Clearly, the economic environment which led to the creation of value added tax (VAT) has evolved. While the underlying core principles remain largely unchanged, the application of those principles is evolving to ensure that European Union VAT rules do not create anomalous results and at the same time safeguard each Member State’s rightful share of VAT.
Indeed the European Commission has continuously tried to push legislative changes to keep VAT rules in sync with developments in business methodologies that modern technology has brought about. One purpose of doing this is to mitigate the risk of uncollected tax while at the same time making it as easy as possible to remain compliant across the bloc.
Testament to this are the relatively recent amendments to the place of supply rules for telecommunication, broadcasting and electronically supplied services provided to non-taxable persons established in the European Union. The onset of the digital age has made it simpler for businesses to obtain a pan-European reach and also brought about the need for these amendments.
However the underlying information technology protocols underpinning the digital era also facilitated the administration of this change from a VAT perspective by enabling the introduction of the simplification method known as the mini-one-stop-shop (MOSS) – a concept that is set to be extended for cross-border online supplies of goods to EU non-taxable persons by 1 January 2021.
The advancement in information technology has also brought about the onset of standardised methodologies (such as the Standard Audit File for Tax or SAF-T) for taxpayers to be able to share relevant information with their tax authorities. Additionally, certain territories across the EU already mandate certain minimum digital communication requirements with their respective tax authorities - the Italian Government, for example, has recently announced the obligation to issue invoices electronically (e-invoicing) from 1 January 2019 using the Interchange System (Sistema di Interscambio – SDI) that will be managed by the Italian Tax Authorities. Similarly, the Spanish Government amended the Spanish VAT regulations to oblige taxpayers to electronically share, on a monthly basis, relevant information related to each invoice issued or received by such taxpayers from 1 July 2017.
However will all these changes be enough to keep up with the accelerated pace of technology driven innovation? There has been quite a bit of talk recently about distributed ledger technology (DLT), particularly the burgeoning blockchain technology and its implications on a number of functions and sectors including supply chain and logistics, data management, healthcare, banking, financial services and insurance to mention a few. But what is the relevance of such technology from a VAT perspective?
For a start the complex operation of first generation blockchain technology in itself has caused widespread debate amongst professionals on the VAT treatment of all matters to do with bitcoin and related altcoins – the VAT committee has released 3 working papers to date on the subject matter (WP 811, WP 854 and WP 892 the latter as a result of the CJEU judgment in Case C-264/14 - Hedqvist).
However the challenges do not end there. The emergence of smart contract functionality in second generation blockchain technology has brought about a new dimension – the nascent concept of a decentralised autonomous organisation (DAO). Such organisations are similar to traditional organisations with the exception that they are capable of self-operation through rules that are encoded in underlying smart contracts.
Essentially this means that once up and running, a DAO may provide and receive supplies without the need of any human intervention. This poses a challenge from a VAT perspective since one of the underlying key attributes of most public blockchains (on which a DAO may operate) is that they are permissionless, meaning that anyone can join the network to partake in the creation and maintenance of information on the chain. Hence, a DAO can be ubiquitous in presence but legally established nowhere at the same time. How can one determine the VAT treatment of a supply if it is not possible to determine where the DAO is established?
Malta has taken the lead in proposing a potential solution for this matter with the introduction of the Innovative Technology Arrangements and Services Act (ITAS) and the Malta Digital Innovation Authority Act (MDIA), which will provide for the possibility of certifying innovative technology arrangements, including DAOs. This may prove to be useful in providing some clarity on how a DAO will be compliant and accountable from a VAT perspective. What is the future of VAT in this area? Only time will tell.
Tax Partner, PwC Malta
Tel: +356 2564 6896
Tax, PwC Malta
Tel: +356 2564 2427