The United Arab Emirates has enacted significant modifications to its Executive Regulations concerning value-added tax (VAT), particularly regarding certain transactions involving virtual assets. The tax authority has also released VAT Public Clarification VATP040, outlining the treatment of VAT in relation to virtual assets.
These revisions offer taxpayers a clear guideline for assessing their VAT obligations.
According to Article 1 of the Executive Regulations, virtual assets are defined as “a digital representation of value that can be traded or converted digitally and utilized for investment purposes, excluding digital representations of fiat currencies and financial securities.”
The new amendments present the following exemptions:
- The transfer and conversion of ownership of virtual assets is exempt from VAT starting from January 1, 2018, coinciding with the VAT’s implementation in the UAE.
- Managing and holding virtual assets, as well as enabling their control, is exempt from VAT, as long as there is no explicit fee, commission, discount, or rebate involved.
The updates regarding the classification of virtual assets and the VAT exemptions for select activities are a positive shift. However, businesses must still navigate practical challenges and evaluate whether these exemptions apply to them, their implications, and how to approach their VAT management.
Practical Challenges
Taxpayers encounter numerous challenges in clarifying the extent of the VAT exemption, valuing transactions, and handling input tax recovery.
Retrospective effective date. Taxpayers must scrutinize the effects of the VAT exemption, backdating to the transfer and conversion of virtual assets, particularly concerning their input tax recovery status.
Stablecoins. Stablecoins are types of cryptocurrency with a value linked to another currency, such as fiat currency or commodities. There’s uncertainty around whether transferring or converting stablecoins qualifies for exemption under virtual assets, or if they fall under the VAT rules concerning the underlying asset they are tethered to.
Since the definition excludes digital representations of fiat currencies or financial instruments, stablecoins pegged to fiat could be excluded from the virtual assets category. However, given that stablecoins are technically cryptocurrencies, which are not classified as money under VAT Public Clarification VAT040, this could lead to complex implications.
Taxpayers need to evaluate each case individually to determine if their stablecoins meet the criteria for virtual assets and, if they do not, how they should be treated in relation to VAT.
Non-fungible tokens (NFTs). Non-fungible tokens are unique digital items on a distributed ledger characterized by an identification code and additional metadata. The identification code serves to distinguish the token, while the metadata details what the NFT signifies, which might include authenticity certificates and descriptive elements.
The revised VAT legislation does not explicitly clarify whether NFTs count as digital representations of value that aren’t excluded from the virtual asset definition. While NFTs do signify value, recognizing them as virtual assets could result in biased VAT treatment.
In the absence of clear guidance, stakeholders may look to existing regulatory frameworks. The Dubai International Financial Center specifically states that NFTs are not included in the definition of crypto tokens, which is echoed in recommendations from the Central Bank of the UAE.
Zero-rated supplies. Services offered to entities based outside of the UAE are eligible for a zero VAT rating, contingent upon certain conditions being satisfied. Suppliers must verify that the recipient is established out of the UAE, which can be complicated when dealing with virtual assets and unidentified parties.
Valuation. Valuation plays a critical role in the VAT framework. The supply’s value is determined without the VAT included. VAT is based on the amount of the supply, which can also affect the recovery of input tax.
Creators and developers often receive payments in tokens, typically native to their project. When services are compensated with virtual assets rather than traditional money, as seen with infrequently traded tokens, determining the value of the underlying services can be quite complex.
Challenges persist even when transactions involve major cryptocurrencies due to the lack of a standardized exchange rate, which can lead to significant value changes within short timeframes.
Barter transactions. Exchange of goods or services for virtual assets typically constitutes a barter transaction, provided both parties are taxable individuals. This scenario may lead to unexpected VAT exempt supplies for the buyer (the party transferring the virtual assets).
An incorrect assessment of the supply’s value, particularly that of the virtual asset, may result in inaccurate reporting and issues with input tax recovery.
Input tax recovery. Input tax incurred for expenses related to VAT-exempt virtual asset transactions is non-recoverable. If the standard input tax recovery approach doesn’t reflect the true utilization, taxpayers may need to modify the input tax reclaimed at year-end, and tax authorities could require a special application method.
Author Information
Bastiaan Moossdorff is a director focusing on indirect taxes at PwC Middle East.