Interpreting the latest encrypted tax information exchange Consensus: How will CARF be implemented?

Author | TaxDAO

1. Introduction

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

The OECD and G20 use the Cryptocurrency Assets Reporting Framework (CARF) to promote automatic exchange of tax information globally, ensuring transparency in cryptocurrency asset transactions and reducing the risks of tax evasion and avoidance. Currently, 58 OECD member countries have announced 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 trend of global tax information exchange based on this article.

2. The main content of the file

2.1 Overview of File Content and Main Implementation Time Points of CARF

Bringing Tax Transparency to Crypto-Assets-An UpdateFirst, the background and purpose of the report are introduced, discussing the definition, uses, and development of encryption assets, and emphasizing the challenges of encryption assets in tax transparency and information exchange; second, the call for a new global standard for encryption assets is discussed, detailing the G20’s push for tax transparency action for encryption assets and the process of OECD and G20 cooperation in developing CARF; third, the implementation of CARF is explained, providing a detailed introduction to the implementation framework of CARF, including domestic legislative framework, international legal framework, technical framework, administrative framework, and confidentiality and data protection standards, and discussing how to utilize the experience of the global forum in implementing the Common Reporting Standard (CRS) to implement CARF; then, the work of the global forum in ensuring the widespread implementation of CARF is described, and finally, the progress of the global forum in implementing CARF is summarized, emphasizing its potential benefits for tax transparency and information exchange.

The global forum aims to ensure that the majority of relevant jurisdictions commence automatic information exchange (AEOI) of encryption assets by 2027. As of the time of reporting, 58 countries and jurisdictions have publicly announced their support to commence CARF-based encryption asset information exchange before 2027, including 10 developing countries.

To ensure that countries can initiate the information exchange of CARF on time in 2027, the Global Forum has set a key midterm target, which is to complete the commitment process on CARF before the Global Forum plenary meeting in 2024 (expected to be held in November 2024). This means that by the end of 2024, the Global Forum will identify most of the jurisdictions that will implement CARF and promote these countries to enact domestic laws to initiate the tax information exchange on encryption in 2027. In addition, developing countries may need technical readiness, and the CARF working group is also discussing whether to grant limited flexibility to certain countries to allow them to initiate the implementation of CARF with latency when 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 framework for the exchange of tax information, addressing the taxation and regulatory issues of Crypto Assets, and providing tax authorities with third-party data on taxpayers’ Crypto Assets activities. CARF is developed based on CRS and will be finalized by the OECD in 2023. This framework requires RCASP (Cryptocurrency intermediary institutions) to comply with detailed due diligence requirements to identify information that needs to be reported and ensure that this information is accurately and timely reported to tax authorities. CARF consists of the following rules and annotations: 1. Coverage of Crypto Assets; 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 Assets users and controllers for reporting and exchange purposes, as well as relevant tax jurisdictions.

Tax authorities in each jurisdiction, upon receiving the information reported by RCASP, exchange and circulate information with other tax authorities within the framework of CARF to supervise encryption assets globally and ensure tax transparency.

2.2.2 Implementation Status of CARF

At the invitation of the G20, the Global Forum has established a CARF working group, responsible for developing the commitment procedure of CARF by the end of 2024 to ensure its widespread implementation globally. 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 implementing CARF at a relatively uniform time to prevent any jurisdiction from becoming a tax avoidance “loophole”.

In order 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 promote effective cooperation among countries.

2.2.3 CARF’s domestic legislation

There is a significant synergy between CRS and CARF, and the Global Forum plans to utilize these synergies to rapidly implement CARF. In order to implement CARF, governments need to establish domestic legislative frameworks and require RCASP to conduct due diligence procedures and report information; establish an international legal framework to regulate the international exchange of reported information; establish the necessary technical framework to receive information from RCASP and exchange it internationally; In addition, countries should also meet expected standards related to confidentiality and data protection to ensure that the exchanged information remains secure and is properly handled.

2.3 The essence of CARF is to extend the automatic information exchange determined by CRS to the field of encryption assets

2.3.1 Introduction to 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. At the core of AEOI is the Common Reporting Standard (CRS), which was jointly developed by the Organisation for Economic Co-operation and Development (OECD) and the G20 countries in 2014. The CRS requires participating countries to collect and report financial account information of their non-resident customers through Financial Institutions to the tax authorities, which is then automatically exchanged between the participating countries.

2.3.2 How to expand AEOI to the field of encryption assets

As before, CARF applies the automatic information exchange mechanism of CRS to encryption asset service providers (RCASP), requiring RCASP to report encryption asset information of their non-resident clients and automatically exchange this information with the tax authorities of these clients’ countries, which can enhance tax transparency in the field of encryption assets and prevent tax evasion and avoidance.

2.3.3 Specific Requirements of AEOI

The specific requirements of AEOI include: account due diligence, Financial Institution needs to conduct due diligence on its held accounts to determine whether the account holders are non-resident taxpayers, and collect necessary information for exchange. Information reporting, Financial Institution needs to report relevant information to the domestic tax authorities in the prescribed format and timetable. This information will then be exchanged by the tax authorities in accordance with the international protocol. Data protection and privacy, during the process of exchanging information, each country must ensure the security and privacy of the data, and 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 who do not comply with AEOI requirements, relevant countries may take various punitive measures, including but not limited to imposing fines on non-compliant Financial Institutions or taxpayers to compensate for the loss of national tax revenue caused by their tax evasion or avoidance behavior. In cases of serious violations, relevant countries may also take disciplinary measures such as revoking business licenses and restricting entry and exit. However, these punitive measures are specifically regulated by the domestic laws of the relevant countries and may vary internationally.

3. Potential Impacts of CARF Implementation

One is to improve tax transparency, the implementation of CARF will significantly improve the tax transparency in the field of encryption assets, allowing tax authorities to more accurately understand the amount of encryption assets held by taxpayers and related income, thereby effectively combating tax evasion and avoidance.

Second, promote fair competition in taxation. By implementing uniform encryption asset reporting standards globally, CARF helps establish a fair competitive market environment and prevent certain jurisdictions from becoming tax havens.

The third is to increase government fiscal revenue, improve tax transparency, and promote fair competition in taxation, which will help the government increase tax revenue and provide more financial support for public services.

Fourth, to enhance public trust, CARF helps strengthen public trust in the financial system and public institutions, and promote the stability and development of the financial market by cracking down on tax evasion and avoidance.

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 shows special follow-up to developing countries, ensuring that they can also benefit from the implementation of CARF, and also hoping that they will not become ‘tax havens’. It can be seen that in response to the global challenges of encryption assets and anonymity, countries around the world will cooperate more closely in dealing with the taxation regulation of encryption assets. CARF is expected to improve global tax transparency, reduce tax evasion, and strengthen institutional trust and global consensus.

References

. Feng Jing. Encryption asset international tax governance: origin, current situation and prospect[1][J].Tax Research, 2022,(09):119-126.

.PwC.2024. “2024 Global Encryption Asset Tax Survey Report”[2]

.TaxDAO.2023. “Introduction to CARF: The Only International Encryption Asset Tax Regulatory Framework”[3]

.An official website of the European Union.2024.《EU defines new rules on crypto-asset information exchange for tax purposes》[4]

.PwC.2022.《OECD is expanding CRS to cryptos and presenting a new Crypto-Asset Reporting Framework》[5]

.OECD.2024.《OECD REPORT TO G20 FINANCE MINISTERS AND CENTRAL BANK[6]