1. Introduction
In July 2024, the Global Forum on Transparency and Exchange of Information for Tax Purposes presented a report to the Organization for Economic Co-operation and Development (OECD) and the G20 titled “Bringing Tax Transparency to Crypto-Assets - An Update.” The report outlines the latest global progress in establishing tax transparency for crypto assets, specifically through the Crypto-Asset Reporting Framework (CARF).
The OECD and G20 utilize the Crypto-Asset Reporting Framework (CARF) to promote the automated exchange of tax information globally, aiming to ensure transparency in crypto-asset transactions and reduce the risk of tax evasion and avoidance. As of now, 58 OECD member countries have announced that the CARF will be finalized by the end of 2027. In this article, the TaxDAO research team will explain the key aspects of the document and discuss the future trends in global tax information exchange.
2. Key Points of the Document
2.1 Overview of the Contents of the Document and the Main time Points for CARF Implementation
“Bringing Tax Transparency to Crypto-Assets - An Update” begins with an introduction to the report’s background and purpose, discussing the definition, uses, and development of crypto assets while highlighting the challenges they present in terms of tax transparency and information exchange. This is followed by a call for a new global standard for crypto assets, detailing the G20’s push for tax transparency measures and describing the process by which the OECD collaborated with G20 countries to develop the Crypto-Asset Reporting Framework (CARF).
The report then provides an explanation of CARF implementation, outlining the framework for CARF, which includes the domestic legislative framework, international legal framework, technological framework, administrative framework, and confidentiality and data protection standards. It also discusses how to leverage the G20’s experience in implementing the Common Reporting Standard (CRS). Subsequently, the report describes the work undertaken by the Global Forum to ensure the widespread implementation of CARF. The report concludes by summarizing the Global Forum’s progress in implementing CARF and highlighting its potential benefits for tax transparency and information exchange.
The Global Forum’s goal is to ensure that the majority of relevant jurisdictions begin the automatic exchange of information (AEOI) for crypto assets by 2027. At the time of the report’s publication, 58 countries and territories had publicly announced their support for commencing CARF-based crypto asset information exchange by 2027, including 10 developing countries.
To ensure that countries are prepared to launch CARF-based information exchanges on schedule in 2027, the Global Forum on Transparency and Exchange of Information for Tax Purposes (GFMD) has set a key interim target of completing a commitment process on CARF by the 2024 GFMD Plenary Meeting, which is expected to take place in November 2024. This means that by the end of 2024, the Global Forum aims to identify the majority of relevant jurisdictions that will implement CARF and will encourage these countries to develop and adopt domestic laws to enable the timely launch of crypto asset information exchange in 2027.
Additionally, developing countries may require technical preparations, and the CARF Working Group is currently discussing whether to grant limited flexibility to certain countries, allowing them to delay the launch of CARF implementation if necessary.
2.2 How the Global Forum will Advance CARF Implementation
2.2.1 Introduction to CARF
The Crypto-Asset Reporting Framework (CARF) aims to establish a harmonized tax information exchange system to address crypto-asset tax regulation and to provide tax authorities with more third-party data on taxpayer activities involving crypto assets. CARF is being developed based on the Common Reporting Standard (CRS) and is expected to be finalized by the OECD in 2023. The framework requires Reporting Crypto-Asset Service Providers (RCASPs) to comply with detailed due diligence requirements to identify the information that must be reported and to ensure that this information is accurately and promptly submitted to the tax authorities.
CARF consists of the following rules and guidelines:
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The scope of crypto assets to be covered; -
The entities and individuals subject to data collection and reporting requirements; -
The transactions that must be reported and the information related to them; and -
The due diligence procedures for identifying users and controllers of crypto assets for reporting and exchange purposes, as well as the relevant tax jurisdictions.
Upon receiving the information reported by RCASPs, the tax authorities in each jurisdiction organize the exchange and flow of information with other tax authorities under the CARF framework 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 the CARF Working Group, which is responsible for developing a commitment process for CARF by the end of 2024 to ensure its wide implementation globally. According to the plan, participating countries are expected to commence CARF information exchange in 2027. In our view, the goal of the Global Forum is to ensure that all relevant jurisdictions begin implementing CARF within a relatively uniform timeframe 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 Domestic Law Implementation of CARF
There are significant synergies between CRS and the CARF, and the Global Forum plans to leverage these synergies to accelerate the implementation of CARF.
