This article will interpret the key points of the document and the future global trend of tax information exchange.

Author: TaxDAO

1. Introduction

In July 2024, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) reported to the Organisation for Economic Co-operation and Development (OECD) and G20 on a document titled "Bringing Tax Transparency to Crypto-Assets – An Update," which detailed the latest developments in the global construction of tax transparency for crypto-assets (i.e., the Crypto-Asset Reporting Framework, CARF).

The OECD and G20 are using the Crypto-Asset Reporting Framework (CARF) to promote automatic tax information exchange on a global scale, ensuring transparency in crypto-asset transactions and reducing the risk of tax evasion and avoidance. Currently, 58 OECD member countries have announced their intention to complete the implementation of CARF by the end of 2027. The TaxDAO research team interprets the key points of this document and the future global trend of tax information exchange.

2. Main Contents of the Document

2.1 Overview of the Document and Key Time Points for CARF Implementation

"Bringing Tax Transparency to Crypto-Assets-An Update" first introduces the background and purpose of the report, discusses the definition, usage, and development of crypto-assets, and emphasizes the challenges of crypto-assets in tax transparency and information exchange. It then calls for global new standards for crypto-assets, discussing the G20's promotion of tax transparency for crypto-assets and the process of OECD and G20 countries collaborating to develop CARF. It further explains the implementation of CARF, detailing the implementation framework, including domestic legislative framework, international legal framework, technical framework, administrative framework, and confidentiality and data protection standards, and discusses how to use the Global Forum's experience in implementing the Common Reporting Standard (CRS) to implement CARF. It then outlines the work undertaken by the Global Forum to ensure the widespread implementation of CARF and summarizes the progress of the Global Forum in implementing CARF, emphasizing its potential benefits for tax transparency and information exchange.

The goal of the Global Forum is to ensure that the majority of relevant jurisdictions begin automatic information exchange (AEOI) for crypto-assets by 2027. As of the report's publication, 58 countries and regions have publicly announced their support for commencing crypto-asset information exchange based on CARF by 2027, including 10 developing countries.

To ensure that countries can start the information exchange of CARF on time in 2027, the Global Forum has set a key midterm target, which is to complete the commitment process for CARF by the time of the Global Forum's plenary meeting in 2024 (expected to be held in November 2024). This means that by the end of 2024, the Global Forum will identify the majority of jurisdictions implementing CARF and push these countries to enact domestic laws to start the exchange of encrypted tax information in 2027. In addition, developing countries may need technical preparation, and the CARF working group is also discussing whether to provide limited flexibility to certain countries, allowing them to delay the implementation of CARF if necessary.

2.2 How the Global Forum Will Promote the Implementation of CARF

2.2.1 Introduction to CARF

CARF aims to establish a unified framework for tax information exchange, address tax regulatory issues related to crypto-assets, and provide tax authorities with more third-party data on taxpayers' crypto-asset activities. CARF is based on the Common Reporting Standard (CRS) and was completed by the OECD in 2023. The framework requires Crypto-Asset Service Providers (RCASPs) to comply with detailed due diligence requirements to identify the information that must be reported and ensure that this information is reported accurately and timely to tax authorities. CARF consists of rules and comments covering the scope of crypto-assets, entities and individuals subject to data collection and reporting requirements, transactions to be reported, and due diligence procedures to identify crypto-asset users, beneficial owners, and related tax jurisdictions for reporting and exchange purposes.

Tax authorities in various jurisdictions, upon receiving information reported by RCASPs, will exchange information and facilitate information flow 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 a CARF working group to develop the commitment process for CARF by the end of 2024, ensuring widespread implementation of CARF globally. According to the plan, participating countries should start the information exchange of CARF in 2027. It is believed that the goal of the Global Forum is to ensure that all relevant jurisdictions implement CARF in a relatively uniform time frame to prevent any jurisdiction from becoming a tax evasion "loophole."

To support the implementation of CARF, the Global Forum is developing necessary technical frameworks, including data reporting and exchange systems. These systems will ensure the accuracy and security of information and promote effective cooperation among countries.

