Many South African businesses are evading tax by converting their profits into Bitcoin and transferring it unnoticed out of the country.
This is feedback from a well-placed South African businessman who said there are cryptocurrency platforms and agents who are facilitating these transactions.
The scheme is aimed at local businesses which mostly trade in cash and are operated by foreign nationals.
These business owners collect cash from their operations without declaring it in their official financial statements.
This cash is provided to a “crypto agent” who converts it into Bitcoin and transfers it to a personal wallet.
These crypto agents are partners in large server farms that mine the Bitcoin which is used in these covert transactions.
After the Bitcoin becomes available in the business owner’s personal wallet, it is transferred to an account on an exchange in the foreign country.
Through this exchange the Bitcoin is sold for fiat currency. This currency can then be deposited into a foreign bank account.
If there is a need to bypass the banking system completely, the Bitcoin can be converted to cash anonymously by using a Bitcoin ATM.
During this whole process the money remains untraceable. It does not touch any local bank accounts or local cryptocurrency exchanges.
Even when the Bitcoin is converted into fiat currency and moved to a foreign bank account the origins of this money are not known.
It is therefore impossible for the South African Revenue Service (SARS) to track this money or tax the profits from these businesses.
What aggravates this tax fraud is that many of these businesses claim VAT back from SARS while not paying VAT or corporate tax on most of their income.
Wiehann Olivier, partner at the audit division of Mazars in South Africa, highlighted that cryptocurrencies were specifically created to allow for anonymous, frictionless, and trusted peer-to-peer transaction to be conducted over the Internet.
This means that cryptocurrencies like Bitcoin can be used as a means of tax avoidance or evasion in many different ways.
Investors can, for example, store their cryptocurrencies in paper or hardware wallets instead of relying on an exchange to safeguard their assets.
This makes it impossible for authorities to confiscate these cryptocurrencies and extremely difficult to track their movements.
“Different types of cryptocurrencies can be exchanged for one another and passed through a series of wallets and public key addresses to attempt to confuse the trading activities and to evade taxes,” Olivier said.
SARS has not released any specific legislation around the taxation of cryptocurrencies yet, besides that taxpayers need to include any gains from cryptocurrency trading in their taxable income.
“However, we believe that SARS will publish new regulations in the coming years to have a more specific focus on these digital assets,” he said.
One of these interventions may include the introduction of regulations that require all South African cryptocurrency exchanges to share information with SARS.
SARS can also reach agreements with offshore cryptocurrency exchanges and banks which can share individuals and companies’ trading and asset holding data with them.
This would make it more difficult to avoid paying tax by moving assets out of South Africa using Bitcoin or other cryptocurrencies.