While HM Revenue & Customs (HMRC) are still to issue any guidance or comments on the VAT treatment of non-fungible tokens (NFTs), the Spanish tax Administration (known as AEAT) has issued a ruling on this subject. This gives us some idea of the potential direction HMRC and other tax authorities may take.
Spain’s Directorate General of Taxation (DGT) published a binding advisory note that concluded, as most expected, that the sale of NFTs should be considered a supply of electronically supplied services. This was on the basis that the specific NFTs did not transfer ownership rights over any physical goods, merely the right to use a digital asset.
Fernando Matesanz from the Spanish VAT Services, Madrid VAT Forum Foundation published an article on 30 May 2022 within the Kluwer International Tax Blog, which sets out the conclusions of the ruling.
The conclusions were that it would not be correct to characterise the transfer of the NFTs as a supply of goods, as the NFTs do not entitle their holder to the purchase of any tangible property. The object of the transaction appears to be the digital certificate of authenticity itself, which represents the NFT, without the physical delivery of the image file associated with it.
In light of this, AEAT concluded that transactions in NFTs was a supply of services. Furthermore, AEAT carried out an overview of the circumstances that must be met for a service to be an electronically supplied service. These services are those that, by their nature, are mainly automated and require minimal human intervention and are not feasible without information technology.
As a result, the conclusion was that the transfer of an NFT qualifies, for VAT purposes, as an electronically supplied service.
So, it was determined that the sale of NFTs could come within the scope of VAT and are treated as electronically supplied services. In many ways, this makes matters easier, as there are already set rules to determine how to treat electronically supplied services for VAT purposes in Spain. These rules are also fairly consistent across the EU and in the UK. Although no-one will be surprised that there are some anomalies, including specific use and enjoyment provisions that apply in Spain. However, what we can take from the ruling, assuming the UK, the EU and other countries apply a similar approach to NFTs is that:
- The sale of NFTs can come within the scope of VAT.
- Where the NFT doesn’t represent a right to any tangible property, it will be a supply of an electronic service.
- Where the buyer is in business and a different country, the buyer may be able to account for any VAT due under a reverse charge, as highlighted in the Spanish ruling. This depends on local rules.
- Where the buyer is not in business or there is no reverse charge, the place of supply, where the VAT is due, will be determined by where the customer is resident in most cases. It will then be the responsibility of the seller to determine the domicile of the customer.
The ruling clarifies that the supplier must prove that the service is, or is not, exploited in Spain. And that there is no clear guidance from AEAT on how it can be proved. This makes the application of the rule controversial and dependent on the factual circumstances of each case.
This ruling highlights the main issue for those supplying and selling NFTs. Does the NFT transfer rights to physical goods, and what rights are these? Where that is not the case, what due diligence must be carried out to identify where a customer is resident and whether they are in business? Usually, suppliers of electronically supplied services will look to IP addresses and bank accounts to evidence where customers are resident, but is that possible where the transaction is via a blockchain?
Once you have established where they are resident, the seller must look at the rules in that territory to establish if they have a requirement to register and account for local tax.
So, the VAT treatment for the sale of NFTs isn’t easy to determine and to satisfy tax authorities the sellers of NFTs will need to ensure that they have adequate due diligence process in place to support the VAT position adopted.
We await HMRC’s position on this issue, but if you have any questions regarding how you and your business may be affected, speak to Sean McGinness, Head of VAT or John Butterfield, VAT Director,
E: [email protected].
With thanks to Fernando Matesanz, founder and director of Spanish VAT Services, whose original work outlining the position of the Spanish tax authority forms the basis for this article.