Sign up for tax alert emails GTNU homepage Tax newsroom Email document Print document Download document
October 17, 2022
OECD publishes final Crypto-Assets Reporting Framework and amendments to Common Reporting Standard
On 10 October 2022, the Organisation for Economic Co-operation and Development (OECD) published their final report which details new and amended reporting requirements covering the reporting of crypto-assets and e-money. The report also contains broader revisions to the existing Common Reporting Standard (CRS).
The document covers two main areas:
The OECD first introduced the CRS in 2014, building on the United States Foreign Account Tax Compliance Act (FATCA) regime. In overview, those rules require banks and other Financial Institutions (FIs) to report on assets that they hold for clients who are resident outside of the country. The information is reported to their local tax authority, which then exchanges that information with other participating jurisdictions.
Since 2016, more than 100 countries have signed up to participate in the CRS. In the European Union (EU), those rules were adopted through an amendment to the Directive on Administrative Co-operation in the field of taxation (DAC), commonly referred to as DAC2.
Those rules have recently been repurposed to require reporting by digital platforms on their sellers, with the digital platform rules expected to be adopted first in the EU (through the 6th amendment to the DAC (DAC7) from 2023.
The OECD released the initial draft of these rules as a consultation document in March 2022.1 Written comments were requested by 29 April 2022, and the OECD received a large number of comment submissions from industry and professional bodies, which are posted on the OECD website.
What has changed since the consultation?
The final rules are largely the same as those proposed in March, which is unsurprising given the close alignment to the already in force CRS.
However, a number of key changes have been made, which address comments received on the initial draft:
E-money and amendments to the CRS
The OECD has indicated that further work is required, including:
The OECD has also indicated that it is working to a “ensure a broad implementation of the CARF as the single global reporting framework for Relevant Crypto-Assets.”
The list of jurisdictions that plan to adopt CARF will be of considerable interest to affected institutions. Many comments noted the risk that a jurisdiction that did not adopt the CARF could gain an unfair competitive advantage over adopting jurisdictions. To a lesser extent, the same can also be said for decentralized exchanges, where there may be no one who exercises sufficient control to enforce documentation and reporting requirements.
At the same time, CARF should not be viewed in isolation, but as part of a rapidly growing body of regulation applying to the crypto-assets industry. Developments like the EU’s Markets in Crypto-Assets Regulation (MiCA), which will likely be implemented as of 2024, will narrow the circumstances in which non-adopting jurisdictions for CARF gain an advantage, by increasingly requiring a local presence for regulatory purposes which will likely lead to a reporting requirement under CARF.
Review of the Rules: The Crypto-Asset Reporting Framework
The CARF is substantially based on the model of the CRS. However, rather than requiring reporting on assets that are held, it would require reporting on certain transactions.
The rules have a wide scope of both transactions and providers. The aim appears to be to capture all businesses operating within the crypto-space, including those that are currently only subject to limited regulatory oversight.
The OECD notes that some key aspects required for CARF adoption are still to be agreed and published, including:
Separately, the OECD notes that work is ongoing to ensure a broad implementation of the CARF as the single global reporting framework for Relevant Crypto-Assets.
The OECD also notes that it will continue developing guidance to support the consistent application of the CARF, including on the definition of Relevant Crypto-Assets and in particular the criteria for adequately determining that a Crypto-Asset can or cannot be used for payment or investment purposes, as well as paying particular attention to the development of decentralized finance.
The obligations under the Framework apply to “Reporting Crypto-Asset Service Providers” (CASPs) which includes any individual or entity that as a business provides a service to “effectuate” for or on behalf of customers a Reportable Transaction including making available a trading platform.
The final package notes that service providers who make a trading platform available will be in scope to the extent that an entity or individual exercises sufficient control over the platform that they could comply with the due diligence and reporting requirements under CARF. That definition is likely to exclude software providers, although many solutions package both software and access to services, which will need to be assessed separately. The analysis for decentralized exchanges and other decentralized finance may be more nuanced, particularly where the decentralized application is overseen by a Decentralized Autonomous Organization or DAO.
It is noted that these providers are expected to also fall within the scope of obligated entities for FATF purposes (i.e., virtual asset service providers), so they should be able to collect and review documentation from their customers, including anti-money laundering or know-your-client documentation.
