OECD Finalises Global Tax Reporting Framework for Crypto-Assets

The need for a new and separate framework comes in the light of the rapid growth of the Crypto-Asset market. Crypto-Assets can be transferred and held without interacting with traditional financial intermediaries increasing the risk of Tax evasion. Therefore, acknowledging and addressing the tax compliance risk with respect to Crypto Asset became a priority for the OECD and the G20.  

CARF has four key elements:  

1. Crypto-Assets’ scope
2. Intermediaries and other providers’ scope 
3. Reporting requirements
4. Due Diligence requirements

Scope of Crypto-Assets:  

Crypto-Assets are defined as a “digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions” (these include stablecoins, derivatives issued in the form of a Crypto-Asset) and certain non-fungible tokens (“NFTs”).  

Obligations under CARF would apply to Relevant Crypto-Assets, which are Crypto-Assets that:  

• Give rise to reporting on Relevant Transactions; and 
• Do not fit any of the below three exemptions due to low tax compliance risks: 
• First Category: Crypto-Asset Service Provider (“CASP”) has adequately determined cannot be used for payment or investment purposes.
• Second Category: Central Bank Digital Currencies, representing a claim in Fiat Currency on an issuing Central Bank.  
• Third category: Electronic Money. 

The term Relevant Transaction is defined as either:  

• Exchange Transaction (i.e., an exchange between Relevant Crypto-Asset and fiat currencies, or an exchange between one or more forms of Relevant Crypto-Assets); or
• Transfer of a Relevant Crypto Asset (includes Reportable Retail Payment Transactions, which are Transfer of Relevant Crypto-Assets in value exceeding USD 50,000)

Intermediaries and other providers’ scope 

Reporting would apply to CASPs, who are entities or individuals that, as a business, provide services effectuating Exchange Transactions in Relevant Crypto-Assets, for or on behalf of customers. Their positions as intermediaries in transactions would make them best placed to obtain information on their customers (e.g., AML/KYC). The CARF is meant to capture a wide-ranging set of intermediaries, such as exchanges, operators of crypto-asset ATMs crypto broker/dealers.  

Reporting CASPs will be subject to the CARF rules when they are  

• tax resident in, 
• both incorporated in, or set up under the laws of, and have legal personality or are subject to tax reporting requirements in, 
• managed from, 
• having a regular place of business in,
• effectuating Relevant Transactions through a branch based in, a jurisdiction adopting the rules. 

Reporting requirements 

Relevant Crypto-Asset reporting will be made on an aggregate basis but distinguishing between inward and outward transactions for two types of transactions:  

1. Crypto-Asset to Crypto-Asset
2. Crypto-Asset to fiat currency 

Whilst Crypto-Asset to fiat currency transactions will be easily calculated (i.e., fiat gross proceeds from the transaction), CARF rules should also require Crypto-Asset to Crypto-Asset to be reported in fiat currency. Under this approach, the transaction would be split into two reportable elements: 

1. A disposal of Crypto-Asset (the reportable gross proceeds based on the market value at the time of disposal)
2. An acquisition of Crypto-Asset (the reportable acquisition value based on the market value at the time of acquisition)

Due diligence 

Reporting CASPs will be required to follow certain due diligence procedures under CARF. Those procedures will however be largely based on those in place under the CRS framework, especially in relation to the use of self-certifications as well as current AML/KYC obligations forming part of the 2012 FATF Recommendations and their 2019 virtual asset service providers’ update. 

Crossover with the CRS 

The report notes the potential increased burden for entities subject to reporting under both CARF and the CRS. Below are several measures included to reduce such burdens: 

• The definition of Relevant Crypto-Assets excludes Specified Electronic Money Products and Central Bank Digital Currencies from the scope of the CARF, as reporting on these assets is ensured under the CRS; 
• As there are certain assets that qualify both as Relevant Crypto-Assets under the CARF and as Financial Assets under the CRS (e.g., shares issued in crypto form), the CRS contains an optional provision to switch-off gross proceeds reporting under the CRS if such information is reported under the CARF; 
• Indirect investments in Relevant Crypto-Assets through traditional financial products, such as derivatives or interests in investment vehicles, are covered by the CRS; and 
• To the extent possible and appropriate, the due diligence procedures are consistent with the CRS due diligence rules. In particular, the CARF allows Reporting Crypto-Asset Service Providers that are also subject to the CRS to rely on the due diligence procedures for New Accounts performed for CRS purposes.

Future developments 

The OECD is working on an implementation package which will consist in a framework of bilateral/multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF and IT solutions to support the exchange of information. Whilst no formal date was put forward, the OECD did mention it will work on implementation timelines for both CARF and the amended CRS.     

How Apex can help 

• CO/MLRO-(Crypto-VA)
• Crypto AML & CO Oversight Support Services
• Crypto-assets due diligence services
• Crypto/Virtual asset/ VASP-CASP licensing 
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• VASP/CASP Due Diligence 
• Crypto AML business risk assessment templates