Author: TaxDAO
1. Introduction
In July 2024, the Global Forum on Transparency and Exchange of Tax Information (Global Forum) reported to the Organization for Economic Cooperation and Development (OECD) and the G20 a document entitled Bringing Tax Transparency to Crypto-Assets – An Update, which details the latest progress in the global construction of crypto-asset tax transparency (i.e., the Crypto-Asset Reporting Framework, CARF).
The OECD and the G20 use the Crypto-Asset Reporting Framework (CARF) to promote automatic tax information exchange worldwide, ensure transparency in crypto-asset transactions, and reduce the risk of tax evasion and tax avoidance. Currently, 58 OECD member countries have announced that CARF will be implemented by the end of 2027. The TaxDAO research team uses this article to interpret the key points of the document and the future trend of global tax information exchange.
2. Main contents of the document
2.1 Overview of the document and the main time points for CARF implementation
Bringing Tax Transparency to Crypto-Assets-An Update first introduced the background and purpose of the report, discussed the definition, use and development of crypto-assets, and emphasized the challenges of crypto-assets in tax transparency and information exchange; secondly, it called for new global standards for crypto-assets. This part tells about the G20's promotion of tax transparency actions for crypto-assets and discusses the process of OECD and G20 countries working together to develop CARF; thirdly, it explains the implementation of CARF, details the implementation framework of CARF, including domestic legislative framework, international legal framework, technical framework, administrative framework and confidentiality and data protection standards, and discusses how to implement CARF by leveraging the Global Forum's experience in implementing the Common Reporting Standard (CRS); then it explains the work taken by the Global Forum to ensure the widespread implementation of CARF, and finally summarizes the progress of the Global Forum in implementing CARF and emphasizes its potential benefits for tax transparency and information exchange.
The Global Forum aims to ensure that most relevant jurisdictions begin automatic exchange of information (AEOI) on crypto assets by 2027. As of the time of the report, 58 countries and regions have publicly announced their support for starting CARF-based crypto asset information exchange by 2027, including 10 developing countries.
In order to ensure that countries can start the exchange of CARF information on time in 2027, the Global Forum has set a key mid-term goal to complete the commitment process on CARF before the 2024 Global Forum Plenary Meeting (expected to be held in November 2024). This means that by the end of 2024, the Global Forum will identify most of the relevant jurisdictions for the implementation of CARF and promote these countries to formulate and pass domestic laws to start the exchange of crypto tax information on time in 2027. In addition, developing countries may need technical preparation, and the CARF Working Group is also discussing whether to give certain countries limited flexibility to allow them to delay the implementation of CARF if necessary.
2.2 How will the Global Forum promote the implementation of CARF?
2.2.1 Introduction to CARF
CARF aims to establish a unified tax information exchange framework, address crypto asset tax supervision issues, and provide tax authorities with more third-party data on taxpayers' and crypto asset activities. CARF is developed on the basis of CRS and will be completed by the OECD in 2023. The framework requires RCASP (cryptocurrency intermediaries) to comply with detailed due diligence requirements to determine the information that must be reported and ensure that this information can be reported to the tax authorities accurately and in a timely manner. CARF consists of the following rules and annotations: 1. The scope of crypto assets covered; 2. Entities and individuals subject to data collection and reporting requirements; 3. Transactions that need to be reported and information related to these transactions; 4. Due diligence procedures for determining crypto asset users and controllers and relevant tax jurisdictions for reporting and exchange purposes.
After receiving the information from the RCASP report, the tax authorities of various jurisdictions will organize information exchange and information flow with other tax authorities under the CARF framework in order to regulate crypto assets globally and ensure tax transparency.
2.2.2 Current status of CARF implementation
At the invitation of the G20, the Global Forum established a CARF Working Group to develop a commitment process for CARF by the end of 2024 to ensure the widespread implementation of CARF around the world. According to the plan, participating countries should start exchanging information on CARF in 2027. We believe that the goal of the Global Forum is to ensure that all relevant jurisdictions begin to implement CARF at a relatively uniform time to prevent any jurisdiction from becoming a tax avoidance "loophole".
To support the implementation of CARF, the Global Forum is developing the necessary technical framework, including data reporting and exchange systems. These systems will ensure the accuracy and security of information and facilitate effective cooperation among countries.
2.2.3 Implementation of CARF in domestic law
There are significant synergies between CRS and CARF, and the Global Forum plans to leverage these synergies to rapidly implement CARF. To implement CARF, governments need to establish domestic legislative frameworks and require RCASP to perform due diligence procedures and report information; establish an international legal framework to provide for the international exchange of reported information; establish the necessary technical framework to receive RCASP information and exchange it internationally; and countries should also meet the expected standards related to confidentiality and data protection to ensure that the information exchanged remains secure and is properly processed.
