Pablo Porporatto 11 April 2022
In recent years, individuals and companies have adopted the use of cryptoassets for a wide and growing variety of financial and investment activities, including their use as a means of payment for international transactions and transfers. However, unlike
traditional financial products (e.g., bank deposits, securities, mutual fund shares or trusts, among others), cryptoassets can be transferred and held without the intervention of traditional financial intermediaries and without any central administrator having full visibility of the transactions made or of the respective holdings. That is why, a “pseudo anonymity” of cryptoassets is alluded to. With support in blockchain technology (blockchain), cryptoassets can be issued, registered, transferred and stored in a decentralized manner and the new intermediaries involved include those facilitating exchanges (exchanges, brokers, dealers and other operators) and those who provide the services of wallets. In this context, from the OECD [1] they understand that these new assets (crypto and electronic money or digital currencies, even those issued by central banks) could be used to undermine existing international tax transparency initiatives, such is the case of the automatic exchange of financial accounts established by the Common Reporting Standard, CRS. In addition, these new assets, among others, can be stored and have payment functions similar to traditional assets subject to the rules of the CRS, therefore, it becomes necessary to level the playing field.
For this reason, the OECD published, on March 22, 2022, a public consultation document that includes specific questions [2] on a new global tax transparency framework to facilitate national reporting and the automatic exchange of tax information between states regarding crypto assets (Crypto-Asset Reporting Framework, or CARF), as well as proposed amendments to the standard CRS relating to the automatic exchange of financial account information between countries, including the new CARF rules and revised CRS rules, and their respective comments.
The knowledge of this document is important for the states’ political leaders, due to the possible adoption of these rules and their technical design components, and for the cryptoasset industry on whose intermediaries and operators the new due diligence and information reporting obligations will fall.
The G20 has asked the OECD to develop a framework for the automatic exchange of information on cryptoassets. This new CARF framework foresees the collection at the respective national levels from the reporting of the service providers reached, and the exchange of relevant information, for tax purposes between tax administrations, with respect to persons conducting certain transactions in cryptoassets, following a scheme similar to the CRS.
Alongside this new framework, the OECD has also developed proposals as part of the first comprehensive review of the CRS, with the aim of further improving its operation, based on the experience gained since its adoption.
The cryptoassets market does not use traditional financial intermediaries (banks, investment entities, trusts, etc.), which are the typical information providers of the information regimes implemented by the tax administrations with respect to their clients, for example the financial institutions reached by the reporting obligations, according to the CRS. The new types of intermediaries (exchanges suppliers and other brokers) are often not required to report information for tax purposes in relation to their clients. In addition, since individuals can have crypto assets in wallets that are not affiliated with any service provider and transfer the assets across national borders, there is a risk that these assets will be used for illicit activities or to evade tax obligations.
The CARF rules set out the scope of cryptoassets to be covered; the intermediaries subject to data collection and reporting requirements; the transactions subject to reporting and the information to be reported; and the relevant due diligence procedures for identifying users and the relevant tax jurisdictions for reporting. The regulatory, technical and operational architecture of the CRS was fundamental to the development of the CARF.
The definition of cryptoassets refers to the use of distributed ledger technology with cryptographic security and similar technology, so the definition may also cover future asset classes of a functionally similar nature. This definition covers assets that can be held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries. This definition is intended to ensure that the assets covered by the new reporting framework for tax purposes are also within the scope of the recommendations of the financial action task force (FATF), so that due diligence requirements can be based on existing obligations in relation to anti-money laundering (AML/CFT).AML) and “know your customer” (KYC).
With respect to non-cashable tokens, NFTs, in one of the public consultation questions, it is mentioned that they are within the scope of the FATF Recommendations as a virtual asset if they are to be used for payment or investment purposes in practice.
According to the CARF framework, an NFT would have to represent a security and be tradable or transferable to be considered a cryptoasset. In this regard, the following public question is posed to the industry Are you aware of any circumstances in which this is not the case, in particular, any NFT that being covered by the definition of cryptoassets would not be considered virtual assets or financial assets according to the FATF Recommendations or vice versa?
The information requirements under CARF cover exchanges between cryptoassets and fiat currencies; exchanges between one or more forms of cryptoassets; reportable retail payment transactions; and transfers of cryptoassets. Transactions must be reported in aggregate for each type of crypto asset and separately for inbound and outbound transactions.
