TRA faces fresh test from cryptocurrencies usage

Tanzania may appear to be too far away from being straightforwardly affected by cryptocurrencies.

However, the reality on the ground and the direction things are going, the tax system and execution design need to be ready to deal with cryptocurrencies, whose anonymity and decentralised nature present difficulties, not least for the value-added tax to the taxman.

Since the launch of Bitcoin in 2009, the first and largest cryptocurrency, there have been over 10,000 variations created that can be used as payment ways. Tax systems are now playing catch-up due to the staggering quickness at which they have developed and the pseudonymity they can offer.

Bearing in mind the recently approved fiscal budget for 2023/24 and the need for the government to broaden its tax base in addition to the existing ones, it was prudent to consider how the government can address the new challenges associated with taxing these crypto assets while their use is still top-secret to prevent leakage of tax revenue and safeguard the integrity of the tax system.

Knowing Tanzania’s tax management and intention to widen tax sources well and its tax collection challenges, I am of the view that those assigned with the clout to assist government identify tax sources may find it difficult to integrate cryptocurrencies into tax systems that aren’t set up to handle them.

Although it may sound like a dream, taxing crypto users contains a plain fact test. The truth, however, is that execution presents the biggest difficulties, as those who have been following the development will concur with me. Third-party reporting is inherently complex by cryptographic pseudo-anonymity.

Given cryptocurrencies are financial assets and payment means, a strong argument for example exists for corrective taxation on carbon-intensive mining to mention a few. Uncertain design issues resulting from this suggest that our tax system must be smarter if to enter taxing crypto usage.

Given the technology and borderless ecosystem, finding and maintaining a balance between encouraging innovation and ensuring financial stability and investor protection is going to be a difficult issue for regulators in the country who in one way or another have chosen to work along this sector and designing how to tax-related transactions is going to be thorny.

Whatever the future might hold for cryptocurrencies, which responsibility will remain, despite the difference in importance and whether cryptocurrencies fail or succeed as a means of payment in our case the tax system still needs to deal with them.

To address the consequences of the taxes, which is the subject of this provoking thinking, an outline of the challenges that the appearance of and probable advancements in crypto assets pose for tax design and execution is underlined. It is not my intention to maul anyone or any authority, but an attempt to describe the context in which I am of the view decisions must be taken and underline the problems they will need to address taxing deals settled by crypto usage.

Based on analyses and studies and reviews related to what is revealed in this industry critically examining tax-related matters, the challenge for tax design is straightforward but central.

I stand to be corrected, but our tax system, taking the case of Tanzania was not crafted for a world in which assets could be traded and transactions completed in anything other than national currencies.

The intrinsic anonymity of crypto assets poses enforcement concerns that have always been connected to the use of cash. These in turn pose questions about the consistency of the taxation of capital income seeing cryptocurrency assets as a kind of property and less obviously, but ultimately more important the taxation of final sales under the VAT and other equal taxes viewing them as a form of currency.  That raises an important issue about whether taxes could play a corrective role in addition to regulatory actions.

The assumption, or suspicion, that crypto assets provide a new and significant way for the wealthy, criminals, and others to evade or avoid taxation, a process that if not well managed could deny a government a lot of taxes, is among the most current prominent tax concerns, given that the country is not an island and that technologically, the world is presently like a small village.

As a work-up call to revenue authority, decision, and policymakers, the innovations that underlie crypto assets present tax authority with opportunities and tests.

Without going into detail, it is sufficient to say the underpinning of these systems is distributed ledger technology, of which blockchain is the most noteworthy.

To those who aren’t familiar with these issues, this technology is extremely transparent in the information it contains on the history of deals, which may ultimately prove valuable for tax administration. Meaning, using smart contracts within blockchains, for example, could, in principle, help secure chains of value-added tax compliance and enforce withholding.

But the difficulties with taxes that are directly related to crypto assets themselves are exclusive and will be a topic of its own for another day’s discussion that will also examine potential income tax, evasion, and overall revenue potential that the tax system if well designed could be ready to circumvent tax loopholes involving those closing transaction deals using cryptocurrency as means of payment gateway.

The risks, especially for the taxes may be bigger than the nation may realise, but the issues that need serious examination, especially how to raise taxes from the usage of cryptos, in my view are central.

As many governments around the world and in our region are starting to understand the benefits and costs and repercussions linked to the use of cryptocurrencies usage, taxing cryptocurrency will require the creation and designing of clear, logical, and efficient tax structures.

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