2.3 The essence of CARF is to extend the automatic information exchange determined by CRS to the field of crypto assets
2.3.1 Introduction to the AEOI System
Automatic Exchange of Information (AEOI) is an international tax cooperation mechanism that aims to improve tax transparency and prevent cross-border tax evasion and avoidance. The system is implemented by requiring financial institutions to report the financial account information of their non-resident account holders and automatically exchange this information with the tax authorities of the countries where these account holders are located. The core of AEOI is the Common Reporting Standard (CRS), which was jointly developed by the Organization for Economic Cooperation and Development (OECD) and the Group of Twenty (G20) countries in 2014. CRS requires participating countries to collect and report the financial account information of their non-resident customers to the tax authorities through financial institutions, and then this information is automatically exchanged between participating countries.
2.3.2 How AEOI can be extended to crypto assets
As before, CARF applied the CRS's automatic information exchange mechanism to crypto asset service providers (RCASPs), requiring RCASPs to report crypto asset information of their non-resident customers and automatically exchange this information with the tax authorities of the countries where these customers are located. This will improve tax transparency in the crypto asset field and prevent tax evasion and tax avoidance.
2.3.3 Specific requirements of AEOI
The specific requirements of AEOI include: Account due diligence, financial institutions need to conduct due diligence on the accounts they hold to determine whether the account holder is a non-resident taxpayer and collect necessary information for exchange. Information reporting, financial institutions need to report relevant information to their own tax authorities in the prescribed format and timetable. This information will then be exchanged by the tax authorities in accordance with international agreements. Data protection and privacy, in the process of exchanging information, countries need to ensure the security and privacy of data to avoid disclosure to unauthorized third parties. Finally, in terms of technical standards, in order to improve the efficiency and accuracy of information exchange, countries participating in AEOI usually need to adopt unified technical standards and data formats.
For financial institutions or taxpayers that do not comply with AEOI requirements, relevant countries may take a variety of punitive measures, including but not limited to fines on financial institutions or taxpayers that violate regulations to make up for the losses caused to national tax revenue by their tax evasion or tax avoidance. In the case of serious violations, relevant countries may also take punitive measures such as revoking business licenses and restricting entry and exit. However, these punitive measures are specifically stipulated by the domestic laws of relevant countries and vary internationally.
3. Potential impacts of CARF implementation
First, it will improve tax transparency. The implementation of CARF will significantly improve tax transparency in the field of crypto assets, enabling tax authorities to more accurately understand taxpayers' crypto asset holdings and related income, thereby effectively combating tax evasion and tax avoidance.
Second, it promotes fair competition in taxation. By implementing unified crypto asset reporting standards globally, CARF helps establish a fair and competitive market environment and prevents certain jurisdictions from becoming havens for tax evasion and tax avoidance.
Third, increasing government fiscal revenue, improving tax transparency and promoting fair competition in taxation will help the government increase tax revenue and provide more financial support for public services.
Fourth, enhance public trust. By combating tax evasion and tax avoidance, CARF helps enhance public trust in the financial system and public institutions and promote the stability and development of the financial market.
In general, the OECD and the Global Forum hope to learn from the experience of CRS and promote the implementation of CARF with reference to the mechanism of CRS. At the same time, the Global Forum shows special attention to developing countries, on the one hand to ensure that they can also benefit from the implementation of CARF, on the other hand, they do not want them to become "tax havens". It can be seen that in order to cope with the global and anonymous challenges of crypto assets, countries around the world will work more closely together when facing the tax supervision of crypto assets. CARF is expected to improve global tax transparency, reduce tax evasion, and strengthen institutional mutual trust and global consensus in the future.
References
[1]. Feng Jing. International tax governance of crypto assets: origin, current situation and prospects[J]. Tax Research, 2022, (09): 119-126.
[2]. PwC. 2024. Global Crypto Asset Tax Survey Report 2024
[3]. TaxDAO.2023. Introducing CARF: The only international crypto asset tax regulatory framework
[4].An official website of the European Union.2024.《EU defines new rules on crypto-asset information exchange for tax purposes》
[5].PwC.2022.《OECD is expanding CRS to cryptos and presenting a new Crypto-Asset Reporting Framework》
[6].OECD.2024.《OECD REPORT TO G20 FINANCE MINISTERS AND CENTRAL BANK
