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In recent years, the rapid growth of the market for cryptocurrencies and the increasing trend to raise funds through issuance of tokens , known as initial coin offerings (“ICO”) have resulted in inconsistencies in the regulation of ICOs across the world.
The world of crypto and tax – Can we make things less cryptic?
By: Loh Eng Kiat, Partner & Practice Leader, Tax (Accredited Tax Professional, SIATP) 
This article was first published in The Business Times on 18 October 2018.
In making its point about coin offerings (commonly known as Initial Coin Offerings or token sales), the report stated that “two obscure companies with no sales raised nearly US$400 million combined in recent days from outside investors". This was then juxtaposed with a 2016 statistic about US companies raising some US$219 million on average by undertaking the more conventional (and highly regulated) IPO route.
The growing significance of ICOs increasingly makes it a common acronym in the business lexicon. Certainly the abbreviation should no longer be confused as a typo for IPOs.
In the field of taxation, it is similarly important to have a discerning view towards coin offerings. Let's take a look at some of the implications for issuers, from the standpoint of income tax and goods & services tax (GST) - which collectively contributed 76 per cent of Singapore's tax revenue for financial year 2017/2018, according to official statistics.
Income Tax
For a Singapore ICO, there would be an issuer (typically a Singapore-incorporated company) seeking to raise funds by issuing or selling tokens. As outlined by Monetary Authority of Singapore managing director Ravi Menon in a recent interview with Bloomberg, Singapore puts crypto currency activities into three categories - utility tokens, "securities" tokens and payment tokens (such as bitcoin).
In the ICO context, the first category of utility tokens (which he said need "hardly any regulation") is particularly popular, and is the focus of our income tax discussion. A good starting point is to look through the form of the ICO to assess the economic substance and risks involved, and find a close parallel with conventional business offerings.
For example and without any intent to over-generalise, the sale of utility tokens during an ICO may be likened to a fitness operator's sale of gym membership packages. In a purely domestic tax context, there is little doubt that a locally-based fitness operator having only Singapore customers should be subject to tax on its income earned from the sale of gym membership packages. This will be so to the extent that the fitness operator's business activities are substantively carried out locally, as it should then result in its income being regarded as Singapore-sourced, which is generally taxable.
While the token seller/fitness operator analogy can be a useful heuristic, a more nuanced approach will likely be needed for many ICOs. This is because the domestic content for an ICO may be limited, as compared to the "brick and mortar" fitness operator. The token seller is likely to have a high proportion of overseas customers, and may also need to fulfil sales obligations through foreign resources in due course. In some instances, the extent of foreign elements in the value chain may point to much stronger links elsewhere and corresponding tax claims of the relevant overseas tax authorities. This may be sufficient to persuade the Inland Revenue Authority of Singapore (Iras) to diminish Singapore's taxing rights but ultimately the facts and circumstances involved in each unique situation will have to be taken into account.
Indeed, in this regard the second (and more obvious) analogy is that an ICO player may be no different from an international business, with the upshot that both Singapore and non-Singapore tax consequences need to be considered holistically. A judicious taxpayer with international business should take proactive steps in relation to tax (both planning and compliance), as failure to do so can result in the business suffering double (or multiple) taxation. It would be remiss not to make a specific reference to the "upfront" nature of utility token sales, through which the issuer/seller typically obtains the sales proceeds (commonly fiat currency or virtual currency) upfront, in exchange for the utility tokens sold.
The token purchaser in question may, however, only consume or utilise the token benefits/offerings over an extended period of time. This is similar to a gym member who may pay upfront fees to the fitness operator, in order to enjoy the gym amenities and services over a number of months or years. In this regard, a pertinent question is often whether the "upfront" amount collected can be deferred or spread over a number of years (or some other reasonable period) for tax purposes.
To this, it is of relevance to note that in relation to timing of taxation, the principle of "tax follows accounting" has been accepted and endorsed in various court decisions in many Commonwealth jurisdictions, including Singapore. With this in mind, to the extent that the accounting standards support a deferred recognition of revenue from utility tokens, a corresponding tax deferral will not be unreasonable. That said, the Iras may not be inclined at the first instance to agree to an approach of collecting tax later, especially given that the crypto currency world is potentially fraught with risks of financial instability. It also bears mentioning that for now, all tax settlement has to be in fiat currency (for example, utility tokens or even payment tokens like bitcoin would not be allowed).
GST
In the area of GST, the Iras has come up with some helpful clarification. Specifically, they have stated that "virtual currencies (such as Bitcoins) are not considered as "money", "currency" or "goods" for GST purposes. Instead, the supply of virtual currency is treated as a supply of services, which does not qualify for GST exemption.
Consequently, if a Singapore company selling utility tokens is GST-registered, it may be required to charge GST on such sale of tokens (this being likely to be treated as a taxable supply of services based on the Iras' view). The exception would be where the token sale is made to "a person belonging outside Singapore".
At first glance, the above may seem reasonably straightforward to apply, but as with many activities in the crypto world, there is more intricacy involved. For example, with the anonymity associated with crypto tokens, it is not difficult to see how secrecy surrounding say, the nationality of the token purchaser can impede proper application of the GST treatment. Where the Singapore issuer is not able to segregate between its Singapore and non-Singapore customers, it may well have to charge a 7 per cent GST on all its token sales, or risk punitive consequences.
Another interesting GST clarification by the Iras indicates that when a person uses virtual currencies to pay for goods or services, the transaction will be considered as a barter trade. In that sense, there are two supplies made for GST purposes - one by the supplier who supplies the goods and services, and another by the person who uses virtual currencies to pay the supplier. GST will need to be charged on each supply if the supplier is GST-registered.
Hence even though the literature is relatively scarce, seeking to understand tax outcomes in the fairly nascent world of ICOs ought not to be an exercise in futility. An inclination towards a principles/analogy-based approach will likely be helpful, although with many international tax principles and concepts being in a state of flux of late, one should review the situation for currency (pun intended) of the tax treatment from time to time.
Get in touch with the author(s):
Loh Eng Kiat
Partner & Practice Leader
Tax
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