OECD Releases a Public Consultation Document on Crypto-Asset Reporting

The Organization for Economic Co-operation and Development (OECD) has released Released a Public Consultation Document on Crypto-Asset Reporting. This consultation has been bought in wake of the growing market for Crypto-Assets (including cryptocurrencies, as well as cryptography-based tokens).

Crypto-Assets: The Impact on Financial Markets

1. The market for Crypto-Assets (including cryptocurrencies, as well as cryptography-based tokens) is growing rapidly. This is also affecting tax administrations, which must adapt to the growing role of Crypto Assets. In particular, several characteristics of Crypto-Assets are likely to pose novel challenges in tax administrations’ efforts to ensure taxpayer compliance.

2. Firstly, Crypto-Assets’ reliance on cryptography and distributed ledger technology, in particular blockchain technology, means they can be issued, recorded, transferred and stored in a decentralized manner, without the need to rely on traditional financial intermediaries or central administrators.

3. In addition, the Crypto-Asset market has given rise to a new set of intermediaries, such as Crypto-Asset exchanges and wallet providers, which may currently only be subject to limited regulatory oversight. Crypto-Asset exchanges typically facilitate the purchase, sale and exchange of Crypto-Assets for other Crypto-Assets or fiat currencies. Wallet providers offer digital “wallets”, which individuals can use to store their Crypto-Assets via authorization through public and private keys. These services may either be provided in online (i.e. “hot”) wallets, or via service providers offering products allowing individuals to store their Crypto-Assets offline on downloaded (i.e. “cold”) wallets. Both types of products are relevant for tax authorities.

Repercussions of Crypto-Assets on Global Tax Transparency

4. The Crypto-Asset market, including both the Crypto-Assets offered, as well as the intermediaries involved, poses a significant risk that recent gains in global tax transparency will be gradually eroded. In particular, the Crypto-Asset market is characterized by a shift away from traditional financial intermediaries, the typical information providers in third-party tax reporting regimes, such as the Common Reporting Standard (CRS), to a new set of intermediaries which only recently became subject to financial regulation and are frequently not subject to tax reporting requirements with respect to their clients. Furthermore, the ability of individuals to hold Crypto-Assets in wallets unaffiliated with any service provider and transfer such. Crypto-Assets across jurisdictions, poses a risk that Crypto-Assets will be used for illicit activities or to evade tax obligations. Overall, the characteristics of the Crypto-Asset sector have reduced tax administrations’ visibility on tax-relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed.

5. The CRS, published by the OECD in 2014, is a key tool in ensuring transparency on cross-border financial investments and in fighting offshore tax evasion. The CRS has improved international tax transparency by requiring jurisdictions to obtain information on offshore assets held with financial institutions and automatically exchange that information with the jurisdictions of residence of taxpayers on an annual basis. However, Crypto-Assets will in most instances not fall within the scope of the CRS, which applies to traditional financial assets and fiat currencies. Even where Crypto-Assets do fall within the definition of financial assets, they can be owned either directly by individuals in cold wallets or via Crypto Asset exchanges that do not have reporting obligations under the CRS, and are therefore unlikely to be reported to tax authorities in a reliable manner.

6. Therefore, the current scope of assets, as well as the scope of obliged entities, covered by the CRS do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in, or hold, Crypto-Assets.

Increasing Global Tax Transparency with Respect to Crypto-Assets

7. Recognizing the importance of addressing the above-mentioned tax compliance risks with respect to Crypto-Assets, the OECD is developing the Crypto-Asset Reporting Framework (the “CARF”), designed to ensure the collection and exchange of information on transactions in Crypto-Assets. The CARF consists of three building blocks:

• The CARF rules and commentary that can be transposed into domestic law to collect information from resident Crypto-Asset intermediaries;
• A framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF with jurisdiction(s) of residence of the Crypto-Asset Users, based on relevant tax treaties, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters; and
• Technical solutions to support the exchange of information.

8. This document contains the current draft of the first building block, i.e. the rules and commentary. Once the work on the rules and commentary is completed, the second and third building blocks will be further developed.

Reporting Requirements

 The following four types of Relevant Transactions are reportable under the CARF:

• exchanges between Crypto-Assets and Fiat Currencies;
• exchanges between one or more forms of Crypto-Assets;
• Reportable Retail Payment Transactions; and
• transfers of Crypto-Assets.

Intermediaries in Scope

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 ?

To Read More Details Download PDF Given Below: