New regulations have helped clarify how digital tokens (DTs) should be taxed, but grey areas remain
Regulatory authorities in Singapore have been trying to ensure that conventional tax laws and regulations can be applied to the blockchain industry.
Organisations such as the Inland Revenue Authority of Singapore (IRAS) and the Monetary Authority of Singapore have been tackling the taxation challenges associated with DTs such as Bitcoin.
Income tax implications
IRAS has issued guidelines on applying traditional tax principles and practices to the unique nature of DT-related transactions, but certain areas remain open to interpretation and practice.
The guidelines clarify the income tax implications for common DT-related transactions, including paying for goods and services, buying and selling DTs, and issuing DTs through an Initial Coin Offering (ICO).
For example, IRAS has made it clear that when calculating the amount of taxable income for transactions involving DTs and for tax deduction claims, the value of the underlying goods and services exchanged should be used.
Additionally, IRAS recognises the unique uses and features of DTs, such as their ability to act as a security token that gives the owner an equity or debt interest – or both. In these cases normal taxation rules, such as taxing interest or dividend income, also apply to the token owner.
Limitations of guidelines
However, the guidelines do have limitations in certain cases. For example, IRAS has left it open for businesses themselves to determine the geographical source of income for DT-related transactions based on specific background facts and circumstances.
This implies companies may be able to defer taxation on income sourced outside the country until it is received in Singapore. The main consideration here is how – and to what extent – should, accountants evaluate the background of an income to determine what its source is?
While IRAS acknowledges that proceeds from issuing utility tokens – digital tokens that represent rights to goods or services – are generally regarded as deferred revenue and taxes when goods are delivered or services fulfilled, the interaction between these principles and those of current revenue recognition for accounting purposes has not been discussed.
Therefore, the timing of taxation around issuing is uncertain. Should it be at the time of the ICO event, in line with taxpayers’ recognition of ICO proceeds in their profit and loss accounts, or some other basis?
Goods and services tax (GST)
Given the supply of DTs has been exempt from GST since 1 January 2020, IRAS guidelines seek to define what a DT is and the value and time of the supply for GST reporting purposes.
With the introduction of the GST Reverse Charge (RC) in Singapore for imported services on 1 January 2020, IRAS guidelines state taxpayers who make GST-exempt supplies of DTs may have to take the RC into consideration.
This is because taxpayers making such supplies are unlikely to fully recover any input GST that is incurred and may be regarded as partially exempt businesses, which would trigger the requirement to apply the RC, depending on the quantum of the imported services.
However, the guidelines do not go on to clarify how the above is to be applied in practice in certain situations.
For example, taxpayers need to be aware of the distinction between supply of DTs that are GST-exempt, out-of-scope or zero-rated. These distinctions affect the calculation of the percentage of input tax claimable by taxpayers and that in turn determines if the RC is applied and how.
It appears that, despite revised regulations, there are GST and income tax considerations relating to DTs that are still not fully addressed, so businesses must make plans to manage the associated risks.
For more information, contact:
Date: August 2020