Tax reforms could triple taxes on cryptocurrency operations, association warns

If the current text of the tax reform (PEC 45) is passed, the cryptocurrency sector will be one of the sectors that could suffer most from the increase in the tax burden on its activities, which will even increase the indirect taxes on operations with cryptocurrencies could triple. .

The PEC, which has already been analyzed and approved by the Chamber of Deputies, is being sent to the Federal Senate for consideration.

According to the Associação Brasileira da Cryptoeconomia (ABCripto), with the exception of tokens acting as a means of acquiring products, most crypto-asset operations today are taxed as services and intangible assets, with the incidence of ISS and PIS-Cofins.

It is worth noting that the cryptocurrency market moves an average of BRL 100 billion worth of bitcoins annually through exchanges alone (number from 2021).

And the total transaction value is estimated to be about BRL 317 billion – of that amount, BRL 137 billion was traded on national exchanges, according to ABCripto.

PEC 45 could affect taxation of cryptocurrencies in Brazil, says association

While beneficial to Brazilian society, there are relevant implications of PEC 45 (proposed constitutional amendment 45, from 2019) on topics related to the taxation of crypto-assets that have not been considered in the debates on the text.

PEC 45 extinguishes five taxes and creates four others (see table below), in a dual-IVA (value added tax) model. However, the crypto sector has idiosyncrasies, which, even with simplification, can lead to scenarios of serious legal uncertainty given the increase in the tax burden.explains Daniel Paiva, a lawyer specialized in crypto assets and tokenization, partner at VDV Advogados, part of ABCripto. “In this sense, the proposal should be limited to the taxation of consumer goods and services, but not on mediums of exchange and payment, a context in which crypto-assets would mainly be used.“, strengthens.

The definition of the concept of goods and services, and how crypto assets would fit into the new tax rule, are the central points ABCripto brings to the debate.

According to Paiva, there is no clear definition in the text of the PEC, which causes controversy about the impact of taxes on cryptocurrencies, especially with regard to new taxes that would be created – the Selective Tax (IS) and the contribution on goods and services. Services (CBS)/Tax on goods and services (IBS).

Crypto-assets, like Bitcoin, are instruments of exchange that act as a means of payment and should not be taxed as goods or services because mediums of exchange are cumulative in nature, such as loyalty programs and carbon credits, which have this preference of exchange and credit. . The VAT model assumes the exact opposite, namely completely non-cumulativereinforces the expert, recalling the chameleonic legal nature of crypto-assets. “The adaptation of crypto-assets like a chameleon shows the impossibility of a single categorization, as it depends on context and function, changing its legal nature. Therefore, it would be a technical mistake to generally label them subject to double VAT.“, clarified.

Framework and values ​​of the new rates

The current Brazilian tax system actually divides companies into cumulative and non-cumulative regimes.

In the non-cumulative regime (which only focuses on the added value between one operation and another), there is a PIS-Cofins of 9.25% and an ISS of 2% to 5%, with an overall percentage of 11.25% to 14.25%, with the right to deduct PIS-Cofins inputs; companies included in the cumulative regime (without entitlement to credit for inputs) pay a rate of 3.65% from PIS-Cofins and 2% to 5% from ISS, totaling 5.65% to 8.65%.

In the reform proposal, the federal government estimates that all these companies can now pay a rate of 25% to 27% of the new dual VAT model (CBS and IBS), which in certain cases could triple the tax burden, especially given the uncertainties about the application of the CBS/IBS and the IS (which would have consequences for the production, sale or import of goods and services that are harmful to health or the environment).

The taxation of crypto assets within the IS is one of the most controversial points of PEC 45, as it provides for taxation based on factors that would characterize it as harmful. “Controversial issues include electricity consumption resulting from the demand for computers to validate operations; alleged harm to investors’ mental health due to market volatility; and even, as absurd as it may seem, that games, a relevant field of the crypto economy, would encourage violence; or even the existence of alleged environmental damage from hardware used in cryptocurrency mining”, explains the lawyer.

These are points that are still being defined but, if adopted, will increase legal uncertainty in the crypto-asset activities of Brazilian companies.

The sector will clearly be at a disadvantage compared to potential foreign competitors. It is a measure that goes against what Brazil has done to position itself as a cutting-edge hub of the crypto economy, such as the recently launched Real Digital, Drex“, says Paiva.

For example, the European Union, a global reference in this field, has long operated on the basis of the VAT model, but with specific rules. According to Paiva, for example, there is no VAT on bitcoins, because, in short, there is an understanding that it is a medium of exchange that is sometimes a means of payment for the acquisition of goods and services, and does not boast about material consumption itself.

In the EU, discussions about the impact of VAT concern NFTs and utility tokens that give access to goods and services, but not payment and security tokens.“, comments.

Association Warns New CPMF Affects Blockchain Transactions

ABCripto – which has more than 30 members including exchanges, fintechs, tokenizers and banks – understands that international experience, especially European experience, is important as a reference to avoid the creation of a tax that would in practice focus on the activities of financial institutions, revealing a new version of the CPMF: an extinct Brazilian tax that was in effect until 2007 and focused on withdrawals, debit, wire transfer and credit transactions, among other things.

If before the CPMF was levied on transactions with reais (R$), now double VAT would be levied on Blockchain transactions“warns Paiva.

For Bernardo Srur, CEO of ABCripto, if PEC 45 is passed without further discussion on the crypto sector, the impact will be much greater.

We will have an estimated tax levy of 25% to 27%, which would increase the cost of operating the market and would be passed on to the end consumer. It’s not just a debate about the crypto sector and tokenization, but the entire financial market“, it says.

The director of ABCripto also recalls that the crypto economy is an emerging industry and that it promotes financial inclusion.

We are moving towards a symbolic economy, and Brazil has led this movement in an innovative way. Legislation should take into account tokens as digital representations of goods, looking at the content, at the object that will be taxed, not at the form“, he explains.

Taxation is part of the process of promoting the crypto economy in Brazil as a tool for development and financial inclusion. Our proposal is to contribute to a tax regime that is healthy for the sector as a whole, including society, businesses and the legislator.“, adds Bernardo Srur.

ABCripto published a technical note on PEC 45, prepared with the technical support of Daniel and Eduardo de Paiva Gomes, partners at VDV Advogados. This document describes the implications for the sector in detail.

Source: Live Coins

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