Although it seems to have largely gone unnoticed, the European Union introduced new Value Added Tax (VAT) laws on 1st January this year.

As a consequence of this legislation, companies selling electronic goods or services to customers within the EU are now legally required to record the country of residence of their customers, which – according to some – spells bad news for bitcoin.

The new legislation was put in place to make sure that VAT is actually paid in countries where the products in question are consumed, as is the purpose of these kinds of taxes.

More specifically, the new VAT laws are supposed to prevent a certain form of tax evasion, where – mostly – large corporations open up an office in a VAT-friendly country in order to sell their products throughout all of the EU, while paying as little tax as possible.

But according to some tax lawyers, such as Richard Croker, head of corporate tax at London-based law firm CMS, these new VAT laws are consequently disadvantageous for anonymous (or pseudonymous) methods of payment such as bitcoin.

Speaking to CoinDesk, he said:

“Due to the inability to identify a buyer or his location, taking payments in bitcoin might be partially incompatible with these new laws. Whether it’s a total drag on the market I don’t know, but it’s certainly a disincentive for companies to accept bitcoin.”

Proof of residence

In order to establish the country of residence for customers, companies both within and outside of the EU are required to collect two independent pieces of evidence that prove what their customer’s country of residence is.

As a guideline, the European Commission has formulated nine options that would suffice (see the full explanatory notes here). Particularly relevant for bitcoin is the third option on that list, which entails “bank details such as the place where the bank account used for payment is and the billing address of the customer held by that bank”.

This might indeed seem like bad news for bitcoin and bitcoin users for obvious reasons, but not everybody sees it that way.

Prominent Dutch IT lawyer Arnoud Engelfriet of Legal ICT believes a customer’s ability to pay with bitcoin should be no more than a minor issue.

Engelfriet said:

“Note that the nine options are not the only ways in which companies can prove where someone’s country of residence is. They can use any two independent methods of proof.”

Excluding bitcoin, that would still leave more than enough options to play by the rules, according to Engelfriet.

“It is not necessary under the VAT rules to identify the consumer by name and address,” he said. “You only have to identify the country of residence. If customers wish to pay with bitcoin, merchants could simply use the invoice address and the IP address, for example.”

Vanessa Mock, a European Commission spokesperson, acknowledged that the new rules are not meant to impede on buyers’ potential desire to pay anonymously.

“All a company needs to establish is the country of residence of their customers. This can be done in a number of ways that don’t include a buyers’ identity. After a customers’ country of residence has been established, using a potentially anonymous method of payment like bitcoin shouldn’t pose a problem”, she told CoinDesk.

What exactly counts as evidence to prove the customers’ country of residence is determined by the individual member states of the EU.

EU VAT forms image via Shutterstock