CASPs are required to report three categories of Relevant Transactions:
There are similarities here to the evolving approach under anti-money laundering rules, which initially targeted the point of exchange between fiat and crypto and increasingly are targeting the point of transactions.
The final rules align assets in scope to those assets treated as virtual assets under FATF guidance for anti-money laundering purposes.
This restricts the assets in scope to only those used for investment or payment services. This intention had been included in the preamble to the initial draft of the CARF but was not reflected in the detailed rules; the final rules are now aligned to that approach.
The Commentary to the CARF goes into further detail, and proposes two questions for CASPs to consider:
The OECD notes that in the case of doubt about whether the asset could be used for payment or investment purposes, the CASP should assume the asset is a relevant crypto-asset.
Particular Crypto-Asset considerations
Requirements for Crypto-Asset Service Providers
Beyond the scoping provisions above, the rules would provide a familiar landscape for the obligations of service providers based on the CRS, which includes:
The final CARF includes additional detailed Commentary on due diligence and how to treat particular scenarios. It also includes detailed rules for valuing crypto-assets in the absence of an active market on the day of the transaction. The rules create a waterfall for valuation that includes:
Reporting of wallet addresses
The OECD’s initial draft indicated the potential inclusion of wallet addresses when reporting the transfers of crypto-assets outside of the control of a CASP. Many stakeholder comment submissions raised concerns about this approach.
The OECD has removed that requirement. Instead, CASPs are required to report aggregate transfers to wallet addresses not known to be associated with a virtual asset service provider or financial institution (i.e., wallet addresses that are not subject to reporting by other CASPs).
In addition, CASPs are required to hold those external wallet addresses for a period of five years. This requirement suggests that tax authorities may still request this data, albeit on a one-to-one basis with CASPs rather than the bulk data collection envisaged in the earlier draft. This in turn suggests that tax authorities may be planning to use Exchange of Information on Request measures contained in tax treaties and tax information exchange agreements.
Review of the Rules: Amendments to the Common Reporting Standard
There are three main groups of amendments to the CRS:
Interactions with the CARF
The amendments to the CRS to manage the interaction with the CARF include:
The rules do provide that where transactions are reported under the CARF, by election they do not need to be included in gross proceeds reporting.
Changes to bring e-money into scope
E-money products and CBDCs are brought into scope with the aim of ensuring a level-playing field between digital money products and traditional bank accounts and to ensure consistent reporting outcomes.
The definition of depository institution is amended to include in addition to entities that “accept deposits in the ordinary course of a banking or similar business,” any entity “that holds Specified Electronic Money Products or Central Bank Digital Currencies for the benefit of customers.” This means that any organization that holds cash on deposit will potentially be in scope as an FI – and is likely to have an impact on organizations beyond e-money.
The rules also introduce the concept of “Specified Electronic Money Products,” which mirrors e-money definitions in other regulations.
The rules are amended so that any institutions/accounts that are brought into scope as a result of this change (or any other change) would be pre-existing accounts if they opened before the future implementation date, giving two years from that date to complete reviews, self-certifications, etc.
Two new categories of Excluded Accounts are added for products considered to be low-risk:
Changes to improve compliance
The amendments to the CRS include:
Much of the Framework remains the same as the draft rules published for consultation in March, which were viewed by many as requiring substantial changes to customer onboarding, data capture and reporting capabilities.
Following the introduction of the CRS, the global benchmark for implementation projects of this scale and scope is estimated at around 18 months. These will require changes to customer experience as well as legal terms and conditions, communications, customer support and public documents. While many service providers might expect to have better data capture and transformation capabilities than traditional financial institutions, the CARF will present other implementation challenges, including the imposition of data collection within a new decentralized environment.
Affected Crypto-Asset Service Providers should start to assess the scale of changes that will be required and begin implementation efforts as soon as possible, in order to be ready to respond to any early adopting jurisdictions.
any financial institutions will need to consider both the CARF and the CRS changes across their organizations. While some of the CRS changes have been anticipated, there are likely to be substantial data uplift requirements to comply with reporting changes and the addition of new data elements. At the same time, many financial institutions may expect to be offering crypto-currency or digital assets by the time that CARF is introduced and should engage with the rules and tax authorities now in preparation for future years.
For additional information with respect to this Alert, please contact the following:
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Hamburg
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Frankfurt
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP, Oslo
Ernst & Young, Singapore
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States)