The CARF establishes the due diligence procedures, which must be conducted by reporting service providers to correctly identify the users of cryptoassets, the relevant tax jurisdictions to report; and the information that must be reported under the CARF. Service providers subject to CARF related to cryptoassets include those that are intermediate (known as exchanges), who transact for or on behalf of their customers, the brokers and dealers and other operators of these crypto assets.
Together with CARF, the OECD has also developed proposals as part of the first comprehensive review of the CRS, with the aim of improving its operation, based on the experience acquired by the tax administrations and the entities achieved during the last seven years since its adoption. These proposals include:
This first document includes a proposal for new CARF and revised CRS technical rules and their respective comments, and in a second phase it would be necessary to address the framework for the agreement of competent authorities -bilateral or multilateral- to formalize the legal mechanism that allows the exchange of information.
Some voices warn that a large part of the crypto industry is not following the OECD developments closely. This public consultation is the opportunity for the industry to get involved and answer the questions that this document raises in a very concrete way (see Annex). Intermediaries and other cryptoasset service providers will be the key pieces for the successful implementation of these CARF Model rules, hence the importance of them getting involved at this stage of defining rules.
Finally, it should be noted that, although this advance in transparency is especially important, countries must assume their responsibility to clarify or, if necessary, expressly establish the tax treatment that cryptoassets produce in direct and indirect taxation, so that tax administrations can control the correct tax compliance and also to provide certainty and legal security to taxpayers.
[1] The OECD has published a study that reviews the international tax treatment of cryptoassets that was analyzed in the following posts of this Blog: 1) “OECD recommendations on tax treatment and the necessary international transparency of cryptocurrencies” (2020-10-28) and 2)“Implications of crypto assets in the value-added tax, income tax and property taxes” (2020-12-10).
[2] For more information or to comment on the public consultation draft: https://www.oecd.org/tax/exchange-of-tax-information/public-consultation- document-crypto-asset-reporting-framework-and-amendments-to-the-common- reporting-standard.pdf. Comments may be sent no later than April 29, 2022, by e-mail (in Word format) to taxpublicconsultation@oecd.org.
Key aspects of the draft Crypto-Asset Reporting Framework
1. Does the CARF cover the appropriate scope of Crypto-Assets? Do you see a need to either widen or restrict the scope of Crypto-Assets and, if so, why?
2. Does the definition of Closed-Loop Crypto-Assets contain the correct criteria for identifying Crypto-Assets that operate in a closed-loop environment?
3. Are you aware of existing types of Crypto-Assets, other than Closed-Loop Crypto Assets or Central Bank Digital Currencies that present a low risk from a tax compliance perspective and should therefore be excluded from the scope?
4. An NFT is in scope of the FATF Recommendations as a virtual asset if it is to be used for payment or investment purposes in practice. Under the Crypto-Asset Reporting Framework, an NFT would need to represent value and be tradable or transferable to be a Crypto-Asset. On that basis it is expected that relevant NFTs would generally be covered under both the CARF (as a Crypto-Asset) and the FATF Recommendations (either as a virtual asset or a financial asset). Are you aware of any circumstances where this would not be the case, in particular, any NFTs that would be covered under the definition of Crypto-Assets and that would not be considered virtual assets or financial assets under the FATF Recommendations or vice versa?
1. Do you see a need to either widen or restrict the scope of the intermediaries (i.e.Reporting Crypto-Asset Service Providers)?
2. Are there any circumstances in which multiple (affiliated or unaffiliated) Reporting Crypto-Asset Service Providers could be considered to effectuate the same Relevant Transaction with respect to the same customer? If so, which types of intermediaries (e.g. the one with the closest relationship with the client) would be best placed to ensure reporting?
3. Do the nexuses described in paragraph A of Section I of the CARF ensure a comprehensive coverage of all relevant Reporting Crypto-Asset Service Providers? If not, under what circumstances would relevant Reporting Crypto-Asset Service Providers
not have a nexus in any jurisdiction? In your view, should this be a potential concern, and if so, what solutions could be considered to address it?
The CARF requires reporting with respect to Relevant Transactions in Crypto-Assets on the basis of their fair market value, determined and reported in a single Fiat Currency at the time of each Relevant Transaction.
1. Do intermediaries maintain valuations on the equivalent Fiat Currency fair market values of Crypto-Assets? Do you see challenges in reporting on the basis of such fair market value? If yes, what do you suggest to address them?
2. Are there preferable alternative approaches to valuing Relevant Transactions in Crypto-Assets?
3. Are there specific difficulties in applying the valuation rules for illiquid tokens, for example, NFTs or other tokens that may not be listed on a marketplace, to identify a fair market value? If so, please provide details of any preferable valuation methods that could be adopted within the CARF.
