New Currencies and Digital Money: What They Mean for VAT

The world and global trade are becoming increasingly interconnected, and businesses regularly face transactions that cross borders, currencies, and even monetary regimes. While VAT is designed to be a neutral tax on consumption, the currency in which transactions are invoiced and reported shapes how VAT is calculated, accounted for, and ultimately collected and remitted.

As if keeping track of currency exchange rates and reporting rules is not challenging enough, businesses in some cases face entirely new currencies, or even digital versions of national currencies. All of this combined creates a patchwork for VAT compliance, reporting systems, and business operations.

VAT and Transactions in a Foreign Currency

Generally, the taxable amount is expressed primarily in the local currency and, secondarily, in any other currency approved by the Tax Authority. In most VAT systems, including those in the EU, when goods and services are invoiced in a foreign currency, the taxable base must be converted into the domestic currency using the appropriate exchange rate on the date of supply. Accurately converting foreign currencies into the national currency is vital to calculating VAT correctly and ensuring compliance with accounting and reporting requirements.

When determining the appropriate exchange rate, regulators typically require the use of the rate published by a central bank or an official statistical body as of the date of supply or invoice. Nonetheless, differences between invoicing and VAT payment dates can create distortions. For example, while the VAT due is fixed in local currency at the time supply occurs, subsequent foreign exchange (FX) movements may create gains or losses in a company’s books, even though the underlying VAT liability remains unchanged.

To ensure compliance with local rules, businesses should provide documentation supporting the exchange rate applied. By adopting this approach, particularly in countries where it is not mandatory, businesses, especially those engaged in frequent international transactions, reduce the risk of costly mistakes due to incorrect VAT calculations. In practice, incorrect currency conversions may result in either under- or overpayment of VAT. In both cases, the consequences are the same: penalties, audits, and administrative work.

The Effects of a Country Adopting a New Currency

Adjusting ERP and accounting systems for seemingly routine foreign currency invoicing is one thing. Remaining compliant with local VAT requirements in countries that just adopted a new currency is a whole different challenge. The change in currency is not the change of one banknote for another. Quite the opposite, it is a structural shift that affects every aspect of tax compliance, including VAT.

Introducing new legal tender or replacing one currency with another requires clear transitional rules for converting historical tax liabilities, VAT records, prices, and accounting systems. In the EU, this transition is covered by both EU regulations and corresponding national laws. Two recent examples of such change within the EU are Croatia's adoption of the euro in 2023 and Bulgaria's in 2026.

In 2023, Croatia adopted the euro as its currency at a fixed exchange rate of EUR 1 = HRK 7.5345. The change required the taxable person to recalibrate their VAT systems and accounting practices, requiring dual-currency pricing periods and adjustments to reporting and invoicing to reflect the euro conversion. During the transitory period, prices had to be displayed in both currencies, and cash transactions could be conducted in either currency during a limited dual-currency circulation period.

A similar period lies ahead for Bulgaria and taxable persons operating there, which formally adopted the euro on January 1, 2026, replacing its national currency, the lev. The change means that tax liabilities, including VAT, must now be reported and paid in euros, and outstanding obligations denominated in the lev were converted at the fixed rate of BGN 1.95583 = EUR 1.

Beyond the EU, another notable example of a national currency change is Zimbabwe's 2024 introduction of Zimbabwe Gold (ZiG), a currency backed by gold and foreign-currency reserves. With the introduction of ZiG, Zimbabwe began converting its previous national currency, the Zimbabwe dollar, at an exchange rate based on the interbank rate and the price of gold. 

The rate applied to all financial and commercial obligations, including bank deposits, loans, treasury instruments, auction allotments, export requirements, and prices of goods and services. Given Zimbabwe's reliance on the US dollar, the change in the national currency also affected the VAT regime. Notably, since 2024, the VAT registration threshold in Zimbabwe has been USD 25,000 or the ZiG equivalent.

Digital Currencies and VAT

As economies and trade increasingly transition to the digital realm, so do currencies. Emerging trends in digital currencies include central bank digital currencies (CBDCs) and the legal status of cryptocurrencies as legal tender.

The EU's Digital Euro

Regarding CBDCs, one of the most anticipated projects is the EU's digital euro, a digital currency issued by the European Central Bank. To avoid going too deep into the legislative and negotiation processes at the EU level, the latest update is that a digital euro could be operational around 2029 if adopted by the European Parliament and the Council. What is important at this stage is its effects on the EU VAT systems.

Once introduced, the digital euro will function as legal tender and serve as a new medium of exchange. The digital euro is not a crypto-asset and will not replace cards or mobile payment apps, but would complement them by offering an additional way to pay digitally. 

For VAT purposes, this means a digital euro would still be denominated in euros, and VAT would be calculated and paid in euros, just as with physical currency. Nonetheless, its digital nature may require changes to reporting systems, invoicing software, and transaction reporting, particularly when third-party payment intermediaries or distributed ledger technologies are used.

Other Examples of Digital Currencies

Several countries have already implemented CBDCs that are now actively used in their financial systems. The Bahamas’ Sand Dollar, Nigeria’s eNaira, and Jamaica’s JAM-DEX are among the first fully launched CBDCs. Notably, CBDCs are used alongside traditional currency systems. Thus, VAT is calculated based on the value of the consideration expressed in the national currency, regardless of whether payment is made in cash, digital currency, or electronically.

With new CBDCs on the horizon, including Peru's CBDC, the UK's digital pound, and China's e-CNY, Tax Authorities may further update VAT reporting systems and impose new rules on digital settlement and recordkeeping, which will ultimately affect taxable persons' day-to-day operations and VAT compliance requirements.

El Salvador's Experiment: USD and Bitcoin as Legal Tender

The case of El Salvador, which adopted Bitcoin alongside the US dollar as legal tender in 2021, might be one of the most interesting examples of how non-traditional currencies intersect with VAT and broader tax systems. In 2021, El Salvador allowed taxable persons to pay due taxes, including VAT, in Bitcoin, and made it mandatory to accept Bitcoin for transactions.

Nonetheless, Bitcoin's adoption remained low due to several factors, including high price volatility that contrasts sharply with the US dollar's stability. Since only 20% of companies accepted Bitcoin, with only 4.9% of sales paid in Bitcoin, and no evidence of Bitcoins being used to pay taxes, El Salvador decided that the acceptance of Bitcoin in transactions is voluntary rather than mandatory, and confirmed that taxes may be paid only in US dollars.

Conclusion

While VAT rules are designed to be currency-neutral, changes in how relevant values are expressed significantly affect VAT calculations and compliance. As monetary regimes evolve, taxable persons must ensure their systems, processes, and documentation keep pace with these changes to avoid any risks, such as errors or regulatory misinterpretations. In a constantly changing monetary environment, adaptability is a key strategy for remaining compliant.
Source: European Commission - Taxable amount, HMRC - Transactions in foreign currencies and VAT, VATabout - Bulgaria Adopts the Euro in 2026: Rules, Timeline, Impact, European Central Bank - Croatia adopts the euro, World Economic Forum - The ZiG, Zimbabwe Revenue Authority - VAT Registration, European Council - The digital euro explained, IMF Country Report - El Salvador, IMF - Central Bank Digital Currency Adoption