A year later

In the framework of a panel held at the Technology Conference in Santiago de Compostela, Rubén Toninelli of AFIP reminded us the challenges faced by tax administrations, in the environment that we call today digital economy. Many concepts that have been familiar to the taxation world enter into not very clear waters, where they may fade away, and where some solutions can fail. I would like to share with you some thoughts on the issue.

In our region, and to fight some of the VAT evasion practices, TAs have insisted on the importance that consumers ask and require invoice from their purchases. They have found an ally in the use of payment methods supported by the financial system through payments with credit or debit cards, since this allow performing information crosses between what is paid to the businesses and what they declare for these operations. The transactions paid in cash are certainly more complex for the tax administration, and perhaps they open spaces for undesirable behaviors. Many transactions are performed in cash when consumers have no other means of payment available. Other transactions are performed in cash to provide the consumer, the seller of the good, the service provider or both, with certain levels of anonymity, precisely to avoid using a financial system payment, which may generate information about what the parties want to hide. To be clear, the parties may want to keep different third parties away from the transaction: It can be the employer, the wife; the financial institution, any party having some control on the exchange, or the tax administration. Some of those transactions are carried out in a completely informal environment, or between direct final consumers who directly sell and buy goods or offer and buy services.

In the world of the digital economy, many of these transactions can be negotiated, paid and performed without direct contact. When the payment of such transactions is electronic, it is common to use directly a financial system payment, with a credit or debit card; or indirectly, using a third party payment service which in turn runs the charges on the credit or debit card. For the first cases, no doubt, administrations can count on information similar to traditional face-to-face operations. In the second cases, things become more complex particularly if the payment service is not in the country; and even more when the transactions take place directly between the consumers.

It seems that payment services via intermediary are entering a period of prosperity. There are not only operators such as PayPal, which by the way begins to explore e-wallets for face-to-face purchases, but the participation of payment systems managed by other companies, not necessarily traditional actors in the financial sector. Examples abound, such as mPesa in Kenya, supported by a cell phone provider; companies like Google or Apple provide specific payment solutions; other payment platforms are supported directly by chain stores or online stores. Many of these solutions are centered on a single market and they will be of interest only for the administration of this market, but some of them are already operating in international markets or have expressed their intention to do it in the near future.

In terms of information, those who have an interest of maintaining anonymity are probably going to continue to use cash, or seek electronic media that are more anonymous, such as precisely encrypted coins. It is true that these operations can be, at least for now, relatively small in volume.

In the external environment, and particularly to fight abusive practices, the use of the financial system will become very important to facilitate the tasks of the tax administration with initiatives such as the CRS[1] as part of the automatic exchange of information so that a jurisdiction can obtain and exchange financial information with another. Nevertheless, one of the possibilities referred to in the BEPS draft document on action 1, about which I will write an upcoming post, raises the possibility of a financial transaction tax that would probably be implemented precisely by the entities of the financial system. It is probable that any of those people who have traditionally carried out transactions abroad with the purpose of hiding income, will attempt to use encrypted coins precisely to avoid passing by the financial system, which report those transactions to the tax administrations.

Recently, Mr. Pascal Saint-Amans said in a press conference prior to the G 20 meeting in Brisbane, that the issue of Bitcoin and other encrypted currencies is being treated by the FATF unit [2]. They are focusing more on money laundering than in tax aspects and consequently they are not working yet with the BEPS initiative.

It has been a year since I wrote the first and second posts of this series; since then water has flowed under the bridge.  I wrote on that occasion that tax administrations should work on the issue and decide the way forward, which can be either to prohibit them completely, to regulate them or even to adopt them as means of payment for taxes.

Since then, some countries have defined their position on the use of bitcoin and other encrypted coins: For instance, Australia or the United States consider them as properties that will subject them to the tax on capital gains. Others, like Germany, will consider them as a financial instrument and others countries, such as in Finland, consider them as a financial service.

Obviously, these regulations will be as effective as the tax administrations enforcing them. To establish the obligation for taxpayers to report their operations performed in encrypted coins, we need to develop enforcement mechanisms.

Good luck

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