The Organization for Economic Cooperation and Development introduced a framework this week for the automatic exchange of information between countries on crypto-assets, in response to a request from the G20 financial leaders.
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The new transparency initiative was developed in conjunction with G20 countries and comes against the backdrop of rapid adoption of the use of crypto-assets for a wide array of investment and financial uses, although recent market turmoil has dampened crypto investing considerably over the past year. Unlike traditional financial products, the OECD noted, crypto-assets can be transferred and held without the intervention of traditional financial intermediaries, such as banks, and without any central administrator having full visibility on either the transactions carried out or on crypto-asset holdings. The crypto market has also spurred the development of new intermediaries and service providers, such as crypto-asset exchanges and wallet providers, many of which remain unregulated.
That means crypto-assets and related transactions are not comprehensively covered by the OECD/G20 Common Reporting Standard (CRS), and the OECD is worried that increases the likelihood of their use for tax evasion while undermining the progress made in tax transparency through the adoption of the standard.
"The Common Reporting Standard has been very successful in the fight against international tax evasion. In 2021, over 100 jurisdictions exchanged information on 111 million financial accounts, covering total assets of EUR 11 trillion," OECD Secretary-General Mathias Cormann said in a statement Monday. "Today's presentation of the new crypto-asset reporting framework and amendments to the Common Reporting Standard will ensure that the tax transparency architecture remains up-to-date and effective."
The Crypto-Asset Reporting Framework aims to provide transparency when it comes to crypto-asset transactions by automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis, in a standardized manner similar to the CRS. The framework will target any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. The OECD foresees there will be carve-outs for assets that can't be used for payment or investment purposes and for assets already fully covered by the CRS. Entities or individuals that provide services effectuating exchange transactions in crypto-assets for, or on behalf of customers would be obliged to report under the CARF.
The CARF includes model rules that can be transposed into domestic legislation, and commentary to help administrations with implementation. In the months ahead, the OECD plans to advance its work on legal and operational instruments to facilitate international exchange of information collected on that basis of the framework and to ensure its effective and widespread implementation, including the timing for starting exchanges under the CARF.
The OECD has also proposed to the G20 a set of additional amendments to the CRS to modernize its scope to comprehensively cover digital financial products and to improve its operation, taking into account the experiences seen in countries and businesses. As with the CARF, this work will occur in tandem with an update to the international legal and operational mechanisms for the automatic exchange of information pursuant to the amended CRS, along with coordinated timelines to bring the agreed amendments into effect.
Tax experts expect to see the G20 endorse the framework. "Ready or not, this is what tax looks like when it moves at light speed," said Tony Tuths, digital asset practice leader and principal in alternative investments in the tax practice at KPMG LLP, in a statement Tuesday. "The G20 is fully expected to endorse the recommendations. Of course, each country will still need to implement the recommendations in their own way. Nevertheless, these rules are focused on the exchanges and wallet providers and seek to impose tax reporting obligations on these entities as they act as on-ramps and off-ramps to the blockchain. The reporting obligations hit fiat to crypto exchanges, crypto to different crypto exchanges and crypto transfers. This is not unlike the U.S. changes to Section 6045 which are supposed to impact U.S. tax reporting in 2023 (although likely to be delayed at this point)."
Crypto companies will need to get ready for the changes. "Organizations that facilitate the selling and trading of digital assets globally will need to start sharing information with regulators," said Denise Hintzke, managing director and global FATCA/CRS tax leader at Deloitte Tax, in a statement. "The CARF provides details of the how, what and when of this new reporting. And changes in the CRS rules will have a big impact on reporting by financial institutions that have been in that regime for a long time."