2.2.3 Domestic Implementation of CARF

There are significant synergies between CRS and CARF, and the Global Forum plans to leverage these synergies to quickly implement CARF. To implement CARF, governments need to establish a domestic legislative framework and require RCASPs to conduct due diligence procedures and report information; establish an international legal framework to regulate the international exchange of reported information; establish the necessary technical framework to receive information from RCASPs and exchange it internationally; in addition, countries should meet expected standards related to confidentiality and data protection to ensure the secure exchange and proper handling of information.

2.3 The Essence of CARF is to Extend the Automatic Information Exchange Determined by CRS to the Field of Crypto-Assets

2.3.1 Introduction to AEOI System

Automatic Exchange of Information (AEOI) is an international tax cooperation mechanism aimed at increasing tax transparency and preventing cross-border tax evasion and avoidance. The system achieves this by requiring financial institutions to report financial account information of their non-resident account holders and automatically exchange this information with the tax authorities of the account holders' countries. The core of AEOI is the Common Reporting Standard (CRS), jointly developed by the OECD and G20 countries in 2014. The CRS requires participating countries to collect and report financial account information of their non-resident clients through financial institutions, and then automatically exchange this information among participating countries.

2.3.2 How AEOI Extends to the Field of Crypto-Assets

As mentioned earlier, CARF applies the automatic information exchange mechanism of CRS to Crypto-Asset Service Providers (RCASPs), requiring them to report the crypto-asset information of their non-resident clients and automatically exchange this information with the tax authorities of the clients' countries, thereby increasing tax transparency in the field of crypto-assets and preventing tax evasion and avoidance.

2.3.3 Specific Requirements of AEOI

Specific requirements of AEOI include: account due diligence, financial institutions need to conduct due diligence on the accounts they hold to determine whether the account holders are non-resident taxpayers and collect necessary information for exchange. Information reporting, financial institutions need to report relevant information to their national tax authorities in accordance with prescribed formats and schedules. This information will then be exchanged by tax authorities according to international agreements. Data protection and privacy, during the exchange of information, countries need to ensure the security and privacy of data to avoid unauthorized disclosure to third parties. Finally, in terms of technical standards, to improve the efficiency and accuracy of information exchange, countries participating in AEOI typically need to adopt uniform technical standards and data formats.

Financial institutions or taxpayers that do not comply with AEOI requirements may be subject to various penalties by relevant countries, including but not limited to fines for violating regulations to compensate for tax evasion or avoidance. In cases of serious violations, relevant countries may also take punitive measures such as revoking business licenses or restricting entry and exit. However, these punitive measures are specifically regulated by the domestic laws of the relevant countries and may vary internationally.

3. Potential Impact of CARF Implementation

First, it increases tax transparency. The implementation of CARF will significantly increase tax transparency in the field of crypto-assets, enabling tax authorities to more accurately understand taxpayers' holdings of crypto-assets and related income, effectively combating tax evasion and avoidance.

Second, it promotes fair tax competition. By implementing uniform reporting standards for crypto-assets globally, CARF helps establish a fair competitive market environment, preventing certain jurisdictions from becoming tax evasion and avoidance havens.

Third, it increases government fiscal revenue. Enhancing tax transparency and promoting fair tax competition will help governments increase tax revenue, providing more funding support for public services.

Fourth, it enhances public trust. By combating tax evasion and avoidance, CARF helps enhance public trust in the financial system and public institutions, promoting the stability and development of financial markets.

Overall, the OECD and the Global Forum hope to draw on the experience of CRS and promote the implementation of CARF based on the mechanisms of CRS. At the same time, the Global Forum has shown special concern for developing countries, ensuring that they can also benefit from the implementation of CARF, while also hoping that they do not become "tax havens." It can be seen that in response to the global and anonymous challenges of crypto-assets, countries around the world will cooperate more closely in addressing the issue of tax regulation of crypto-assets. CARF is expected to enhance global tax transparency in the future, reduce tax evasion, and strengthen institutional trust and global consensus.

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