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PwC tax offers a coordinated global approach to digital assets, bringing together professionals from our dedicated digital assets network. We provide valuable insights that can help businesses across all industries understand, implement, and manage the direct and indirect tax consequences of their digital asset strategy. Our approach considers various tax activities including policy development and planning, tax characterizations, accounting methods, global structuring, transfer pricing, compliance, and information reporting obligations.
Innovative technology coupled with new economic models pose unique tax implications, and it is increasingly important to proactively evaluate and monitor the relevant tax considerations for digital assets.
Digital assets, such as cryptocurrency and non-fungible tokens (NFTs), coupled with the evolution of Web3 and the metaverse, have many unique tax considerations. Each digital asset and use case require careful assessment of all relevant income taxes, indirect and operational taxes, information reporting requirements as well as cross-border tax implications given the nature of these assets and their transferability.
Global indirect taxes, whether Value Added (VAT), Goods and Services (GST), or Digital Services (DST), are increasingly being imposed on foreign sellers making sales of digital services to locally resident customers. More than 85 countries have such rules, with some dating back to 2015 or earlier. The application of these rules to Digital Assets, Web3, and metaverse transactions add further complexity, including the broad scope of existing rules and available exemptions (e.g., financial services), uncertainty around the party responsible for reporting, and technology challenges for customer identification. PwC's Digital Assets team has significant experience in consulting and compliance assistance with sellers, intermediaries, or investors around managing their global indirect tax obligations.
It starts with embedding tax into the overall business strategy and spans through the development of new products, offerings, and services, assessing the impact on the global structure, transfer pricing, indirect taxes to tax reporting, and compliance obligations. PwC offers a coordinated global approach to digital assets, bringing together professionals from our dedicated digital assets tax network, to provide valuable insights that can help businesses across a number of industries understand, implement, and manage the direct and indirect tax consequences of their digital asset strategy and activities.
Taxation follows profits and profits follow value creation. Thus, the central question in transfer pricing has always been where and how value is created. In the context of the new digital asset economy where the ownership of assets and the location of significant people functions are more decentralized, the value creation question is much more difficult to answer.
PwC’s Digital Assets Transfer Pricing team has significant experience with a wide variety of companies in the digital assets space, including but not limited to blockchain payments, blockchain infrastructure, token issuers and administrators, crypto exchanges, NFT marketplaces, software for digital asset operations, and blockchain gaming platforms.
We focus on the real value drivers:
What is the value contribution of technology IP when a lot of the tech is open source?
What is an appropriate return to marketing when many cryptocurrencies and platforms are competing for customer attention?
How important are regulatory efforts/licenses in a space where regulation is still very much a work in progress?
What is the significance of capital, regulatory or otherwise, when its absence can bring down billion-dollar businesses overnight?
What is the transfer pricing paradigm that most effectively fits the facts?
These and other novel questions are the starting point for a robust transfer pricing analysis.
Our transfer pricing teams, with their extensive and diversified experience in this new economy can help you prepare for the future.
There are significant state and local income and franchise tax considerations inherent in the digital assets space. Specifically, the states’ characterization of the digital assets and related transactions can have a broad impact on a taxpayer’s state tax profile, affecting calculations of state taxable income, allocation and apportionment factors, and qualification for special entity designations. Furthermore, given the widespread adoption and utilization of digital assets, there are significant nexus and filing methodology implications for all taxpayers.
PwC's Digital Assets State and Local Tax team has significant experience providing income and franchise tax consulting and compliance services to a wide variety of companies including asset managers, banks, platform operators, exchanges and other technology companies. We routinely assist companies analyze their state tax profiles, advise on allocation and apportionment matters, evaluate state tax calculation and conformity issues, review filing methodologies and assist with reorganizations and planning initiatives. In addition, we leverage our extensive network of state tax specialists, many of whom previously worked at the states’ revenue agencies, to support our clients’ state tax controversies, pursue voluntary disclosure agreements, and seek client specific letter rulings and alternative apportionment agreements.