To implement CARF, governments will need to establish domestic legislative frameworks that require RCASPs to carry out due diligence procedures and report relevant information. They must also develop international legal frameworks to facilitate the exchange of reported information across borders and establish the necessary technological frameworks to receive information from RCASPs and exchange it internationally. Additionally, countries should adhere to expected standards related to confidentiality and data protection to ensure that the exchanged information remains secure and is handled appropriately.
2.3 The Essence of CARF is to Extend the Automatic Exchange of Information Identified by the CRS to the Crypto-Asset Space
2.3.1 Introduction to the AEOI Regime
The Automatic Exchange of Information (AEOI) is an international tax cooperation mechanism designed to enhance tax transparency and prevent cross-border tax evasion and avoidance. The system operates by requiring financial institutions to report information on the financial accounts of their non-resident account holders, which is then automatically exchanged with the tax authorities of the countries where these account holders are domiciled.
At the core of AEOI is CRS, developed by the Organisation for OECD in collaboration with the G20 countries in 2014. The CRS requires participating countries to collect and report information on the financial accounts of their non-resident clients through financial institutions, which is then automatically exchanged between participating countries.
2.3.2 How the AEOI Extends to Crypto Assets
Similar to (CRS, CARF applies the AEOI mechanism to RCASPs by requiring them to report information on the crypto assets of their non-resident clients and to automatically exchange this information with the tax authorities of the countries where these clients are domiciled. This approach enhances tax transparency in the crypto asset sector and helps prevent tax evasion and avoidance.
2.3.3 AEOI Specific Requirements
The specific requirements of the Automatic Exchange of Information (AEOI) include the following:
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Account Due Diligence: Financial institutions are required to conduct due diligence on the accounts they hold to determine whether the account holders are non-resident taxpayers and to collect the necessary information for exchange.
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Information Reporting: Financial institutions must report relevant information to the tax authorities in their home country according to a prescribed format and timetable. This information is then exchanged by the tax authorities in accordance with international agreements.
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Data Protection and Privacy: During the process of exchanging information, countries need to ensure the security and privacy of the data, preventing unauthorized third-party access or data leakage.
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Technical Standards: To improve the efficiency and accuracy of information exchange, countries participating in AEOI are generally required to adopt uniform technical standards and data formats.
For financial institutions or taxpayers that fail to comply with AEOI requirements, relevant countries may impose a range of penalties, including, but not limited to, fines to compensate for the loss of national tax revenues caused by tax evasion or avoidance. In cases of serious violations, countries may also take disciplinary measures such as revoking business licenses or restricting entry and exit. However, these penalties are specified in the domestic laws of the respective countries and may vary internationally.
3.Potential Impact of CARF Implementation
Firstly, the implementation of the Crypto-Asset Reporting Framework (CARF) will significantly enhance tax transparency in the crypto asset sector, allowing tax authorities to gain a more accurate understanding of taxpayers’ crypto asset holdings and related income, thereby effectively combating tax evasion and avoidance.
Secondly, CARF promotes fair competition in taxation. By establishing a uniform reporting standard for crypto assets globally, CARF helps create a level playing field in the market and prevents certain jurisdictions from becoming safe havens for tax evasion and avoidance.
Thirdly, CARF is expected to increase government revenue. Improved tax transparency and fair competition in taxation will enable governments to increase tax revenue, providing more funding for public services.
Fourthly, CARF will enhance public trust. By combating tax evasion and avoidance, CARF will help strengthen public trust in the financial system and public institutions, thereby promoting the stability and development of financial markets.
Overall, the Organisation for Economic Co-operation and Development (OECD) and the Global Forum aim to leverage the experience gained from the Common Reporting Standard (CRS) to facilitate the implementation of CARF, using the CRS mechanism as a reference. Meanwhile, the Global Forum pays special attention to developing countries, aiming not only to ensure that they benefit from CARF implementation but also to prevent them from becoming “tax pits.” CARF is anticipated to improve global tax transparency, reduce tax evasion, and strengthen mutual trust and global consensus in the future.
