[By Riya Sharma]
The author is a student of Institute of law, Nirma University.
Introduction
The realm of international tax law is nowhere defined with its treacherously advantageous nature in the Indian income tax system. It also spans the complex web of virtual currencies that are used in the digital world. This complex scenario creates a predicament where residents of one country may earn income from foreign sources, leaving both nations with legitimate claims to tax that wealth and the power to enforce their respective rights. Inevitably, this situation leads to a potential loss of revenue as either country may need to relinquish its right to levy taxes on such income. The G20 meeting brought forth discussions on the mounting apprehensions surrounding digital virtual currencies and their consequential market.[1] As a response to these emerging needs, a committee report was released, delving into an analysis of the digital currency market, notably addressing the aspect of taxation.[2] However, the current scenario reveals a fragmented landscape, with each country independently formulating tax laws pertaining to digital currencies. Consequently, a notable gap persists in the domain of international law and to adequately handle this changing paradigm, its development is required through the establishment of comprehensive and coordinated international tax frameworks. International collaboration and the development of unified guidelines can contribute to a fair and efficient system, ensuring that tax obligations are appropriately addressed without creating undue burdens or revenue losses for any country involved.
Navigating The Challenges
The taxation of Virtual Digital Assets (VDAs) presents two primary challenges that require international tax law guidance. Firstly, in cases where a transaction involves two countries and the Double Taxation Avoidance Agreement (DTAA) is silent on the taxability of such income, it becomes unclear which country has the right to tax the income generated.[3] Due to the conflicting nature of the relevant jurisdictions, international tax law is necessary to clarify the distribution of taxation rights in cross-border VDA transactions. Secondly, the valuation method for determining the taxable income generated by individuals through VDA transactions is another crucial issue.[4] Accurately determining the taxable value of such transactions is challenging at the moment because there isn’t a standardized valuation technique available. By creating clear rules and a standardized method for valuing VDAs for taxation purposes, international tax law should address this valuation challenge by providing clear guidelines and establishing a consistent approach.
Taxation for Cross–border transactions
The Indian domestic law, specifically Section 115BBH, states that VDAs are subject to a 30% tax rate on capital gains upon transfer[5]. However, this section does not explicitly address the tax treatment when the individual is a non-resident of India. Consequently, it raises questions regarding the taxation of income accrued while residing outside India or if the source of income is located outside India as per the definition of accrual provided in the income tax act.[6] The lack of clarity in this regard necessitates a comprehensive interpretation of the applicable tax laws and potential guidance from Indian tax authorities to determine the tax liability in such situations. The international nature of cryptocurrency transactions creates specific taxes issues. With the help of cryptocurrencies, people may conduct transactions without using real money or conventional financial intermediaries in a borderless digital world. However, because cryptocurrencies are digital, it can be difficult to determine how to manage them tax-wise, especially for those who are subject to DTAA. At this time, neither current DTAA treaties nor international tax legislation give any precise instructions on how to tax Virtual Digital Asset transactions. As they struggle to determine the tax liabilities related to these transactions, tax authorities, and taxpayers are both left in the dark by this lack of transparency. The absence of guidelines from international authorities, including the OECD, regarding the taxation of cryptocurrencies has resulted in countries implementing their own tax laws, often imposing tax rates as high as 30%. This discrepancy in tax treatment compels individuals to explore alternative methods, including trading in tax havens, in an attempt to mitigate the tax burden. Unfortunately, this situation has also given rise to scams on a large scale, as exemplified by the case of FTX.[7] Addressing this issue requires international cooperation, the development of clear guidelines, and effective measures to prevent tax evasion and fraudulent activities associated with cryptocurrencies. The efforts to establish a clear international tax framework for cryptocurrencies are crucial. By developing specific provisions within DTAA treaties and international tax laws, countries can ensure consistency and fairness in taxing cryptocurrency income.
Absence of Methodology for Valuation
The absence of procedures for valuing cryptocurrencies in India’s current laws makes it difficult to calculate their taxable worth. Despite the ease with which cryptocurrencies may be exchanged for fiat money anywhere in the globe, the precise procedure for valuing them for tax reasons is not specified. The valuation of VDAs presents a challenge in the Indian context. While VDAs are considered property under Section 56(2) of the Income Tax Act,[8] the specific valuation method for VDAs is not outlined. The Fair Value method as defined in Rule 11UA of Income Tax Rules,[9] does not explicitly cover the valuation of cryptocurrencies and other VDAs, and no proposed modifications have been made to address this gap.[10] In situations where an individual is subject to taxation in India but receives income in a wallet based in another country, determining the appropriate valuation becomes crucial. There are two options: using the amount in the other country or valuing the income in India at the time of taxation. However, clear guidelines and direction from Indian tax authorities are needed to address this valuation dilemma in cross-border scenarios involving cryptocurrency income. Indian tax authorities may assist in creating transparent and uniform standards for valuing digital currency revenue, maintaining fairness in taxation, and encouraging compliance by giving explicit clarity and direction.
