Common Reporting Standard
The Common Reporting Standard (“CRS”) is an international standard for the Automatic Exchange of Information (AEOI) regarding financial accounts by tax authorities in participating jurisdictions. The CRS was developed by the Organisation for Economic Co-operation and Development (“OECD”) in 2014 with the main objective to fight tax evasion. Under the CRS, financial institutions of participating jurisdictions have to apply the necessary due diligence, identify reportable accounts and report them to their local tax authorities for further submission to other relevant participating jurisdictions. Currently, the CRS defines four categories of financial institutions namely depository, custodial, investment entity and specified insurance company. Accordingly, in most cases each category of financial institution maintains financial accounts for and on behalf of account holders. Under the standard, reporting financial institutions are required to review the financial accounts they maintain in order to identify whether any of them should be reported to their local tax authority.
Crypto-Asset Evolution and Existing Tax Transparency Initiatives
The rapid evolution of the Crypto-Asset market is posing novel challenges in tax administration efforts in ensuring taxpayers compliance. The moreso, many people around the world have adopted and continue to adopt the use of crypto-assets for a range of investments and financial activities. The main challenge lies in the fact that, unlike traditional finance (TradFi), crypto-assets can be easily transferred and held without the use of traditional intermediaries and with a lack of visibility on transactions and crypto-asset holding. This, in turn, could be exploited to undermine the existing tax transparency initiatives, such as the CRS. Furthermore, the crypto-asset market has given rise to a new set of intermediaries, such as crypto-asset exchanges and wallet providers. As at date and depending on the jurisdiction in which they are established, these intermediaries may be subject to limited regulatory oversight.
As of now, crypto-assets would, in most situations, not fall within the scope of the CRS, which applies mainly to traditional financial assets and fiat currencies. In other situations where crypto-assets may fall within the definition of financial assets, the next problem arising is that crypto-asset intermediaries may not have reporting obligations under the CRS and therefore information about taxpayers conducting crypto-asset transactions or holding crypto-assets through cold wallets or crypto-exchanges are unlikely to be reported.
Crypto-Asset Reporting Framework (CARF)
In view of the above challenges, the G20 requested the OECD to develop a framework for AEOI on cryto-assets, taking into consideration the specificities of this emerging market. As such, the OECD is developing the Crypto-Asset Reporting Framework (“CARF”) which will mainly consist of three components:
- CARF rules and commentary to be transposed into domestic law to collect information from resident crypto-asset intermediaries;
- A framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF with jurisdiction(s) of residence of the Crypto-Asset Users, based on relevant tax treaties, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters; and
- Technical solutions to support the exchange of information.
As at date, only the first component has been circulated in draft form for comments from stakeholders.
Scope of the CARF
The rules and commentary of the CARF has been sub-divided into four units:
- The Scope of crypto-assets to be covered
The proposed definition of crypto-asset will focus on the use of cryptographically secured distributed ledger technology and similar technology. This definition will mainly target crypto-assets that can be held and transferred in a decentralised manner, without intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of crypto-asset and certain non-fungible tokens (NFT).
Two categories of crypto-assets are likely to be excluded from reporting requirements since viewed as posing limited tax compliance risks:
- Closed loop crypto-assets intended to be redeemed against goods and services within a clearly defined, limited setting; and
- Central Bank Digital Currencies representing fiat currency on an issuing central bank or monetary authority which function similar to money held in a traditional bank account.
- Intermediaries subject to data collection and reporting requirements
It is proposed that intermediaries that as a business provide services effectuating exchange transactions in relevant crypto-assets, for and on behalf customers, would be considered Reporting Crypto-Asset Service Providers. These intermediaries would also fall within the scope of obliged entities of the FATF and will, therefore, be in a position to collect and review the required documentation on the basis of AML/KYC documentation. These intermediaries would include exchanges, brokers, dealers, operators of crypto-asset ATM. Decentralized exchanges and decentralized finance would also fall within this scope.
- Transactions subject to reporting as well as information to be reported
Four types of transactions would be reportable under the CARF:
- Exchanges between crypto-assets and fiat currencies
- Exchanges between one or more forms of crypto-assets
- Reportable retail payment transactions and
- Transfers of crypto-assets.
Transactions will have to be reported on an aggregate basis and differentiating between the type of inward and outward transactions and the type of crypto-asset. For instance, the reporting on exchange transaction will have to be distinguished between crypto-to-crypto and crypto-to-fiat currency. If available, other information such as the transfer type (airdrop, loan etc), will have to be provided.
- Due diligence procedures to identify crypto-asset under and relevant tax jurisdictions for reporting purposes
The due diligence process will be aligned, to the extent possible, with existing CRS regime in an attempt to minimize the burden on crypto-asset service providers where they are also subject to CRS obligations in their capacity as financial institutions. As such, the due diligence procedures under the CARF will consist of identifying their crypto-asset users, determining their relevant tax jurisdictions for reporting purposes and collect information required to comply with the reporting requirements. The process is build on self-certification -based procedures and existing AML/CFT obligations outlined in the FATF recommendations, including updates brought in June 2019 with respect to virtual asset service providers.
Conclusion and Timeline
Crypto-assets have, so far, not been subject to the CRS and similar tax reporting requirements. This is, however, going to change with the new rule. The OECD is expecting comments from relevant stakeholder on the consultation paper by end of April 2022, with a public consultation meeting scheduled for end of May 2022. The OECD aims to report to the G20 on the CARF at their October 2022 meeting. Once finalized, CRS participating jurisdictions will be implementing this new tax reporting rule.
While financial institutions (banking and non-banking) established in participating jurisdictions are already used to the CRS and its applicable due diligence and reporting obligations, tax reporting obligation will be new for crypto-asset service providers. A tax reporting regime was however expected in view of the quick evolution of the crypto-asset market. Once in force, Crypto-asset service providers should see the CARF as an opportunity, take a pro-active approach in implementing adequate compliance measures and turn it into a competitive advantage.