On 6/8/23, after conducting the first comprehensive review of the CRS in consultation with participating jurisdictions, financial institutions, and other stakeholders, the OECD released the International Standards for Automatic Exchange of Information in Tax Matters CRYPTO‑ASSET REPORTING FRAMEWORK (CARF) AND 2023 UPDATE TO THE COMMON REPORTING STANDARD). This resulted in two outcomes:
- a new tax transparency framework which provides for the automatic exchange of tax information on transactions in Crypto-Assets in a standardized manner with the jurisdictions of residence of taxpayers (referred to as the “Crypto-Asset Reporting Framework” or “CARF”)
- a set of amendments to the CRS
Tax Administrations consider the behavior of a Financial Institution in the context of their overall compliance environment for purposes of applying appropriate risk treatments
Tax administrations assess a financial institutions’ compliance from the information that it provides. The OECD states that where the risk level is assessed to be relatively high and the root cause analysis points towards a systematic and behavioral issue with an FI or a cluster of FIs, tax administrations may use more targeted compliance measures and thematic reviews. Tax administrations can use a combination of detective, preventative and corrective measures to assess and treat CRS (and now CARF) non-compliance.
Crypto-Asset Reporting Framework (CARF)
CARF is a global tax transparency framework which provides for the automatic exchange of tax information on transactions in Crypto-Assets in a standardized manner with the jurisdictions of residence of taxpayers on an annual basis. The CARF consists of three distinct components:
- Rules and related Commentary that can be transposed into domestic law to collect information from Reporting Crypto-Asset Service Providers with a relevant nexus to the jurisdiction implementing the CARF. These Rules and Commentary have been designed around four key building blocks: i) the scope of Crypto-Assets to be covered; ii) the Entities and individuals subject to data collection and reporting requirements; iii) the transactions subject to reporting, as well as the information to be reported in respect of such transactions; and iv) the due diligence procedures to identify Crypto-Asset Users and Controlling Persons and to determine the relevant tax jurisdictions for reporting and exchange purposes.
- Multilateral Competent Authority Agreement on Automatic Exchange of Information pursuant to the CARF (CARF MCAA) and related Commentary (or bilateral agreements or arrangements)
- Electronic format (XML schema) to be used by Competent Authorities for purposes of exchanging the CARF information, as well as by Reporting Crypto-Asset Service Providers to report CARF information to tax administrations (as permitted by domestic law).
Scope of Crypto-Assets to be covered under the CARF
The definition of Crypto-Assets under the CARF focuses on the use of cryptographically secured distributed ledger technology, as this is a distinguishing factor underpinning the creation, holding and transferability of Crypto-Assets. The definition of Crypto-Assets thereby targets those assets that can be held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a Crypto-Asset and certain non-fungible tokens (NFTs). Excluded from reporting requirements are three categories of Crypto-Assets that pose limited tax compliance risks: Crypto-Assets which the Reporting Crypto-Asset Service Provider has adequately determined cannot be used for payment or investment purposes, Central Bank Digital Currencies and Specified Electronic Money Products that represent a single Fiat Currency.
Intermediaries and other service providers in scope
Entities or individuals that, as a business, provide services effectuating Exchange Transactions of Crypto-Assets for or on behalf of customers, including by making available a trading platform, are considered Reporting Crypto-Assets Service Providers with due diligence and reporting obligations under CARF. These service providers include centralized finance (“CeFi”) and some DeFi Crypto Asset exchanges; Crypto-Asset brokers, dealers, and market makers, whether acting as intermediary or principal; and operators of Crypto-Asset ATMs. As with the Crypto-Asset scope, the rules intend to apply to service providers within the scope of the FATF definition of a “virtual asset service provider.”
Reporting requirements
CARF outlines a transactional reporting regime, requiring annual reporting aggregated by Crypto-Asset type on (i) exchanges between Crypto-Assets and Fiat Currencies, (ii) exchanges between one or more forms of Crypto-Assets and, (iii) Transfers (including Reportable Retail Payment Transactions) of Crypto-Assets. With respect to Transfers, CARF requires reporting of the number of units and total value of Transfers of Crypto-Assets from service providers to un-hosted wallets, intending to increase visibility of tax authorities into transactions without intermediary involvement. Retail payment transactions are also reportable when a service provider processes payments on behalf of a merchant accepting Crypto-Assets in payments for goods or services. This reporting is limited to high value transactions, with the OECD proposing a threshold of USD 50,000. Reportable information includes tax-relevant demographic and financial information on each transaction, including details such as Crypto-Asset type and Transfer type. Where exchanges of Crypto-Assets are made for Fiat Currency, the reportable acquisition amount or disposition gross proceed amount is equal to the fiat received net of transaction fees. For crypto-to-crypto transactions, retail payments, and transfers, the service provider is responsible to determine and report the fair market value of the Crypto-Assets in Fiat Currency at the time of the transaction and in a consistent manner.
Due diligence procedures
The due diligence procedures included in CARF are based on the CRS requirements and existing AML/KYC obligations included in the FATF recommendations, using self-certifications and information on file to determine tax residency and reportability of individual and Entity customers. Under the final rules, a Reporting Crypto-Asset Service Provider must stop effectuating transactions if:
- A self-certification is not provided upon establishment of a new account
- A pre-existing account holder has not provided a self-certification within 12 months
- An updated self-certification is not received within 90 days of a change in circumstances
Amendments to the Common Reporting Standard
In the first comprehensive review of the CRS, new digital financial products are included in the scope of the CRS, as they may constitute a credible alternative to holding money or Financial Assets in an account that is currently subject to CRS reporting. The CRS now covers Specified Electronic Money Products and Central Bank Digital Currencies. Changes are also made to the definitions of Financial Asset and Investment Entity, to ensure that derivatives that reference Crypto-Assets and are held in Custodial Accounts and Investment Entities investing in Crypto-Assets are covered by the CRS.
The CRS now also contains provisions to ensure an efficient interaction between the CRS and the CARF to limit instances of duplicative reporting, while maintaining a maximum amount of operational flexibility of Reporting Financial Institutions that are also subject to obligations under the CARF.
The amendments enhance the reporting outcomes under the CRS, including through the introduction of more detailed reporting requirements, the strengthening of the due diligence procedures, the introduction of a new, optional Non-Reporting Financial Institution category for Investment Entities that are genuine non-profit organizations and the creation of a new Excluded Account category for capital contribution accounts.
Know this
The OECD’s CARF and amendments to the CRS main goal is tackling tax evasion in a digital global world.
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