Author | TaxDAO

1. Introduction

In July 2024, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) reported the document "Bringing Tax Transparency to Crypto-Assets – An Update" to the Organisation for Economic Co-operation and Development (OECD) and G20, detailing the latest developments in the global construction of the Crypto-Asset Reporting Framework (CARF) for tax transparency.

The OECD and G20 are using the Crypto-Asset Reporting Framework (CARF) to promote automatic exchange of tax information globally, ensuring transparency in crypto-asset transactions and reducing the risks of tax evasion and avoidance. Currently, 58 OECD member countries have announced their intention to complete the implementation of CARF by the end of 2027. The TaxDAO research team interprets the key points of this document and the future global trends in tax information exchange.

2. Main Contents of the Document

2.1 Overview of the Document and Key Time Points for CARF Implementation

"Bringing Tax Transparency to Crypto-Assets – An Update" first introduces the background and purpose of the report, discusses the definition, usage, and development of crypto-assets, and emphasizes the challenges of tax transparency and information exchange in the crypto-asset field. It then calls for global new standards for crypto-assets, discussing the G20's efforts to promote tax transparency for crypto-assets and the development process of CARF by the OECD and G20 countries. It further explains the implementation of CARF, detailing the implementation framework, including domestic legislative framework, international legal framework, technical framework, administrative framework, and confidentiality and data protection standards, and discusses how to use the experience of the Global Forum in implementing the Common Reporting Standard (CRS) to implement CARF. It then outlines the work undertaken by the Global Forum to ensure the widespread implementation of CARF and summarizes the progress of the Global Forum in implementing CARF, emphasizing its potential benefits for tax transparency and information exchange.

The goal of the Global Forum is to ensure that the majority of relevant jurisdictions begin automatic exchange of crypto-asset information by 2027. As of the report's release, 58 countries and regions have publicly announced their support for commencing crypto-asset information exchange based on CARF by 2027, including 10 developing countries.

To ensure that countries can start the information exchange of CARF by 2027, the Global Forum has set a key mid-term target, which is to complete the commitment process for CARF by the time of the Global Forum's plenary meeting in 2024 (expected to be held in November 2024). This means that by the end of 2024, the Global Forum will identify the majority of jurisdictions implementing CARF and push these countries to enact domestic laws to commence crypto-tax information exchange by 2027. In addition, developing countries may require technical readiness, and the CARF working group is also discussing whether to provide certain countries with limited flexibility to delay the implementation of CARF if necessary.

2.2 How the Global Forum Will Promote the Implementation of CARF

2.2.1 Introduction to CARF

CARF aims to establish a unified framework for tax information exchange, address tax regulatory issues in the crypto-asset field, and provide tax authorities with more third-party data on taxpayers' crypto-asset activities. CARF is based on the Common Reporting Standard (CRS) and was completed by the OECD in 2023. The framework requires Crypto-Asset Service Providers (RCASPs) to comply with detailed due diligence requirements to identify the information that must be reported and ensure that this information is reported accurately and timely to tax authorities. CARF consists of the following rules and comments: 1. Coverage of crypto-assets; 2. Entities and individuals subject to data collection and reporting requirements; 3. Transactions to be reported and information related to these transactions; 4. Due diligence procedures to identify crypto-asset users and controllers and the related tax jurisdictions for reporting and exchange purposes.

Tax authorities in jurisdictions, upon receiving information reported by RCASPs, organize information exchange and flow under the CARF framework with other tax authorities globally to regulate crypto-assets and ensure tax transparency.

2.2.2 Current Status of CARF Implementation

At the invitation of the G20, the Global Forum established the CARF working group to develop the commitment process for CARF by the end of 2024, ensuring the widespread implementation of CARF globally. According to the plan, participating countries should commence CARF information exchange by 2027. It is believed that the goal of the Global Forum is to ensure that all relevant jurisdictions commence CARF execution at a relatively uniform time to prevent any jurisdiction from becoming a tax evasion "loophole."

To support the implementation of CARF, the Global Forum is developing necessary technical frameworks, including data reporting and exchange systems. These systems will ensure the accuracy and security of information and promote effective cooperation among countries.