4. Regarding Reportable Retail Payment Transactions, what information would be available to Reporting Crypto-Asset Service Providers pursuant to applicable AML requirements (including the FATF travel rule, which foresees virtual asset service providers collecting information on originators and beneficiaries of transfers in virtual assets) with respect to the customers of merchants in particular where the customer does not have a relationship with a Reporting Crypto-Asset Service Provider, for whom it effectuates Reportable Retail Payment Transactions? Are there any specific challenges associated with collecting and reporting information with respect to Reportable Retail Payment Transactions? What measures could be considered to address such
challenges? Would an exclusion of low-value transactions via a de minimis threshold help reducing compliance burdens? If so, what would be an appropriate amount and what measures could be adopted to avoid circumvention of such threshold by splitting a transaction into different transactions below the threshold?
5. Concerning the requirement to report transfers based on certain pre-defined transfer types (e.g. hard-forks, airdrops due to other reasons, loans or staking), do Reporting Crypto-Asset Service Providers have the knowledge necessary to identify, and classify for reporting purposes, transfers effectuated according to such transfer types? Are there any other transfer types that typically occur and that are separately identified for customers or for other purposes?
6. Concerning the proposal for reporting with respect to wallet addresses, are there any specific challenges for Reporting Crypto-Asset Service Providers associated with the proposed requirement to report wallet addresses that are the destination of transfers
sent from a customer’s wallet maintained by a Reporting Crypto-Asset Service Provider? Do Reporting Crypto-Asset Service Providers have, or are they able to obtain, information to distinguish wallet addresses associated with other Reporting Crypto-
Asset Service Providers from wallet addresses that are not associated with another Reporting Crypto-Asset Service Provider? The OECD is also considering to require, in addition, reporting with respect to wallet addresses that are the origins of transfers to a
customer’s wallet maintained by a Reporting Crypto-Asset Service Provider. Is this information available and would providing it materially increase compliance burdens for Reporting Crypto-Asset Service Providers? Are there alternative requirements (e.g.
reporting of the public keys associated with Crypto-Asset Users instead of wallet addresses) that could be considered to more efficiently increase visibility over transactions carried out without the intervention of the Reporting Crypto-Asset Service Provider?
7. Information pursuant to the CARF is to be reported on an annual basis. What is the earliest date by which information on the preceding year could be reported by Reporting Crypto-Asset Service Providers?
1. The due diligence procedures of the CARF are in large part based on the CRS. Accordingly, the CARF requires Reporting Crypto-Asset Service Providers to determine whether their Entity Crypto-Asset Users are Active Entities (corresponding largely to the definition of Active NFE in the CRS) and, on that basis, identify the Controlling Persons of Entities other than Active Entities. Would it be preferable for Reporting Crypto-Asset Service Providers to instead document the Controlling Persons of all Entity Crypto-Asset Users, other than Excluded Persons? Are there other elements of the CRS due diligence procedures that should be included in the CARF to ensure that Reporting Financial Institutions that are also Reporting Crypto-Asset Service Providers can apply efficient and consistent due diligence procedures?
2. An Entity Crypto-Asset User qualifies as an Active Entity if less than 50% of the Entity’s gross income is passive income and less than 50% of the assets held by the Entity produce, or are held for the production of, passive income. The Commentary on
the term “Active Entity” provides that passive income includes “income derived from Relevant Crypto-Assets”. Are there any specific instances in which such income (e.g. income from mining, staking, forks or airdrops) should qualify as active income?
3. The CARF removes the information collection and reporting obligations with respect to Crypto-Asset Users which are Excluded Persons. The OECD is still considering whether Reporting Crypto-Asset Service Providers should be included in the definition
of Excluded Persons. Against this background, would Reporting Crypto-Asset Service Providers have the ability to obtain sufficient information on clients that are Reporting Crypto-Asset Service Providers to verify their status?
4. Section III.D enumerates effective implementation requirements in instances where a Reporting Crypto-Asset Service Provider cannot obtain a self-certification from a Crypto- Asset User or Controlling Person. Notably, these requirements specify that the Reporting Crypto-Asset Service Provider must refuse to effectuate any Relevant Transactions on behalf of the Crypto-Asset User until such selfcertification is obtained and its reasonableness is confirmed. Are there potential alternative effective implementation measures to those listed in Section III.D? If so, what are the alternative or additional effective implementation measures and which persons or Entities would be best-placed to enforce such measures?
1. Comments are also welcomed on all other aspects of the Crypto-Asset Reporting Framework.
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