The report on Crypto-Asset Reporting Framework (CARF) and Amendment to the Common Reporting Standard (CRS) was released to the public by Organization for Economic Cooperation and Development (OECD) in the month of October 2022.
This comes at a time where OECD recognizes the need to address Crypto assets which can be transferred and held without interacting with traditional financial intermediaries and without any central administrator having full visibility on either the transactions carried out. In order for the tax administration to adapt to the growing role of Crypto-Assets, there is need to understand the challenges posed to ensure tax compliance;
- Crypto-Assets’ reliance on cryptography and distributed ledger technology (Blockchain), in particular blockchain technology, means they can be issued, recorded, transferred and stored in a decentralised manner, without the need to rely on traditional financial intermediaries or central administrators.
- Crypto-Asset market has given rise to a new set of intermediaries and other service providers, such as Crypto-Asset exchanges and wallet providers, which may currently only be subject to limited regulatory oversight.
It should be noted that the Crypto-Asset market (Crypto-Assets Offered, Intermediaries and Wallet Service Providers) poses a significant risk that recent gains in global tax transparency will be gradually eroded. Against this backdrop, OECD has developed CARF designed to ensure collection and automatic exchange of information on transactions in Relevant Crypto-Assets. In addition, there is effort to amend the CRS to bring in scope the Crypto Assets and non-regulated players such as wallet service providers and exchanges intermediaries. A separate work shall be undertaken as put forth by OECD to ensure a broad implementation of the CARF as the single global reporting framework for Relevant Crypto-Assets.
Therefore, CARF has been designed around four building blocks;
First, the scope of Crypto-Assets to be covered:
The scope of Crypto-Assets targets those assets that can be held and transferred in a decentralised 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 excluded Crypto-Assets that pose a limited tax compliance risks include;
- Crypto-Assets that do not have the capacity of being used for payment or investment purposes.
- Central Bank Digital Currencies, representing a claim in Fiat Currency.
- Electronic Money Products that represent a single Fiat Currency and are redeemable at any time in the same Fiat Currency.
However, it should be noted that Central Bank Digital Currencies and certain Specified Electronic Money Products held in Financial Accounts will be included within the scope of the CRS.
Secondly, the Entities and individuals subject to data collection and reporting requirements
Intermediaries and other service providers facilitating the exchanges between relevant crypto-assets are in scope in addition to playing a central role in the crypto asset market. This is because they are well placed to have the best and most comprehensive access to the value of the relevant crypto assets and exchange transactions carried out by collecting and reviewing the required documentation of their customers including on the basis of Anti-Money Laundering documentation.
Reporting Crypto Asset Service Providers shall be subject to rules when;
- Tax resident in
- Both incorporated in under the laws and have a legal personality.
- Managed from
- Having a regular place of business in
- Effectuating relevant transactions through a branch based in a jurisdiction adopting the rules.
Third, the transactions subject to reporting as well as the information to be reported in respect of such transactions.
Under article 20 of crypto asset reporting framework developed by OECD, there are three types of relevant transactions are that are reportable under the CARF:
- exchanges between Relevant Crypto-Assets and Fiat Currencies: The CARF foresees that for Crypto-Asset-to-Fiat Currency transactions, the fiat amount paid or received is reported as the acquisition amount or gross proceeds.
- exchanges between one or more forms of Relevant Crypto-Assets: For Crypto-Asset-to-Crypto-Asset transactions it is proposed that the value of the Crypto-Asset (at acquisition) and the gross proceeds (upon disposal) must (also) be reported in Fiat Currency. In line with this approach, in respect of Crypto-Asset to-Crypto-Asset transactions, the transaction would be split into two reportable elements;
- a disposal of Crypto-Asset A (the reportable gross proceeds based on the market value at the time of disposal)
- an acquisition of Crypto-Asset B (the reportable acquisition value based on the market value at the time of acquisition)
- Transfers (including Reportable Retail Payment Transactions) of Relevant Crypto-Assets: the CARF requires reporting of the number of units and the total value of Transfers of Relevant Crypto-Assets effectuated by a Reporting Crypto-Asset Service Provider, on behalf of a Crypto Asset User, to wallets not associated with a virtual asset service provider or a financial institution.
Finally, the due diligence procedures to identify Crypto-Asset Users and the relevant tax jurisdictions for reporting and exchange purposes.
Under article 25 of CARF contains the due diligence procedures to be followed by Reporting Crypto-Asset Service Providers in identifying their Crypto-Asset Users, determining the relevant tax jurisdictions for reporting purposes and collecting relevant information needed to comply with the reporting requirements under the CARF.
The due diligence procedures build on the self-certification-based process of the CRS, as well as existing AML/KYC obligations enshrined in the 2012 FATF (Financial Action Task Force) Recommendations.
Author: Eddie Opiyo