The last developments of the digital economy and bitcoins as a ‘stress test’ for the EU VAT system

Abstract

The BEPS project highlights the relevance of the challenges posed by the digital economy. The OECD notes that, because the digital economy is increasingly becoming the economy itself, it is not feasible to ringfence it from the rest of the economy for tax purposes. To a certain extent, this risk is inherent to the EU VAT system. In this article, the author uses virtual currencies as a ‘stress test’ for the actual EU VAT system, with the aim of pinpointing some of its weaknesses in respect of the digital economy. Having summarised the recent developments within EU and OECD context, the author proposes an analysis of what virtual currencies and mining activities ‘are’ under the current VAT, and how they could be treated. Finally, the author proposes and analyses a set of possible solutions. He goes from solutions based on the interpretation of current VAT legislation, which could be accepted by the CJEU in the pending case Hedqvist (C-264/14), to an innovative idea that would imply a radical change of the current system. This contribution tackles the current pattern of the categories ‘good’ and ‘service’.

Notes

1 See also Robert F van Brederode, ‘The Impact of Science and Technology on Taxation’ (2013) 41 Intertax 628; Maarten F de Wilde, ‘Some Thoughts on Fair Allocation of Corporate Tax in a Globalizing Economy’ (2010) 38 Intertax 281; Klaus Eicker, ‘Tax E-fficient Structures for Electronic Business: The Challenge for Corporate Structures and Business Models' (2000) 28 Intertax 120; Luigi Quaratino, ‘New Provisions Regarding the Taxation of the Digital Economy’ [2014] European Taxation 211; Subhajit Basu, ‘Implementing Ecommerce Tax Policy’ (2014) 1 British Tax Review 46; and the Introduction of the Department of the Treasury Office of Tax Policy Report ‘Selected Tax Policy Implications of Global Electronic Commerce’ of November 1996, available on the official website <www.tresaury.gov>.

2 See also Antonio Uricchio, ‘Some Thoughts for E-Reforming the Tax System: Beyond the Bit Tax’ (2006) 34 Intertax 617.

3 See, for example, Case C-277/09 RBS Deutschland Holdings GmbH [2010] ECLI:EU:C:2010:810. It deals with a situation in which two Member States treat the same transaction in different ways. In particular, para 20 reads: ‘The rental payments, received first by RBSD and then by LL, were not subject to VAT in the United Kingdom law, the transactions carried out under those leasing agreements were treated as supplies of services and consequently the United Kingdom tax authorities regarded them as having been made in Germany, that is to say, where the supplier had its place of business. Nor were those payments subject to VAT in Germany since, under German law, the transactions in question were treated as supplies of goods and were therefore regarded as having been made in the United Kingdom, that is to say, the place of supply.'

4 See also Luc Hinnekens, ‘VAT Policies in the Digital Age’ [2001] EC Tax Review 116.

5 See also Peter Kavelaars, ‘EU and OECD: Fighting against Tax Avoidance’ (2013) 41 Intertax 507; John Box, ‘E-Commerce and Tax—An Australian Perspective’ [2014] Asia–Pacific Tax Bulletin 174; Noah Gaoua, ‘Taxation of the Digital Economy: French Reflections’ (2014) European Taxation 10; SS Johnston, ‘Chasing Google: The Global Struggle to Tax E-Commerce’ [2014] Tax Notes International 490.

6 The OECD Report ‘Addressing Base Erosion and Profit Shifting’ is available on the official website <www.oecd.org>.

7 See also ‘OECD Reports on Base Erosion and Profit Shifting’ (2013) 41 Intertax (Monthly Features) 475.

8 The OECD Report ‘Action Plan on Base Erosion and Profit Shifting’ is available on the official website <www.oecd.org>.

9 See, among others, Hemal Zobalina and Jimit Devani, ‘Base Erosion and Profit Shifting Report and Action Plan—Overview and Relevance in Indian Context’ (2014) 20 Asia–Pacific Tax Bulletin 8; Shee Boon Law, ‘Base Erosion and Profit Shifting—An Action Plan for Developing Countries’ (2014) Bulletin for International Taxation 41; Yariv Brauner, ‘BEPS: An Interim Evaluation’ [2014] World Tax Journal 10; Pasquale Pistone, ‘Coordinating the Action of Regional and Global Players during the Shift from Bilateralism to Multilateralism in International Tax Law’ [2014] World Tax Journal 3; Andrei Cracea, ‘OECD Actions to Counter Tax Evasion and Tax Avoidance (2013): Base Erosion and Profit Shifting and the Proposed Action Plan, Aggressive Tax Planning Based on After-Tax Hedging and Automatic Exchange of Information as New Standard’ [2013] European Taxation 565; Kavelaars (n 6) 507–515; Chas Roy Chowdhury, ‘Thoughts on the BEPS Digital Economy Draft’ [2014] International Tax Notes 1098; Hugh J Ault, Wolfgang Schön and Stephen E Shay, ‘Base Erosion and Profit Shifting: A Roadmap for Reforms’ [2014] Bulletin for International Taxation 275.

