cryptocurrency innovation centre. In fact, the proposed changes deeming ICO revenue to be liable for 0% GST, could be one of the friendliest tax regulations in the world for non-securitised token offerings, among the various financial hubs.
4. International Comparison
In Australia, there is currently no GST liability when virtual currency is used to pay for goods and services. It is great that Singapore will catch up in this aspect from 1st Jan 2020. Virtual currency is deemed as a method of payment and the consequences of using it as a form of payment in Australia are similar to those of using money as a payment method. However, Australia does not extend the same treatment to coin offerings, meaning that ICO revenue might still be subject to 10% GST liability.
In the United Kingdom, the sale of virtual currency from mining activities are generally falls beyond the scope of Value Added Tax (VAT). Similarly to Australia, when bitcoins are exchanged for the Sterling Pound, no VAT will be due on the value of the bitcoins themselves. However, ICO revenue will likely be subject to the 20% VAT rate, just as it is under Australian tax regulations.
This means that Singapore is the pioneer among the global financial hubs to establish friendly and well-defined GST regulations for non-securitised tokens.
5. GST Implications for Crypto Assets
The proposed changes will impact the following highlighted crypto assets in Table 3 below, which include virtual currencies and other non-securitized virtual tokens. Security tokens are already considered as exempt supplies as financial services under the GST Act.
Please note that businesses currently registered for GST and transacting in virtual currency will need to apportion their input tax for GST reporting purposes. For businesses that do not need to register for GST, their digital currency transactions will no longer be part of the SGD 1 million threshold turnover in determining their GST registration requirements.
6. Impending Digital Tax effective from 1st Jan 2020 and Overseas Vendor Registration
In the Budget 2018 announcement made by the Finance Minister on 19 Feb 2018, it was announced that GST will be introduced on imported services from 1st Jan 2020. This implies that online cryptocurrency exchanges which are selling virtual currencies to Singapore persons will need to register as an overseas vendor and pay 7% GST on the sale. Singapore persons receiving virtual currencies from overseas vendors, depending on their GST registration status, may have to account for GST under the reverse charge mechanism. Can you imagine the problems the cryptocurrency ecosystem will face?
Issuers/sellers of crypto assets might not want to make their crypto asset offerings available to the Singapore market. If Libra is made available for sale in 2020, Singapore persons might be excluded from purchasing it.
With a non-existent local market, issuers/sellers of crypto asset might choose not to be based in Singapore, making it a less attractive location to build cryptocurrency and blockchain innovation. The double taxation issues faced by tokens buyers will also result in Singapore being not an ideal location for growth of the token economy.
Hence, the proposed GST update is certainly timely. This will eliminate many existing business hurdles and costs setting back the progress Singapore has made in the past few years as a blockchain and cryptocurrency innovation hub.
7. Other Feedback on the Proposed Updated GST Guide on Digital Tokens
- One of the characteristics of a DPT is “it is not denominated in any currency, and is not pegged by its issuers to any currency” as mentioned in point 3.2 (c)of the proposed guide. At first glance, stable coins do not qualify as DPT and it is akin to a financial service, even though one of the functions of stable coins is to facilitate cryptocurrency payments. Stable coins can be pegged to a cryptocurrency, fiat currency or a basket of assets. More clarification on the various kinds of stable coins would be welcomed for this particular characteristic. Alignment with other areas of regulations would be ideal as well.
- More examples might be required to elaborate “substantial restrictions on its use as consideration” as stated in point 3.2 (d) of the proposed guide. The example of loyalty points be restrictive and hence token with feature of loyalty points and limited usage might not qualify as a DPT.
- The definition of hybrid tokens mentioned in the draft guide point 5.12 could be misleading as it seems to defer from the conventional definition of hybrid tokens which have characteristics of both utility and security tokens. As hybrid tokens are not mentioned again in the draft guide, it is suggested to not mention hybrid tokens in the guide.
A. Since 2014, virtual currency has been considered as a “service” for GST purposes in Singapore.
- A seller of virtual currencies is supplying a standard GST supply and the sale is subject to the prevailing GST rate of 7%.
- A buyer of virtual currencies has to pay GST twice, first when they purchased the virtual currencies and again when they convert the virtual currencies to fiat or other virtual currencies or for other services.
- The impending “Digital Tax” effective 1st Jan 2020 will impose additional business hurdles and costs for overseas sellers of virtual currencies to the Singapore market.
- The Singapore consumers will likely be an unattractive market to virtual currencies sellers.
- There are compliance challenges faced by the ecosystem in identifying the counter parties and the valuation of the transactions.
- Singapore might not be an ideal place to build innovation of the token economy.
B. The proposed changes to GST starting 1st Jan 2020 include considering virtual currencies as exempt supplies if they fulfil all the characteristics of “digital payment tokens (DPTs)”, hence eliminating the issues from point (1) to (6) above.
C. Digital payment tokens include tokens issued in initial coin offerings (ICO) or initial exchange offering (IEO) if the tokens fulfil all the characteristics of DPTs.
D. In summary, the proposed changes in GST is a positive move that the ecosystem values in order to enhance Singapore’s position as a cryptocurrency and blockchain innovation hub. Singapore is now taking the lead in cryptocurrency taxation for aligned development of the cryptocurrency, blockchain and digital payment ecosystem.
9. Public Feedback and Consultation
IRAS is seeking feedback on the draft guide from businesses dealing in digital payment tokens. The feedback is to be completed by submitting a template in Annex 1 available here before 26th Jul 2019. MOF will also be conducting a public consultation via comments submission at www.mof.gov.sg.
The link to the full article can be found at: https://www.linkedin.com/pulse/why-revamp-gst-policy-virtual-currencies-strengthen-zann/by