I want to talk about money. In a commercial environment, some customers might want to pay you with digital currency. Conversely, it’s only a matter of time before some suppliers similarly demand payment in one.
Since you cannot touch it, many people do not consider it to be real. Claims that this is merely a fad or a bubble are understandable.
However, by conflating offerings such as Bitcoin with similar based government issues, we’re in danger of missing the bigger picture. Some people are confusing the concept with the provider.
The Federal Tax Authority recently issued a directive on the method of converting the value of digital currencies into the UAE dirham. We now have an approved accounting methodology that is tax compliant.
It might be the English translation but it appeared to suggest that the accounting and VAT treatment might be allowed to differ. This does not apply with corporate tax as the treatment must comply with international financial reporting standards.
Given the volatility of some of these digital coins, I would suggest that it’s always best to have one approach as differing numbers for the same thing will ultimately lead to uncomfortable questions. Further, the rationale behind such an approach might be lost.
Firstly, it’s important to understand what money is. It must be portable: how else can it be used as a medium of exchange for goods and services? It must be divisible. From pirate tales, you might remember the words "pieces of eight". This comes from the time of the Spanish Empire when some coins were made to be broken into pieces, representing someone’s change on a transaction.
The value of each unit must be uniform. A dirham is a dirham to all. There must be a limited supply of currency, giving it rarity. Otherwise, you get inflation, as seen when the cities and towns of Germany were given permission after the First World War to print whatever currency they felt they needed.
It must be durable, unlike a supermarket receipt printed on thermal paper that will be blank in months. Finally, everyone must agree that it represents money. This last one represents the greatest challenge to digital currency.
Some countries have already embraced this technologically driven solution. The central banks of Bahamas, Jamaica and Nigeria are live, with the UAE's Digital Dirham to function as legal tender for transactions. The law permitting this was passed in October 2023.
It is a detailed piece of legislation that needs to be carefully reviewed and considered before making your decision on how to interact with it.
The reporting process
Now that we know the legal position of digital currencies in the UAE, let us return to how it must be recorded and reported.
From a list of approved centralised public digital currency exchange platforms, three must be chosen. The reporting party – or the taxable person in Federal Tax Authority parlance – must have been using the same three for all transactions for the same calendar year. Please note, unlike the turnover registration threshold that is based on any 12 months, this is calendar.
Calculate an average rate for the relevant currency from the date and time of the transaction. Unlike the recording of foreign currency transactions using traditional currency where the day rate as provided by the UAE Central Bank is used, this asks for a time match. The regulatory regimes are highlighting and recognising how volatile the rate of exchange can be.
This approach applies to both the buying and selling of goods and services. You now have your dirham value.
Proof must be retained for each transaction for review in any audit of how the dirham value was arrived at.
We are awaiting a further clarification as to what protocol to follow where the digital currency used is not shown on one or more of the approved exchanges.
What happens where you need a different mix of exchanges to get three for different transactions? Although the clarification does not address this, I would think as long as you consistently use the same three for a given currency you might be OK.
Also, what happens if a currency is delisted on one exchange but you have a replacement? There will be many more questions.