10 The OECD Public Discussion Draft ‘BEPS Action 1: Addressing the Tax Challenges of the Digital Economy’ is available on the official website <www.oecd.org>.

11 The OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ is available on the official website <www.oecd.org>.

12 OECD Public Discussion Draft ‘BEPS Action 1: Addressing the Tax Challenges of the Digital Economy’ (n 11) 48. For an overview of some aspects of the taxpayers’ mobility, see also Casper Bjerregaard Eskildsen, ‘Insourcing and Outsourcing in a VAT Context’ (2012) 40 Intertax 444.

13 OECD Public Discussion Draft ‘BEPS Action 1: Addressing the Tax Challenges of the Digital Economy’ (n 11) 54.

14 OECD Public Discussion Draft ‘BEPS Action 1: Addressing the Tax Challenges of the Digital Economy’ (n 11) 56 and 59.

15 See also Karl-Heinz Haydl, ‘BEPS Digital Economy Draft: VAT and GST Considerations’ [2014] International Tax Notes 1096.

16 The OECD document ‘International VAT/GST Guidelines’ is available on the official website of the OECD <www.oecd.org>. The latest version was published on April 2014.

17 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 43.

18 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 43. It also underlined the fact (44) that, due to the features of a tax on consumption, in which the revenue should accrue to the jurisdiction where the final consumption takes place, the World Trade Organization (WTO) considers it to be the ‘international standard’. For an overview of some related issues, see also Ine Lejeune and Jeanine Daou, ‘VAT Neutrality from an EU Perspective’ in Michael Lang and Ine Lejeune (eds), Improving VAT/GST—Designing a Simple and Fraud-Proof Tax System (IBFD Publisher, Amsterdam, 2014) 459–482.

19 Two examples are provided (106–107). The first regards a VAT-exempt business (eg a financial services company) that acquires a data processing service from a non-resident supplier. In ‘normal’ situations VAT self-assessment is required, but without entitlement to claim an off-set. As a consequence, the exempt business is ‘input taxed’ in its residence jurisdiction, where it is assumed to use the service for making exempt supplies. However, some jurisdictions currently do not require the exempt business to self-asses VAT on the services and intangibles acquired from abroad, and, as a result, the transaction is not taxed. The second example uses the same facts but with data processing subject to VAT in the jurisdiction where the supplier is resident (or established, or located). This situation raises concerns where this jurisdiction has no VAT or a VAT rate lower than that in the jurisdiction of the exempt business customer.

20 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 107–108.

21 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 120–121. In this section, OECD recalls the ‘OECD VAT/GST Guidelines’, and in particular Guidelines 2 and 4.

22 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) Chapter VII.

23 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 126.

24 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 126.

25 On this topic, see also Tatiana Falcao and Bob Michel, ‘Assessing the Tax Challenges of the Digital Economy: An Eye-Opening Case Study’ (2014) 42 Intertax 317.

26 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 133–136.

27 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 137–138.

28 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 147–148.

29 Among others, see also Kavelaars (n 6) 507–515.

30 The ‘Commission Expert Group on Taxation of the Digital Economy’ Report is available on the official website <www.ec.europa.eu>. See also ‘Report on the taxation of the digital economy’ [2014] European Taxation (EU Update Section) 25.

31 The European Commission established the Group on 22 October 2013 with the Decision C(2013)7082-final.

32 See also the Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, COM(2011)851-final, on the future of VAT—Toward a simpler, more robust and efficient VAT system tailored to the single market (Brussels, 6.12.2011). For an overview of the topic, see also Walter Hellerstein, ‘Jurisdiction to Tax in the Digital Economy: Permanent and Other Establishments’ [2014] Bulletin for International Taxation 346.

33 European Commission Report ‘Commission Expert Group on Taxation of the Digital Economy’ (n 31) 31.

34 See the dedicated section of this contribution.

35 European Commission Report ‘Commission Expert Group on Taxation of the Digital Economy’ (n 31) 31.

36 Ibid.

37 Ibid 32–36.

38 On the MOSS, see also Rick Minor and Claus Gärtner, VAT on Electronically Supplied Services to EU Consumers (2nd ed, Spitze Publishing, USA, 2014) 121–212; and Rick Minor, ‘Countdown to 2015: Top 10 EU VAT Changes for Suppliers of Digital Services’ [2014] Tax Notes International 769.

