OECD releases its report against crypto-asset tax evasion

17/10/22

Tax eAlert

In brief

ln light of the rapid development and growth of the Crypto-Asset market and to ensure that recent gains in global tax transparency will not be gradually eroded, in April 2021 the G20 mandated the Organization for Economic Cooperation and Development (OECD) to develop a framework providing for the automatic exchange of tax-relevant information on Crypto-Assets. In August 2022, the OECD approved the Crypto-Asset Reporting Framework (CARF) which provides for the reporting of tax information on transactions in Crypto-Assets in a standardized manner, with a view to automatic exchange on such information.

ln August 2022, the OECD also approved amendments to the CRS to provide certain electronic money products and Central Bank Digital Currencies in its scope. ln accordance with the CARF purpose, changes have also been made to enhance the due diligence and reporting requirements.

It is within this context that the OECD has finally published on October 10 its report which is therefore divided in two parts: (i) the “Crypto-Asset Reporting Framework” (CARF) and (ii) Amendments to the “Common Reporting Standard” (CRS).

The OECD presented its report and work to G20 Finance Ministers and Central Bank Governors at their meeting on 12-13 October in Washington D.C, as part of the latest OECD Secretary-General’s Tax Report.

Further news is therefore expected and should be followed with attention.

In detail

Background

The global financial services sector has been recently experiencing a rapid adoption of the use of crypto-assets for a range of investment and financial activities.

The major concern raised around crypto-assets was that, unlike traditional financial products, crypto-assets can be transferred and held without interacting with traditional financial intermediaries and without any central administrator having a full visibility on either the transactions carried out or the location of crypto-assets holdings. Furthermore, the ability of individuals to hold crypto-assets in wallets unaffiliated with any service provider and transfer such relevant crypto-assets across jurisdictions, presents the risk that crypto-assets are used for illicit activities or to evade tax obligations.

Tax authorities around the world have therefore expressed their concern with the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed.

Against this background, the OECD has sought to modernize the tax transparency framework by introducing CARF and proposing amendments to CRS.

The CARF framework

What is the scope covered?

The definition proposed by the OECD under the CARF deals with the use of “cryptographically secured distributed ledger technology”. This definition targets the assets that can be held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries, including stable coins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens (“NFTs”).

The definition also refers to “similar technology” to include new technological developments that could emerge in the future and similar to crypto-assets which could raise similar tax risks.

Who needs to report?

Intermediaries and other service providers facilitating exchanges between crypto-assets, as well as crypto-assets and fiat currencies, play a central role in the crypto-assets market. Thus, it is proposed that those entities or individuals concerned with a business of providing services in exchange of crypto-assets, for or on behalf of customers, would be considered as “reporting crypto-asset service providers” subject to customer due diligence and annual reporting obligations on crypto-assets.

What needs to be reported?

These following transactions would be reportable under the CARF:

Exchanges between crypto-assets and fiat currencies: in this case, the reporting data should indicate in an official currency the value of a crypto-asset at acquisition and the value of the gross proceeds at disposition.
Exchanges between one or more forms of relevant crypto-assets: in this case, both the value of the disposed, as well as the acquired, crypto-asset must be reported in official currency.
Transfers (including reportable retail payment transactions) of crypto-assets.

Amendments to the Common Reporting Standard (“CRS”)

The CRS was designed to promote tax transparency with respect to financial accounts held abroad and requires the collection and automatic exchange of information of the identity of account holders. It was adopted in 2014 and has been implanted in over 100 countries.

The OECD is conducting its first comprehensive review of CRS, soliciting input from businesses as well as governments. Thus, the OECD proposes to amend the CRS model that aims to:

bring new digital financial products within CRS to achieve a level-playing field between new digital money products and traditional bank and other CRS reportable accounts, and
improve the quality and usability of existing CRS reporting.

The OECD first proposes to bring digital money products (e.g., coverage of derivatives referencing crypto-assets and investment entities investing in crypto-assets) into the scope of the existing CRS framework because they may constitute an alternative to holding money or financial assets in an account that is currently subject to CRS reporting. Thus, the OECD has expanded the definitions of “financial institution”, “financial account”, and “financial asset” to cover the so-called “specified electronic money products”, “central bank digital currencies”, and “relevant crypto-assets”. These new terms are, logically, consistent with the terms used in CARF and aim to catch a broad variety of digital assets.

Based on the scope of application of both new CARF and CRS rules as explained above, the OECD acknowledges that certain assets may simultaneously be subject to reporting as crypto-assets under the CARF and financial assets under CRS. To address duplicate reporting, the OECD proposes that where the disposal of such assets may result in duplicative reporting, the gross proceeds upon such disposal are to be reported only under CARF.

The OECD also proposes amendments to a variety of existing CRS sections 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.

Upcoming steps ?

Following the presentation to G20, the OECD is working on an implementation package to ensure the consistent domestic and international application and effective implementation of the CARF. The implementation package will consist of a framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF, IT-solutions to support the exchange of information. Similarly, the work will also progress to put in place the mechanisms to automatically exchange information pursuant to the amended CRS.

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