New EU Tax Law Could Double Tax Bitcoin and Log Location Data

A reclassification of how Value Added Tax (VAT) is to be applied in the EU will force merchants to log users' location, and make the user pay VAT twice. In particular, this could mean that from January 1 merchants could be forced to log identifying details about bitcoin users' identity in order to apply the tax correctly. This is a new chapter for the Europe-based tax, and comes after both Sweden and Finland have fought with the EU over bitcoin’s status as a taxable object.

The changes to the Europe-wide VAT system have come as an attempt by the European Parliament to curb the practice of firms locating their supplying offices for digital goods in low-VAT countries such as Luxembourg, which has a historical rate of only 15%.

Companies are now required to record the EU country in which the digital goods and services they supply are to be consumed as the VAT is now based on the rate within the nation of consumption rather than the registered location of the supplier. A company supplying digital downloads from Luxembourg to Hungary, for example, could increase the tax rate from a current 17% to 27% of the total value.

Announcing the change last year, the EU stated in their explanatory notes the reasons behind this change.

“The underlying reason for these changes was to bring the VAT treatment of these services in line with one of the main principles of VAT that, as a consumption tax, revenues should accrue to the Member State in which goods or services are consumed.”

The broad classification of these “digital services” means that the supply of bitcoins could be included in such a definition. Article 7.2.a of the explanatory notes defines digital goods so broadly as “the supply of digitized products generally, including software and changes to or upgrades of software.”

Without any European wide agreement about what digital currencies actually are for tax purposes, companies aiming to stay on the right side of the law may fairly presume that supplying digital currencies and services related to them constitute this tax liability.

The lack of the European wide ruling on the nature of bitcoins and other digital currencies for taxation is one of the biggest stumbling blocks currently facing member states as they try integrating the new form of income, saving, and spending into their domestic tax systems, where VAT levels are set. As mentioned earlier, both Sweden and Finland have fought with the EU over this issue in the past.

Finland's approach to the issue has been notable for its deviation from the standard model across most of Europe. The Nordic state ruled in November of 2014 that bitcoin services were exempt from VAT, as the digital currency was found to fit better with their definition of a financial service. This was a surprising move, following a decision earlier in the year by the Bank of Finland that bitcoin and other digital currencies not only failed to qualify as a currency, but the lack of a central issuer and authority meant it could not even be regarded as a payment platform.

Henry Brade the co-founder of Finland's bitcoin exchange Bittiraha.fi explained to Cointelegraph how the current VAT arrangements worked for both themselves and others.

“European exchanges that serve Finnish customers can offer them VAT free service all the way. So it's not ‘all negative,’ it's just complicated as hell. Our service in Finland has 99% Finnish customers only so it's pretty easy for us.”

Across the Baltic in Sweden however, the country has faced its own problems over the applicability of VAT to bitcoin transactions. This led the government to apply to the European Court of Justice in late 2014 for a European Wide ruling on the issue. This upcoming decision by European authorities could put digital currencies and their related services more concretely on the map of taxation and financial classification.

Swedish tax authorities have also asked the high-courts about the nature of virtual currency taxation back in 2014, in a case against David Hedqvist who raised tax questions about the digital currency to the Swedish state.

Sweden is now asking the European Court of Justice to clarify:

“Is Article 2(1) of the VAT Directive (1) to be interpreted as meaning that transactions in the form of what has been designated as the exchange of virtual currency for traditional currency and vice versa, which is effected for consideration added by the supplier when the exchange rates are determined, constitute the supply of a service effected for consideration?”

If the ruling from the European Court of Justice decides that VAT is applicable to bitcoin transactions and services, then this could seriously harm the rate of adoption among merchants and users in the region.

A similar situation already exists in Australia, where the tax authorities classified bitcoins as a commodity, and thus bitcoin purchasers have been liable to pay a 10% “Goods and Services Tax” of the total value of their bitcoin acquisition on top of normal tax when they later use the coins as payment. Moreover, this has forced companies like CoinJar to relocate abroad.

Facing a double level of taxation, both at the point of acquiring bitcoins and when used for a purchase, users would face a strong dis-incentive to use the digital currency for payments in the EU. The additional factor of merchants now being required to keep track of the geographical information of the user adds a further level of complexity. This could be a deal-breaker for a merchant considering accepting bitcoin.

Bitcoin expert Martin Albert highlighted the problem facing merchants wishing to accept bitcoin.

“Central legislators by definition want to take control over payments and whether intended or not, they want to see what is going on also in terms of bitcoin payments. This is why already now registered businesses have to file extensive documentation like tax declarations, balance sheets, profit loss calculations, declarations of all kinds and keep super accurate accounting in general. In the future these registered businesses will have to fulfill more and more bureaucratic requirements that will ultimately kill bitcoin for legit businesses.”

The EU guidance uses standard card payment processing platforms as an example, which can offer instant clarification and information about the customer's identity and geographical tax location where “payment service providers verify at least part of the billing address of a payment method before approving a transaction.”

The lack of such a system for cryptocurrency transactions would make an equivalent proof of location impossible. The new ruling by the EU lays out nine of these forms of identity that may be acceptable as proof of location, many of which the digital currency fails to inherently work with.

In order to verify “the place where the customer belongs is that identified by the supplier as such on the basis of two items of non-contradictory evidence”, merchants will need to collect a range of information on their customers.  Furthermore:

“In the event that a supplier has difficulties to collect two items of non-contradictory evidence to determine the place where the customer belongs, he should nevertheless continue to seek further evidence such as relevant commercial information.”

With a decision expected in the coming months, the outcome of this VAT ruling looks set to have far reaching implications for digital currencies in Europe in general.

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