39 European Commission Report ‘Commission Expert Group on Taxation of the Digital Economy’ (n 31) 36–40.

40 With regard to this last point, it has to be said that very often the New Zealand VAT system is taken as a ‘model’, because it provides one single VAT rate. One strong argument to support such a system is that one single VAT rate eliminates all kinds of distortions, and with the extra revenue it is possible for the state to pursue social aims by funding specific targeted programs. See also Sigrid Hemels, ‘Influence of Different Purposes of Value Added Tax and Personal Income Tax on an Effective and Efficient Use of Tax Incentives: Taking Tax Incentives for the Arts and Culture as an Example’ in Michael Lang et al (eds), Value Added Tax and Direct Taxation—Similarities and Differences (IBFD Publisher, Amsterdam, 2009) 35–59.

41 For an historical prospect, see also Michael Massbaum and Klaus Eicker, ‘The Proposal for an EC Council Directive Regarding the VAT Arrangements Applicable to Services Supplied by Electronic Means’ [2001] 29 Intertax 91–97; and Eicker (n 2) 120–130.

42 See also the Department of the Treasury Office of Tax Policy Report ‘Selected Tax Policy Implications of Global Electronic Commerce’ of November 1996 (n 2) 1418.

43 Introduction to the European Central Bank Report of October 2012 ‘Virtual Currency Schemes’. Available on the official website <www.ecb.europa.eu>. 

44 See also ‘“Bitcoins”—VAT News’ [2014] International VAT Monitor 147.

45 See also the European Banking Authority (EBA) Opinion on ‘virtual currencies’, 11–13, available on the official website <www.eba.europa.eu>; and the European Central Bank Report of October 2012 ‘Virtual Currency Schemes’ (n 44) 16–17. For a definition of the ‘electronic money (scheme)’, see also the 2009/110/EC European Directive of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money. Article 2, point 2, on the definition of ‘electronic money’ reads as follows: ‘“electronic money” means electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions as defined in point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal person other than the electronic money issuer.'

46 See also Aleksandra Bal, ‘Stateless Virtual Money in the Tax System’ [2013] European Taxation 351.

47 European Central Bank Report of October 2012 ‘Virtual Currency Schemes’ (n 44) 13–19.

48 In the above-mentioned Report one real example is provided (13): World of Warcraft (WoW). This is an online role-playing game designed by Blizzard Entertainment, where players are supposed to ‘earn’ ‘WoW Gold’ by performing well in the game. This ‘Gold’ is used as a mean of exchange in the game, and can be used by the player, for example, to purchase the equipment that is required to reach the higher levels.

49 The example provided by the European Central Bank Report is that of Facebook Credits (FB). This virtual currency was introduced in 2009 and allows users to buy virtual goods in any application on the Facebook platform. These credits can be bought with real money, but the opposite exchange is not possible.

50 The practical example provided by the report is the one of Linden Dollar, the virtual currency issued in the Second Life virtual world, which is fully convertible in real money.

51 On the indirect taxation of peer-to-peer schemes, see also Cristina Trenta, VAT in Peer-to-Peer Content Distribution: Towards a Tax Proposal for Decentralized Networks (JIBS Dissertation Series, 2013); and Pernilla Rendahl, ‘Imposing EU VAT on Unlawful Digital Supplies’ (2011) 20 EC Tax Review 192.

52 See also Redmar Wolf, ‘Bitcoin and EU VAT’ (2014) 25 International VAT Monitor 254.

53 See also the Financial Crimes Enforcement Network (FinCEN) Guidance on the Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FIN-2013-G001, 18 March 2013), available on the official website of the US Department of the Treasury <www.fincen.gov>; Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, available on the website <www.bitcoin.com>.

54 OECD Public Discussion Draft ‘BEPS Action 1: Addressing the Tax Challenges of the Digital Economy’ (n 11) 16.

55 European Central Bank Report of October 2012 ‘Virtual Currency Schemes’ (n 44) 21.

56 See also Machiel Lambooij, ‘Retailers Directly Accepting Bitcoins: Tricky Tax Issues?’ [2014] Derivatives and Financial Instruments 138; and Oskar Henkow, ‘VAT and Virtual Reality—How should Crypto Currencies be Treated for VAT Purposes?’ in Michael Lang et al (eds), VAT and Digital Economy (forthcoming).

