FATCA and CRS are set to have a new tax transparency reporting compatriot: the Crypto-Asset Reporting Framework (CARF).
Government officials and tax authorities around the world are concerned that because crypto-assets can be transferred and held without using a traditional financial intermediary and with no central administrator visibility, global tax transparency gained through measures such as the Common Reporting Standard (CRS) will be eroded.
Since the CRS applies to traditional financial assets and fiat currencies, crypto-assets (such as stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens) in most instances aren’t in scope, noted the OECD CARF consultation document.
And where crypto-assets do fall within the definition of financial assets, they can be owned either directly by individuals in offline “cold wallets” or via crypto-asset exchanges that have no CRS reporting obligations.
In response, the OECD is developing the CARF in a bid to strengthen global tax transparency through the collection and automatic exchange of tax information on transactions in crypto-assets.
Under its proposals, service providers (including crypto-asset exchanges and brokers/dealers) involved in crypto-to-crypto exchanges and/or crypto-to-fiat currency transactions will be required to carry out due diligence to identify and screen their customers. They will then need to report the aggregate values of customers’ exchanges and transfers in an official currency to their respective tax administration annually.
The due diligence requirements, which aim to determine the identity and tax residence of each crypto-asset user, are based on the CRS self-certification process, plus the AML/KYC obligations enshrined in the 2012 Financial Action Task Force (FATF) Recommendations.
Information that will need to be reported include the:
- Name, address, jurisdiction of residence, TIN(s), and date and place of birth of each reportable crypto-asset user.
- Name, address and identifying number of the reporting crypto-asset service provider.
- Aggregate amount paid and number of units bought and sold for each type of crypto-asset against fiat currencies.
- Aggregate fair market value, number of units, and number of acquisition and disposal transactions for each type of crypto-asset against other relevant crypto-assets.
Requiring the reporting of crypto-assets that are acquired differs from CRS, since the “acquisition of an asset is not typically viewed as a realization and recognition event marking the time for taxation,” noted PwC.
In addition, the OECD is proposing “a set of amendments to the CRS, in order to bring new financial assets, products and intermediaries in scope,” noted the consultation document.
The updates, PwC observed, aim to:
- Incorporate new digital financial products within CRS to ensure a level-playing field between digital money products and traditional bank and other CRS reportable accounts. As such, CRS’ scope will be extended to cover specified electronic money products, central bank digital currencies and relevant crypto assets.
- Improve the quality and usability of existing CRS reporting.
The proposed amendments would expand the reporting requirements to cover the role controlling persons play with respect to the entity holding the account, and which controlling persons have an equity interest in an investment entity to help improve transparency around ownership and control structures.
Other changes would require the reports to specify whether an account is new or pre-existing and whether a valid self-certification has been obtained so tax administrations can see if due diligence procedures have been applied; whether an account is a joint account and how many account holders there are; and what type of financial account it is (depository/custodial/equity and debt interests, and cash value insurance contracts) to allow tax administrations to better understand the financial investments held by their taxpayers.
Where an entity or individual account holder is resident for tax purposes in two or more jurisdictions, the OECD proposal suggests “all countries of tax residence should be self-certified by the Account Holder and the Account Holder should be treated as tax resident in all identified jurisdictions.”
Collecting all the data, managing data quality and creating standardised global processes to ensure the necessary data elements are reported properly in each jurisdiction will be a huge undertaking.
Get ready to comply
Crypto has not been the focus of CRS and the automatic exchange of information regimes to date, noted PwC. That is now changing. “Banks and other financial market participants that are classified as reporting financial institutions under CRS likely would be heavily impacted by this new framework and should take steps to prepare for its implementation.”
Will you – and your regulatory reporting solutions – be ready?
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