KPMG report: OECD’s proposed crypto-asset reporting framework
Adapted from a report prepared by the KPMG member firm in Switzerland and that looks at certain Swiss implications
Adapted from a report prepared by the KPMG member firm in Switzerland
The Organisation for Economic Cooperation and Development (OECD), on 22 March 2022, published a public consultation document [PDF 1 MB] concerning a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets (Crypto-Asset Reporting Framework, or CARF), as well as proposed amendments to the common reporting standard (CRS) for the automatic exchange of financial account information among countries. Read TaxNewsFlash
New reporting requirements for crypto-asset service providers
The CARF introduces extensive due diligence and reporting obligations for reporting crypto-asset service providers, which is expected to include 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)
- 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, books, 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).
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 “anti-money laundering” or “know your customer” (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 three 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 “Depository Account” is amended to include accounts that hold specified electronic money products or central bank digital currencies for the benefit of customers.
- The term “Financial Assets” is amended and will also include relevant crypto assets. This amended definition will mean that an entity that holds, as a substantial portion of its business, financial assets (i.e., including relevant crypto assets) for the account of others, will meet the criteria of a custodial institution under CRS.
- The term “Investment Entity” is amended to include entities that:
- Primarily conduct as a business otherwise investing, administering, or managing financial assets, money, or relevant crypto assets on behalf of other persons
- 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
Many crypto-asset service providers have so far been classified as an active non-financial entity 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
- 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 non-financial entities) 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.
The OECD requests public comments on the proposed rules by 29 April 2022.
The OECD intends for the proposed rules to be incorporated into the domestic law of member jurisdictions (like for CRS). Details of the implementation of these rules into Swiss national law and the timing for that are unclear.
Read an April 2022 report prepared by the KPMG member firm in Switzerland
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.