In 2014 the OECD first published the Common Reporting Standard (“CRS”) for an Automatic Exchange of Information in Tax Matters (“AEoI”). In Switzerland, the AEoI has been in place since 2017. Since then, crypto assets have largely developed as a new asset class.
As the CRS was written with traditional Financial Institutions and assets in mind, in most cases crypto assets do not fall within the CRS’s current scope. To catch up with the fast development of the crypto world, the OECD has now published a proposal for an extensive Crypto Asset Reporting Framework (“CARF”) for crypto-asset service providers as well as a comprehensively revised CRS.
New reporting requirements for crypto-asset service providers
Purpose and scope
The CARF introduces extensive due diligence and reporting obligations for Reporting Crypto-Asset Service Providers. The term “Reporting Crypto-Asset Service Provider” means any individual or entity that, as a business, provides a service effectuating exchange transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such exchange transactions, or by making available a trading platform. The term therefore covers most crypto-asset brokers, dealers and exchange service providers.
Under the proposed rules, the following four types of relevant transactions are reportable by Reporting Crypto-Asset Service Providers:
- Exchanges between crypto assets and fiat currencies (i.e. the official currency of a jurisdiction);
- Exchanges between one or more forms of crypto assets;
- Reportable retail payment transactions (i.e. a transfer of relevant crypto assets in consideration of goods or services); and
- Transfers of crypto assets
Any of the above transactions are reportable if they concern “Relevant Crypto Assets”. That term is widely interpreted and comprises all crypto assets except closed-loop crypto assets (i.e. certain crypto assets that can only be exchanged or redeemed within a fixed network or environment for specified goods and services, such as food, book, travel, restaurant vouchers, digital music, games, other media, etc.) and central bank digital currencies (i.e. any digital fiat currency issued by a central bank).
Due diligence requirements
Under the CARF, Reporting Crypto-Asset Service Providers need to perform due diligence procedures in order to identify any of their clients that are reportable crypto-asset users, i.e. clients that are resident in a reportable jurisdiction for CRS purposes. As part of these due diligence procedures, Reporting Crypto-Asset Service Providers need to:
- For individual users: obtain a self-certification from each crypto-asset user, stating the user’s residence for tax purposes;
- For users that are entities: obtain a self-certification from the crypto-asset user, stating the entity’s status and residence for tax purposes, and the entity’s Controlling Persons (except where the entity is an Active Entity or an Excluded Person such as a Financial Institution);
- Confirm the reasonableness of such self-certification based on the information obtained by the Reporting Crypto-Asset Service Provider, including any documentation collected pursuant to AML/KYC Procedures.
For existing clients as of the implementation date of the CARF (so-called pre-existing users), Reporting Crypto-Asset Service Providers are given one year to obtain the above self-certifications. Importantly (unlike the current CRS rules), the proposed CARF rules provide that where no self-certification can be obtained within that year, the crypto-asset service provider must refuse to effectuate any further relevant transactions on behalf of that client.
Reporting Crypto-Asset Service Providers further need to monitor their client base with regards to any changes in circumstances that would make a user’s original self-certification incorrect or unreliable, in which case a new self-certification needs to be obtained. In addition (unlike the current CRS rules), the proposed CARF rules provide that a self-certification needs to be reconfirmed every 3 years.
For each relevant reporting period, a Reporting Crypto-Asset Service Provider will need to report the following information with respect to its Crypto-Asset Users:
- Name, address, jurisdiction(s) of residence, TIN, date and place of birth;
- In the case of an entity other than an Active Entity or an Excluded Person: name, address, jurisdiction(s) of residence and TIN of the entity, and name, address, jurisdiction(s) of residence, TIN, date and place of birth of each Controlling Person who is a Reportable Person as well as a specification of the type of Controlling Person;
- Name, address and identifying number (if any) of the Reporting Crypto-Asset Service Provider;
- Details on any Relevant Transactions of Relevant Crypto Assets (incl. name of the crypto asset, aggregate amount and number of units with regards to transactions/ disposals against fiat currency or other relevant crypto assets, and the relevant wallet addresses).
Important amendments to the CRS relevant for traditional Financial Institutions
Further to the CARF explained above, the OECD proposes certain important amendments to the CRS with regards to crypto currencies.
- The term “Depository Institution” is amended to include entities that hold Specified Electronic Money Products or Central Bank Digital Currencies for the benefit of customers.
- The term “Investment Entity” is amended to include entities that:
a) primarily conduct as a business otherwise investing, administering, or managing financial assets, money, or relevant crypto assets on behalf of other persons; or
b) the gross income of which is primarily attributable to investing, reinvesting, or trading in financial assets or relevant crypto assets, if the entity is managed by another entity that is a Depository Institution, a Custodial Institution, a Specified Insurance Company or an Investment Entity as described in subparagraph (a).
- The term “Financial Assets” is amended and will also include “relevant crypto assets”. This amended definition of the term “financial assets” will mean that an entity that holds, as a substantial portion of its business, financial assets (i.e. incl. relevant crypto assets) for the account of others, will meet the criteria of a Custodial Institution under CRS.
- The term “Depository Account” is amended to include accounts that hold Specified Electronic Money Products or Central Bank Digital Currencies for the benefit of customers.
Many crypto-asset service providers have so far been classified as an Active NFE under the existing CRS rules. Under the new rules those entities will need to revisit their status to determine whether they meet the criteria of a Crypto-Asset Service Provider under the CARF or an Investment Entity, Depository or Custodial Institution under the amended definitions in the CRS.
Where an entity meets the criteria of a Crypto-Asset Service Provider or a Financial Institution, the entity will have far-reaching due diligence and reporting obligations. Most notably, those entities will need to:
- Obtain self-certifications from their clients in order to determine their residence for tax purposes;
- Establish processes to review the self-certifications received;
- Implement systems that capture the information that needs to be reported;
- Annually perform the required reporting, and
- Implement a compliance framework, incl. written policies, procedures, responsibilities and controls.
For banks, the suggested revisions to the CRS will mean that:
- Accounts held by crypto-asset service providers (many of which have so far been Active NFEs) will need to be revisited to determine their correct classification;
- The bank may need to amend its CRS self-certification forms to account for the new status of a crypto-asset service provider;
- Banks will need to report any crypto assets they currently hold on behalf of clients (as these accounts will be Custodial Accounts under the revised definition of the term “Financial Assets”)
- Through the revised definition of the term “Depository Account”, the value of any digital currencies (i.e. digital representations of Fiat currency) will need to be included in the account balance of any depositary account.