On March 22, 2022, the OECD issued a public consultation document involving a new world tax transparency framework to furnish the reporting and exchange of information with regard to crypto-assets and proposed amendments to the Common Reporting Standard (CRS) for the automatic exchange of financial account information between countries. The consultation has the goal to inform the decisions of policy makers on the potential adoption of any such framework and its related components.
A challenge to tax and financial regulators is that a person can transfer and hold crypto-assets without intervention of traditional financial intermediaries and without any central administrator being able to watch either the transactions or the crypto-asset holdings. In addition, the Crypto-Asset market has resulted in a new set of intermediaries, such as Crypto-Asset exchanges and wallet providers, which may currently only be subject to limited regulatory oversight. Crypto-Asset exchanges typically facilitate the purchase, sale, and exchange of Crypto-Assets for other Crypto-Assets or fiat currencies. As a result, individuals can exploit crypto-assets to evade international tax transparency initiatives, such as the CRS.
Crypto-Asset Reporting Framework (CARF)
As a result of the potential to circumvent tax transparency initiatives, the G20 has asked the OECD to develop a framework for the automatic exchange of information on crypto-assets (Crypto-Asset Reporting Framework or CARF). The new framework establishes mechanisms for the collection and exchange of tax-relevant information between tax administrations, with respect to persons engaging in certain transactions in crypto-assets. The framework includes crypto-assets that a person can hold and transfer in a decentralized way, without the intervention of traditional financial intermediaries, as well as asset classes utilizing similar technology that may exist in the future. The framework requires businesses that furnish services to exchange crypto-assets against other crypto-assets or fiat currencies.
Proposed CRS Amendments
In addition to the CARF, the OECD has developed proposals, as part of the first comprehensive review of the CRS, to improve the operation of the CRS, based on the experience of governments and businesses since its adoption in July 2014. The proposal broadens the scope of the CRS to cover electronic money products and the Central Bank Digital Currencies. As a result of the development of the CARF, the proposals also embrace changes to cover indirect investments in crypto-assets through Investment Entities and derivatives. Simultaneously, the proposal has new provisions to achieve an efficient interaction between the CRS and the CARF, including ways to avoid duplicative reporting. The amended CRS endeavors to strengthen the due diligence procedures and reporting outcomes in order to improve the usability of CRS information for tax administrations and limiting burdens on financial institutions.
The OECD is requesting public comments on its proposals. Interested persons should send their comments no later than April 29, 2022 by email (in Word format) to firstname.lastname@example.org. Additional information on the CARF, the amended CRS, or to comment on the public consultation draft should view the public consultation document. All written comments received will be made publicly available on the OECD website. Comments submitted in response to this invitation will be posted on the OECD website.
The OECD will hold a public consultation meeting at the end of May 2022. Speakers and other participants at the upcoming public consultation meeting will be selected from among those providing timely written comments.
Once it receives and digests the input received through the public consultation, the OECD will make final the rules and commentary to the CARF and the amended CRS. The OECD will also develop the exchange instruments and technical solutions needed to support reporting and exchanges pursuant to the CARF and the amended CRS. The OECD intends to report on the CARF and the amended CRS under the Indonesian Presidency of the G20 for its October 2022 meeting.
The public consultation documents explains that the CARF and amended CRS responds to dynamics of the Crypto-Asset market, including both the Crypto-Assets offered, as well as the intermediaries involved. These developments pose a significant risk that recent gains in global tax transparency will be gradually eroded.
Clearly, the Crypto-Asset market and the intermediaries involved are different from the usual information providers in third-party tax reporting regimes, such as the Common Reporting Standard (CRS), to a new set of intermediaries, which only recently became subject to financial regulation and are frequently not subject to tax reporting requirements with respect to their clients. Perhaps, more importantly, the public consultation responds to the ability of individuals to hold Crypto-Assets in wallets unaffiliated with any service provider and transfer such Crypto-Assets across jurisdictions. The ability of persons to hold and transfer Crypto-Assets pose a risk that Crypto-Assets will be used for illicit activities or to evade tax obligations. The potential for persons to possess and transfer Crypto-Assets unaffiliated with any service provider has reduced tax administrations’ visibility on tax-relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed.
The OECD public consultation complements the work of the J5 countries. On March 25, 2021, the Joint Chiefs of Global Tax Enforcement (J5) assembled investigators, cryptocurrency experts and data scientists in a coordinated push to track down individuals and organizations perpetrating tax crimes around the world. Without having in place an effective framework and reporting mechanisms, the J5 and other tax authorities are limited in their compliance and enforcement abilities.
The public consultation follows closely the U.S. Department of Justice announcement of its first director of National Cryptocurrency Enforcement and President Biden signing an Executive Order (titled “Ensuring Responsible Development of Digital Assets” and issued with an accompanying Fact Sheet) regarding the U.S. government’s strategy for digital assets. The Executive Order orders federal agencies to issue various reports that will set forth future U.S. policy toward digital assets, including the potential launch of a federally issue digital dollar.
Hence, the international and national compliance and enforcement framework for Crypto-assets are changing dynamically.
The current issue of the IELR will discuss in more detail the public consultation and its implications.