Evaluation

To make the evaluation clear, an example of how the decision of crypto companies based outside the region would be when they are looking to start businesses in the region. It will be considered only the Relevant Business Decisions.

4.2.1. Exchange of Cryptocurrencies

The systems may likely distort all the Relevant Business Decisions of crypto companies, in respect of the exchange of Cryptocurrencies. For example, in the case of an exchange, in which the core business is the acquisition and selling of Cryptocurrencies, the business decisions may be distorted according to the following:

A. The countries in which the company operates, as well as the decisions of whether to sell to customers in that jurisdiction, may be directly altered because of the VAT system of the countries.

This is because the final prices charged to the customers could considerably differ from one country to another, because of the taxation of that transaction of not.

B. The decision on whether to acquire supplies from local vendors is very likely to be altered because of the VAT systems, because the supplies may be charged with VAT or not, depending on the jurisdiction chosen to acquire the supplies.

This effect would remain although the VAT may be deducted, because of the cash flow impact on the payment of the VAT and later refund, as well as the risk of not obtaining the refund.

C. The structure of the supply chain, as well as possible outsourcing of operations are also decisions that may be altered by the VAT system of the country, because the VAT liability may be modified, depending on the level of presence of the companies in each jurisdiction.

For example, a company may decide to sell Cryptocurrencies in a country. But to not be obliged to add the VAT to its selling price, it may decide to limit its presence in the country and, therefore, transfer the VAT liability and obligations to the customers.

This transfer of liability could be reached by either changing their supply chain or outsourcing some activities to not create any fixed establishment in the countries.

This may occur, for example, in Mexico, in which the VAT law provides that, when the supplier of a taxable transaction is a foreign tax resident and it does not have a

permanent establishment (for VAT purposes), the customer is obliged to withhold the VAT. ⁹⁴

Therefore, the systems may create relevant distortions in the business decisions of companies regarding the exchange of Cryptocurrencies. Thus, a harmonized system for this transaction would be justified and could solve this distortive problem.

4.2.2. Use of Cryptocurrencies as means of payments

In this case, the taxation of the use of Cryptocurrencies as means of payment does not seem to alter the Relevant Business Decisions of crypto companies.

However, the market may be altered because of the VAT system regarding the customer’s decisions on whether to acquire Cryptocurrencies and where to spend them, because the use of them as means of payment may imply additional VAT consequences and obligations.

For example, in countries in which the use of Cryptocurrencies as means of payment is a taxable transaction, individuals with no economic activity may be forced to register for VAT purposes because of the use of the assets as means of payment.

Therefore, individuals in countries where such transactions are taxed may be discouraged to acquire Cryptocurrencies, in respect of countries in which the transactions are out of the scope. This distortion is even higher in the case of Venezuela, in which the VAT system is designed to intentionally discourage the acquisition and use of Cryptocurrencies.

Another distortion may be that the acquirers of Cryptocurrencies may be discouraged to use them to pay transactions in specific jurisdictions, and they may be encouraged to use the currency acquired in one jurisdiction to make acquisitions in other jurisdictions.

This means that customers’ decisions about where to keep and use their Cryptocurrencies may be altered, based on the differences in the VAT system.

Even though these distortions are not recognized by the VAT/GST Guidelines as undesired, this is a relevant fact to be considered by the business, since it affects their customers.

Additionally, it is important to remark that the sale of Cryptocurrency is a transaction closely related in nature to the use of them as means of payment because both imply the transfer of property of the goods.

94 Mexican VAT law, article 1-A(III)

Therefore, under the principle of legal neutrality, the use of Cryptocurrencies as means of payment, should be closer in nature or have a similar effect to the exchange of

Cryptocurrencies.

Therefore, a harmonized system would be also justified, considering together the taxability of the exchange of Cryptocurrencies and the use of them as means of payment are aligned.

4.2.3. Mining of Cryptocurrencies

In the case of the mining of Cryptocurrencies, as can be seen in Appendix I, a harmonization already exists in the VAT systems, with some small exemptions in El Salvador and Uruguay (that do not happen often in practice)

In this case, the harmonization indeed solves the distortive problem, because companies willing to do mining in the region will not base their decision on which country to do it based on the VAT system of the countries.

Therefore, the system as it is right now, in which the Mining is a taxable transaction in most cases, is a neutral system that does not create any distortion in the crypto industry.

The harmonization of the system in another direction (to not tax these transactions) does not seem to be justified on the nature of the service, and it seems difficult to achieve because it would imply the establishment of exceptional rules like exemptions.

Regarding the exceptional cases in El Salvador and Uruguay, they do not seem to have a distortive effect that may justify additional modifications to the VAT systems, because they are not common in practice.

4.2.4. Related services

The related services are in a similar situation to the mining because in all countries the VAT treatment is the same. This harmonization also seems to prevent any distortion in business decisions. Additionally, because none of the countries grants any exception for those services, legal neutrality is not affected either.

The exceptional case of El Salvador, in which related services could be exempted, is not taken into consideration, because the situation is exceptional, and requires the fulfilling of three requirements: 1) the service uses Bitcoin, 2) the related services are also qualified as financial services and, 3) the service provider is a regulated financial institution.

Therefore, there is no distortion in respect of most undertakings in the crypto industry, because 1) the crypto companies may use differentiated tax treatment depending on the

Cryptocurrency used, 2) the related services usually are not similar in nature to financial services, but they have their own nature, 3) financial institutions are usually not involved in the crypto industry.

Because of that, this exceptional rule in El Salvador does not affect the general evaluation of the systems altogether.

Therefore, the systems of the countries as they are nowadays, comply with the two analysed aspects of the neutrality principle.