States that have provided guidance around digital assets generally treat cryptocurrency as intangible property or a medium of exchange, with no sales tax due on cryptocurrency exchanges. However, sales tax is due when cryptocurrency is used to purchase taxable property and services. State guidance varies as to how to compute the tax base (e.g., advertised selling price of the product, cryptocurrency value at the time of the transaction, or cryptocurrency value as of the date of payment).
In addition, US sales and use taxes may apply to the sale of digital assets and transactions that occur in the metaverse. State taxing departments are starting to issue guidance on the taxability of such transactions and educating themselves on emerging technologies (e.g., cryptocurrency, NFTs, blockchain) so they can capture potentially lost tax revenue.
PwC's Digital Assets Indirect Tax team has significant experience in consulting on the US sales and use tax implications of emerging technologies, and we work closely with both Fortune 100 companies and technology start-ups. We can assist these companies by assessing their tax exposure and helping them understand where the risks lie with respect to U.S. sales and use tax compliance on a go-forward basis and manage their out-of-pocket cash costs.
Global indirect taxes, whetherValue Added (VAT), Goods and Services (GST), or Digital Services (DST), are increasingly being imposed on foreign sellers making sales of digital services to locally resident customers — over 85 countries have such rules, with some dating back to 2015 or earlier. For simplicity, we use “VAT” to refer to all such taxes. VAT rates average 20%, with low (or non-existent) de minimis thresholds below which sellers may be relieved of their VAT obligations. Tax authorities have been known to proactively contact foreign sellers, requesting that they comply or provide an explanation for non-compliance. As these VAT rules are destination-based, irrespective of the seller’s location, compliance depends on a seller’s ability to collect specific information about their customers in real time, for example:
the location of their customer;
their status as a non-business (typically private individuals) or a business registered for VAT, since many (though not all) countries limit the seller’s collection responsibility to non-businesses, though tax authorities in those countries will still expect the seller produce evidence of their customers’ business status in order to be relieved of their VAT obligations;
the channel through which the customer makes their purchase, as some countries may shift the compliance responsibilities to an “intermediary” through whose marketplaces the digital services are sold, even if the digital content is not owned by the marketplace operator.
The application of these rules to metaverse transactions add further complexity. Some key challenges include:
The broad scope of VAT typically means that NFTs and most cryptocurrencies are treated as “digital services” prima facie within scope of VAT digital service rules.
The involvement of multiple parties in the ecosystem can make it particularly challenging to determine which (if any) of them bear the responsibility for VAT on the transaction.
Customer identification may not be readily available, particularly if it is collected and maintained by a third party other than the seller or marketplace (e.g. by the host of the customer’s crypto wallet), resulting in challenges in attributing transactions to the appropriate jurisdiction to apply VAT rules.
VAT exemptions for financial transactions have not evolved and tax authority guidance is nascent, so their application to cryptocurrencies can be unclear, with NFTs usually treated akin to other digital services subject to VAT.
PwC's Digital Assets Global Indirect Tax team has significant experience in consulting and compliance assistance with sellers, intermediaries, or investors. We assist clients with:
assessing potential indirect tax obligations worldwide;
advising on approaches for addressing gaps in customer data;
advising on communications with customers regarding VAT obligations, whether in contract terms and conditions, FAQs, customer onboarding, transaction checkout screens, or invoices/account statements;
planning strategically for remediation and ongoing compliance, and assisting with tax authority communications;
advising on ERP or other automation tools to streamline VAT compliance; and
evaluating financial statement reserves and disclosures.
The IRS released much-anticipated proposed regulations requiring information reporting by brokers on the calculation of gain or loss for digital assets. Jamison Sites shares his insights on the broad range of transactions affected and steps brokers might consider taking to comply with this new guidance.
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We know that successful investing in digital assets depends on a structure that works both for your business goals and tax strategy. While tax regulatory frameworks evolve and the pace of emerging technologies and digital assets continues to race forward, our team can assist you with a lens toward real world practicality and industry-wide observations, extensive knowledge of emerging and mature technology platforms, and a pulse on tax regulatory and legal developments. Let’s plan your next move.
Principal, International Tax Services, PwC US
Partner, FinTech Tax Leader, PwC US
Partner, Tax Controversy and Regulatory Services, PwC US