57 CJEU, Case C-264/14 Hedqvist of 2 June 2014, pending.

58 For some further details, see also ‘“Bitcoins”—VAT Case Notes’ [2014] International VAT Monitor 114. As mentioned, on 14 October 2014 the Swedish Council for Advanced Tax Rulings ruled on the VAT aspects of transactions involving bitcoins in Case 32/12-I, and the National Tax Board has appealed the decision to the Supreme Administrative Court; Pernilla Rendahl, ‘EU VAT and Double Taxation: A Fine Line between Interpretation and Application’ (2013) 41 Intertax 450; and the US Congress Library Report ‘Regulation of Bitcoin in Selected Jurisdictions’ of January 2014, available on the official website <www.loc.gov>. 

59 Opinion of the Advocate General J. Kokott in the Case C-264/14 Hedqvist of 16 July 2015, ECLI:EU:C:2015:498. At the time of writing, the English translation is unavailable. For the sake of clearness, the author specifies that this analysis is based on the Italian version.

60 Case C-172/96 First National Bank of Chicago [1998] EU:C:1998:354, paras 25–35.

61 For an in-depth analysis of the exemption system with regard to EU VAT, see in particular Oskar Henkow, Financial Activities in European VAT – A Theoretical and Legal Research of the European VAT System and the Actual and Preferred Treatment of Financial Activities (Kluwer Law International, Netherlands, 2008) 87–152.

62 Case C-409/98 Mirror Group [2001] EU:C:2001:524, para 26.

63 These options are also analysed in an Expert Group document recently released by the European Commission: VAT Expert Group 9th meeting—3 November 2014 taxud.c.1(2014)3933496—EN Brussels, 28 October 2014. 

64 See Case C-267/08 SPÖ Landesorganisation Kärnten [2009] ECLI:EU:C:2009:619. The same concept is also recalled in the Case 246/08 Commission v Finland [2009] ECLI:EU:C:2009:671. See also Renato Portale, Imposta sul Valore Aggiunto—IVA Comunitaria—Tutte le Novità in vigore dal 2012 (Gruppo24Ore Publisher, Milano, 2012) 99.

65 Case C-16/93 Tolsma [1994] ECLI:EU:C:1994:80, para 14.

66 Case C-172/96 First Bank of Chicago [1998] ECLI:EU:C:1998:354, para 42.

67 See also Wolf (n 52) 254–257; Lambooij (n 56) 138–143.

68 See also the European Banking Authority (EBA) Opinion on ‘virtual currencies’ (n 45) 13.

69 See also Lambooij (n 56) 138–143; and Howell H Zee, ‘A VAT Voucher System for Origin-Based Taxation’ [2011] EC Tax Review 75.

70 On the VAT treatment of vouchers, see also Cases C-288/94 Argos Distributors Ltd [1996] ECLI:EU:C:1996:398; C-317/94 Elida Gibbs Ltd [1996] ECLI:EU:C:1996:400 C-48/97 Kuwait Petroleum (GB) Ltd [1999] ECLI:EU:C:1999:203; C-40/09 Astra Zeneca UK Ltd [2010] ECLI:EU:C:2010:450. See also Sophie Claessens and Ine Lejeune, ‘Taxation of B2C TBE Services under EU VAT Directive from 2015’ [2014] International VAT Monitor 7.

71 Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax COM(2012)206, available on the official website <www.ec.europa.eu> 2–3.

72 For an overview of the VAT treatment of various ‘forms of debt’, see also Jochum Zutt and Lionel van Rey, ‘Axa Case: The VAT Treatment of “Debt Collection”’ [2011] Derivatives and Financial Instruments 7; and Case C-305/01 MKG-Kraftfahrzeuge-Factoring GmbH [2003] ECLI:EU:C:2003:377.

73 See also the European Banking Authority (EBA) Opinion on ‘virtual currencies’ (n 45) 11–13.

74 Lambooij (n 56) 138–143.

75 See also Portale (n 64) 565.

76 See for example Stefano Capaccioli, ‘VAT & Bitcoin Services’ [2014] EC Tax Review 361.

77 Wolf (n 52) 255–256.

78 Wolf (n 52) 254–257.

79 On this topic, see also Donato Raponi, ‘VAT Treatment of Electronically Delivered Services’ [2000] EC Tax Review 188.

80 For a deep analysis on the concept of ‘taxable person’ with regard to EU VAT see in particular Oskar Henkow, Financial Activities in European VAT – A Theoretical and Legal Research of the European VAT System and the Actual and Preferred Treatment of Financial Activities (Kluwer Law International, Netherlands, 2008) 189–202.

81 OECD Report ‘Addressing the Tax Challenges of the Digital Economy’ (n 12) 12.

82 On this point, see also the recent judgments delivered by the CJEU in Cases C-479/13 Commission v France [2015] ECLI:EU:C:2015:141 and C-502/13 Commission v Luxembourg [2015] ECLI:EU:C:2015:143.