2.2.3 Domestic Implementation of CARF

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, require RCASPs to conduct due diligence procedures and report information; establish international legal frameworks to regulate the international exchange of reported information; establish necessary technical frameworks to receive information from RCASPs and exchange it internationally; in addition, countries should meet expected standards related to confidentiality and data protection to ensure that exchanged information remains secure and is appropriately handled.

2.3 The Essence of CARF is to Extend the Automatic Information Exchange Determined by CRS to the Crypto-Asset Field

2.3.1 Introduction to Automatic Exchange of Information (AEOI) System

Automatic Exchange of Information (AEOI) is an international tax cooperation mechanism aimed at enhancing tax transparency and preventing cross-border tax evasion and avoidance. The system achieves this by requiring financial institutions to report financial account information of their non-resident account holders and automatically exchange this information with the tax authorities of the account holders' countries. The core of AEOI is the Common Reporting Standard (CRS), jointly developed by the OECD and G20 countries in 2014. The CRS requires participating countries to collect and report financial account information of their non-resident clients through financial institutions, and then automatically exchange this information among participating countries.

2.3.2 How AEOI Extends to the Crypto-Asset Field

As mentioned earlier, CARF applies the automatic information exchange mechanism of CRS to Crypto-Asset Service Providers (RCASPs), requiring them to report the crypto-asset information of their non-resident clients and automatically exchange this information with the tax authorities of these clients' countries, thereby enhancing tax transparency in the crypto-asset field and preventing tax evasion and avoidance.

2.3.3 Specific Requirements of AEOI

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 holders are non-resident taxpayers and collect necessary information for exchange. Information reporting, financial institutions need to report relevant information to their domestic tax authorities in accordance with prescribed formats and schedules. This information will then be exchanged by tax authorities based on international agreements. Data protection and privacy, during the process of exchanging information, countries need to ensure the security and privacy of data, avoiding disclosure to unauthorized third parties. Finally, in terms of technical standards, to enhance the efficiency and accuracy of information exchange, countries participating in AEOI typically need to adopt uniform technical standards and data formats.

Financial institutions or taxpayers that do not comply with AEOI requirements may be subject to various penalties by relevant countries, including but not limited to fines for violating regulations to compensate for tax evasion or avoidance that causes losses to national tax revenue. In cases of serious violations, relevant countries may also take punitive measures such as revoking business licenses and restricting entry and exit. However, these penalty measures are specifically regulated by the domestic laws of the relevant countries and may vary internationally.

3. Potential Impact of CARF Implementation

First, it enhances tax transparency. The implementation of CARF will significantly enhance tax transparency in the crypto-asset field, enabling tax authorities to more accurately understand taxpayers' holdings of crypto-assets and related income, effectively combating tax evasion and avoidance.

Second, it promotes fair tax competition. By implementing uniform crypto-asset reporting standards globally, CARF helps establish a fair competitive market environment, preventing certain jurisdictions from becoming tax evasion and avoidance havens.

Three, it increases government revenue. Enhancing tax transparency and promoting fair tax competition will help governments increase tax revenue and provide more funding for public services.

Four, it enhances public trust. By combating tax evasion and avoidance, CARF helps enhance public trust in the financial system and public institutions, promoting the stability and development of the financial market.

Overall, the OECD and the Global Forum hope to draw on the experience of CRS and promote the implementation of CARF based on the mechanism of CRS. At the same time, the Global Forum has shown special concern for developing countries, ensuring that they can also benefit from the implementation of CARF while also avoiding them becoming "tax havens." It can be seen that in response to the global and anonymous challenges of crypto-assets, countries around the world will cooperate more closely in addressing the tax regulatory issues of crypto-assets. CARF is expected to enhance global tax transparency in the future, reduce tax evasion, and strengthen institutional trust and global consensus.

References

[1] Feng, J. International Tax Governance of Crypto-Assets: Origin, Current Situation, and Prospects. Tax Research, 2022, (09): 119-126.

[2] PwC. 2024. "Global Crypto-Asset Tax Survey Report 2024"

[3] TaxDAO. 2023. "Introduction to CARF: The Unique 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"

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