Significance Of Crypto-Assets Reporting Framework To Tax Transparency


In the recent years, the global financial sector has experienced rapid development of new financial products and intermediaries such as Decentralized Finance (DeFi). This is in a bid to meet the varying needs for investors and consumers in different demographics; with countries racing to bridge the financial inclusion gap.

Decentralized Finance (DeFi) is a fast-developing area at the intersection of blockchain, crypto-assets and financial services. It is an umbrella term that stands for a variety of activities and relationships, like payment services, credit, derivatives, insurance and asset management. The global value of digital assets locked into DeFi services has grown from about USD 7 billion in the beginning of 2019 to over USD 30 billion at the end of 2020, and over USD 70 billion in March 2022.

As per the Organisation for Economic Co-operation and Development (OECD) commentary on Crypto Asset Reporting Framework (CARF), one notable technology, cryptography, has enabled the creation of an entirely new asset type, 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, or the location of crypto-asset holdings. In addition to crypto-assets, certain new payment products (i.e., digital money products, including both crypto-based and other electronic money products, as well as Central Bank Digital Currencies) also provide electronic storage and payment functions similar to money held in a traditional bank accounts; and are frequently offered by actors that are not covered by the Common Reporting Standard (CRS).

Against this background, the OECD is advancing work to modernise the tax transparency instruments available to tax administrations by instituting the following interventions;

  • Developing a new global tax transparency framework which provides for the automatic exchange of tax information on transactions in crypto-assets in a standardised manner.
  • Proposing a set of amendments to the CRS, in order to bring new financial assets, products and intermediaries in scope, because they are potential alternatives to traditional financial products, while avoiding duplicative reporting with that foreseen in the CARF.
  • Launching the first comprehensive review of the CRS, with the aim of further improving the operation of the CRS, based on the experience gained by governments and business.

In light of these developments, crypto assets have also had the attention of regulators in different jurisdiction with an intention to regulate them; given the rise of their market cap close to USD 3 trillion at the end of 2021.

OECD Crypto Asset Reporting Framework (CARF) was released for comments on 22nd March 2022 and meeting set on 23rd May 2022 was organized to invite different players and actors to issue their comments and thoughts on the approach. Notable agenda discussed touched on the components of CARF including:

  • The CARF model rules and Commentary for transpositions into domestic law
  • The framework of bilateral or multilateral competent authority agreements for exchanging information
  • The relevant IT solutions to support the exchange of information

On the agenda, comments revolved around the following key areas:

  • Future-proofing the scope of the Common Reporting Standards (CRS)
  • Strengthening the CRS due diligence and reporting requirements
  • Crypto-Assets and intermediaries in scope of CARF
  • Due Diligence and reporting requirements under CARF

The commentary comes at a time when OECD recognizes the importance of addressing the tax compliance risks with respect to crypto-assets; by developing the CARF designed to ensure the collection and exchange of information on transactions in crypto-assets.

As expressed by Raffaele Russo, senior fellow at the University of Amsterdam, it is fundamental that countries introduce rules or publish detailed guidance regarding the tax treatment of the acquisition, holding and disposal of crypto-assets. In order to enhance transparency and accountability amongst the tax payers, the tax administrators should do the following:

  • Consider Voluntary Disclosure Initiatives for the past: As the tax treatment for crypto assets becomes clear and a reporting framework is put in place, consideration could be given to the introduction of voluntary disclosure initiatives in relation to the past so that taxpayers should start with a clean sheet.
  • Evaluate use of blockchain for information collection and sharing since crypto currency ecosystem is built on blockchain. In addition, blockchain increases transparency and accountability and reduces administrative costs.

In July 2020, Kenya signed the CRS multilateral Competent Authority on Automatic Exchange of Financial Account Information and adopted the OECD regulations draft by amending the tax procedures act, 2015.  It is interesting to see how CARF shall be designed to tap into the role of the intermediary as the “Information holder”; for the sake of providing the needed information to the resident state of the cryptocurrency owner to enforce its taxing rights on the latter’s worldwide income.

In the decentralized world of DeFi there is however no entity that takes care of the second role played by financial institutions in traditional finance; namely the role of the ‘withholding agent’ who ensures the enforcement of the taxing rights of the source state on any income paid from a lender in the source state to the borrower in the residence state. Unless DeFi platforms and blockchain integrated Dapps (‘decentralized applications’) can be made to assume a withholding agent function – which seems technically difficult if the entity is a decentralized exchange (DEX) – one question that arises is whether the CARF should assume this function by including information reporting to the source state of certain types of income. When successfully implemented, this shall increase global tax transparency and accountability, thereby increasing the tax base in different jurisdictions.

Author: Eddie Opiyo