Potential Tax Regulations
In the regime of global taxation, two distinct jurisdictions prevail: source nation-based jurisdiction and resident nation-based jurisdiction. The majority of jurisdictions, like the United States of America and China, use both concepts in their tax systems. However, certain jurisdictions, such as Hong Kong and Macau, solely use source nation-based jurisdiction. These frameworks determine tax obligations based on the origin of income or the residence of the investor. Notably, the concept of “Permanent Establishments” (PEs) in the source country has historically governed tax rights in the global economy.[11] However, with the rapid expansion of the digital economy, it becomes imperative to transcend these existing boundaries.[12] Taxing digital currencies based on the principle of source jurisdiction provides a logical and equitable approach to treating them as individual income in the global market. Regardless of an individual’s physical presence, the country where the income originates should have the right to levy taxes on it. This principle acknowledges that the source of income holds significance in determining its taxation, irrespective of where the individual resides. The source jurisdiction principle also assists in preventing possible income losses for the nation of origin. If income sourced from one country is brought into another country for utilization, the latter country may impose indirect taxes, such as sales tax or value-added tax, on the subsequent use of that income. However, without considering the source jurisdiction for direct taxation, the country of origin would miss out on the opportunity to collect tax revenue on the initial generation of income. Overall, putting into practice the source jurisdiction concept guarantees a just and reasonable approach, avoiding double taxation while allowing nations to properly tax revenue earned inside their borders. This strategy supports economic equity, reliable income, and efficient tax administration in the dynamic environment of digital currencies. By addressing the jurisdiction problem, the issue of the valuation of digital currencies can be effectively resolved. When income is taxed in the jurisdiction where it is sourced, the valuation can be based on the rules and regulations established by that particular country. This approach ensures that the valuation method aligns with the taxation framework of the charging jurisdiction, providing clarity and consistency in determining the taxable value of digital currencies. In the context of India, it becomes crucial to introduce an amendment that specifically addresses the valuation method for digital currencies. By incorporating a clear provision within the existing tax laws, Indian authorities can establish a defined methodology for valuing digital currencies for tax purposes.
Conclusion
A comprehensive International Tax Framework on digital virtual currency is the need of the hour to combat the issues faced in the current regime. The volatile market for digital currencies is one of the biggest global concerns and the reason why every country is seeking to control the market in its own unique way.[13] Only a few countries have made it legal tender, while some have outrightly banned the currency. It may be a smart method to make money and transition to cashless transactions, but it also carries a danger of fraud, money laundering, and other illegal activities like tax evasion. It is necessary to clarify the ambiguous taxation system through the establishment of fair and transparent worldwide guidelines. Once the jurisdictional issue is resolved, it will be less difficult for countries to include the required clauses in the DTAA as well as local tax legislation.
[1] INTERNATIONAL TAXATION-OECD, https://www.oecd.org/tax/tax-policy/flyer-taxing-virtual-currencies-an-overview-of-tax-treatments-and-emerging-tax-policy-issues.pdf, (last visited Jun. 20, 2023).
[2] INTERNATIONAL MONETARY FUND, G20 Note on the Macro financial Implications of Crypto Assets,(Issued on February, 2023).
[3] INTERNATIONAL TAXATION> DTAA, https://incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx, (last visited Jun. 19,2023)
[4] The Income Tax Act 1961, s 56(2), No. 43, Acts of Parliament, 1961 (India).
[5] The Income Tax Act 1961, s 115 BBH, No. 43, Acts of Parliament, 1961 (India).
[6] The Income Tax Act 1961, s 9(1), No. 43, Acts of Parliament, 1961 (India).
[7] THE WASHINGTON POST, https://www.washingtonpost.com/business/2022/12/14/ftx-sbf-crypto-fraud-charges-hearing/, (last visited Jun 18,2023).
[8] Supra Note 3.
[9] Income Tax Rules, 1961 Rule 11UA.
[10] Finance Bill, 2022, bill No. 18-C of 2022.
[11] Reuven S. Avi-Yonah, Structure of International Taxation: A Proposal for Simplification, 74 TEX. L. REV. 1301 (1996).
[12]/[2018] taxmann.com 400 (Article)[27-03-201891]
[13] THE ECONOMIC TIMES, https://economictimes.indiatimes.com/news/economy/policy/g20-exploring-cryptocurrency-regulation-nirmala-sitharaman-says/articleshow/97821993.cms, (last visited Jun 15, 2023)