Extension of reporting obligations to crypto-asset and e-money service providers

24/10/22

In brief

On 10 October 2022, the OECD published a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets. In parallel, the OECD released amendments to the Common Reporting Standard (CRS) to comprehensively cover digital financial products and to improve the quality of the reported data. 

In details

1/ Crypto-Asset Reporting Framework

Considering that under CRS, the current definitions of Financial Institution and Financial Assets do not provide sufficient transparency on transactions with and positions held in crypto-assets, the OECD developed a new reporting standard for this type of assets (Crypto-Asset Reporting Framework - “CARF”). 

Under the CARF, entities and individuals facilitating exchanges between crypto-assets, crypto-assets and Fiat Currencies as well as transfers (including reportable retail payment transactions) of relevant crypto-assets for or on behalf of customers are considered Reporting Crypto-Asset Service Providers and have client on-boarding and transaction reporting obligations.

The CARF report has to be filed once a year and needs to disclose, for each type of relevant crypto-asset held by a reportable client, the aggregate fair market value, the aggregate number of units and the number of relevant transactions (incl. acquisitions, disposals and exchange transactions).  

Nominative data exchanged on clients will be similar to what is required under CRS (e.g. name, address, jurisdiction of tax residence, tax identification number (TIN), information on Controlling Persons etc). Such data should also be collected in a similar manner as for CRS by obtaining, as part of the client on-boarding process, a self-certification. This document should be reviewed to ensure that it is valid and that the information provided is reasonable. For clients that are entities, a look-through approach has to be taken for Passive Entities in order to identify (and report if need be) their Controlling Persons as defined under the 2012 FATF recommendations (as updated).

At the same time, the amendments to the CRS clarify that Investment Entities investing in relevant crypto-assets as well as entities holding this class of assets in custody qualify as Financial Institutions and should have CRS reporting obligations. However, the latter will have the choice not to report gross proceeds from the disposal of crypto-assets to the extent that this information will be reported under the CARF.

2/ Extension of Financial Institution definition to E-Money Institutions

The current definition of Depository Institution under CRS targets entities that collect deposits from customers in the ordinary course of a banking or similar business. As such, most E-Money Institutions (EMIs) currently do not have any CRS client on-boarding or reporting obligations. With the amendments to the CRS, entities that hold specific Electronic Money Products or Central Bank Digital Currencies for the benefit of customers become Financial Institutions under CRS. As such, they need to collect and review self-certification forms from their new customers as from the entry into force of the changes. For pre-existing customers, those in-scope EMIs need to determine their tax residence and CRS status either based on a self-certification or information at their disposal or that is publicly available. 

However, smaller accounts that represent specific Electronic Money Products held for the benefit of a customer will be excluded from these review and reporting requirements (in case the rolling average 90 day end-of-day aggregate account balance or value during any period of 90 consecutive days did not exceed USD 10,000 at any day during the reporting period).

3/ Additional information to be reported under CRS

The amendments to the CRS also include additional reporting requirements for all types of Financial Institutions.  In particular, the latter will need to indicate whether the accounts reported were opened prior to the entry into force of CRS or after and also indicate whether a self-certification was obtained. Indeed by doing so, tax authorities might be able to identify potential gaps in the on-boarding process of Financial Institutions. For example, if for a so-called new account, a self-certification has not been obtained or if it is reported without a TIN, this may indicate that the self-certification review process was not done properly.

Financial Institutions will also have to indicate the category of Financial Accounts they maintain (e.g. is it a custodial account, an equity interest etc.). This would allow tax authorities to have a better insight on the wealth of the reported persons. 

In addition, the reporting will also need to indicate whether the account is a joint account and if so the number of joint account holders. 

Finally, in the case of trusts that qualify as Investment Entities, the role(s) by virtue of which a person is reported as equity interest holder should be disclosed as well (e.g. as settlor or beneficiary) as it is currently the case for Controlling Persons of trusts that qualify as Passive Non-Financial Entities (NFEs).

What’s next?

Over the coming months, the OECD will work on an implementation package (including IT schemas, user guides and coordinated implementation timelines) to ensure a consistent international application and transposition into domestic legislation.

At the same time, we should expect a release from the European Commission of a proposed 8th version of the Directive on Administrative Cooperation (DAC 8) to take into account both the CARF and the CRS amendments. 

Once the implementation package is ready and the new Directive has been released, impacted persons will only have a short period of time to adapt their processes and systems. It is therefore important to already start adapting them now.

In addition, with the additional fields in the CRS reporting schema, tax authorities will be in a better position to challenge Financial Institutions regarding clients or investors that have not been sufficiently documented. In particular, we would recommend Financial Institutions to start or continue efforts to collect missing TINs and self-certification forms.

Our experts are available to further discuss the above and help you to understand the impact that the new transparency framework and the CRS amendments might have on your organisation / group. Our team can assist you with:

  • Analysing any potential reporting requirements of all entities in your group; 
  • Reviewing your current on-boarding process to ensure that additional information will be collected and stored in your system; 
  • Reviewing self-certifications obtained from clients, investors or users;  
  • Reporting through our online collaborative platform;
  • Drafting or review of procedures and your control matrix;
  • Performing due diligence on your service providers; 
  • Organising training sessions.