Tax professionals have pointed out flaws in the OECD's crypto reporting template.
Updated: Oct 4, 2022
As many in-house tax teams rushed to comment on the steps to implement the framework, the OECD's Centre for Tax Policy and Administration received a record number of business responses to the Crypto Asset Reporting Framework (CARF) proposal.
To comply with the CARF, the architecture of most underlying in-house SAP ERP systems that collect, store, and transmit data to business units, partners, and intermediaries will need to be modified.
"These proposals signify a significant evolution of the existing exchange of information regimes," says Bilal Abba, director of PwC Middle East's Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standard (CRS) operations.
The OECD public consultation on the CARF proposal, which is due to close on May 22 and has already received 76 responses, comes at a critical time for the crypto market, as recent price fluctuations in Bitcoin and other assets have devalued several crypto businesses and forced them to cut costs.
Overcomplicating the CARF by separating anti-money laundering and know-your-customer laws from CRS rules and regulations, according to Lawrence Zlatkin, vice president of tax at Coinbase in New York, will stifle crypto market growth at a time when prices are volatile.
"Tax compliance and tax reporting go hand in hand," he told the consultation, "but imposing special onerous rules for crypto stifles innovation and it might even slow mainstream adoption."
The CARF framework builds on CRS enhancements that address concerns about tax transparency in the digital economy. In their responses to the consultation, several businesses raised two major concerns: the scope of the upcoming reporting regulation and the timeline for implementing the framework.
"Unlocking crypto’s potential requires clear and simple reporting rules that mirror existing rules on financial services," Zlatkin continued.
As distributed ledger technology expands the number of financial market participants beyond traditional financial intermediaries, crypto assets are posing new challenges for tax administrations to ensure taxpayer compliance.
Although the crypto economy has already introduced several more financial market intermediaries, such as wallet providers and exchanges, large swaths of the crypto economy remain unregulated.
With the CARF, the G20/OECD countries hope to close the regulatory gaps in crypto assets. Most crypto assets, such as cold wallets, and intermediaries, such as crypto exchanges, are not covered by the reporting standard, according to the OECD's first comprehensive review of the CRS.
The CARF, on the other hand, mirrors many of the CRS reporting requirements and adds sweeping third-party information requirements for crypto assets that far outnumber the CRS reporting obligations imposed on traditional financial market participants.
Because the model rules appear to include options for national differences based on legal interpretations and available tools, according to Coinbase's Zlatkin, the CARF is at risk of the same poor market standards as the CRS. This allows national rules in both reporting frameworks to differ slightly from the model rules.
"The CRS was meant to be common, but there is significant variation based on local market conditions, maturity, insufficient tax authority systems, etc."
"The CARF is even more complex than the CRS," Zlatkin added. "Under CRS, local tax authorities created additional requirements and variations in the reporting schema as a result of system limitations and local market considerations. We would expect even more variation in the crypto asset market ."
The CARF is made up of three components: rules that can be incorporated into domestic law to collect information from resident crypto asset intermediaries, multilateral competent authority agreements for information exchange, and technical solutions to support information exchange.
It applies to assets that have a digital representation of value and use a cryptographically secured digital ledger or similar technology to validate and secure transactions. Closed loop crypto assets and central bank digital currencies are also eligible for carveouts.
In March, the model rules were released for public comment. The OECD, on the other hand, is seeking corporate feedback on carveouts that are still being considered, such as crypto assets in the form of air miles or other closed loop digital assets.
According to Raffaele Russo, head of the BEPS project at the OECD Centre for Tax Policy and Administration in Paris, the tight deadline for comments indicates that there must be political momentum to advance this agenda item on a multilateral level.
Crypto assets have direct and indirect tax implications. Because the tax treatment of acquiring, holding, and disposing of crypto assets in many countries remains unclear, taxpayers emphasize the importance of voluntary disclosures to normalize tax situations during the transition to CARF.
Consider whether non-fungible tokens (NFTs) should be included in the scope of crypto assets; whether intermediaries should be decentralized finance (DeFi) providers; and whether reporting requirements should include the wallet address.
Companies will need to start budgeting for costly IT upgrades to adapt to the reporting framework, according to some tax directors who submitted suggestions on the CARF to the OECD's tax policy team.
In the long run, Zlatkin and other in-house tax directors proposed a blockchain-based reporting solution for crypto assets, arguing that when all parties share the same information network with real-time updates, there may be more room for early mistakes.
"We consider it useful for the OECD and countries involved to evaluate the use of a blockchain as the infrastructure for providing and exchanging information for tax purposes," said Alan McLean, chair of the OECD's Business and Industry Advisory Committee, who is based in the United Kingdom.
Regardless of the final reporting mechanism, the OECD has already implemented some technical simplifications, such as de minimis thresholds for e-money. Account aggregation rules in the CRS legislation would apply to crypto assets in order to avoid reporting loopholes by spreading amounts across multiple e-money products.
According to Russo, the treatment of NFTs and DeFi in the OECD's proposed crypto asset transparency framework is still unclear, but the draft rules show at least some processes for administrations to adopt.
Because countries implement the standard differently, taxpayers face ongoing compliance challenges, and there are several risks that the overly complex CARF proposal will result in reporting gaps.
The OECD will publish feedback on CARF carveouts that still need to be considered in order to keep the reporting framework simple. Because crypto intermediary clients are not subject to tax reporting requirements, the greater risk of delaying the framework means that they will continue to pose a significant risk to global tax transparency.
By fLEXI tEAM