- OECD received nearly 80 comments totaling 600 pages from industry stakeholders.
- CARF is a framework that looks to give tax administrations sufficient information about crypto assets.
- One of the stakeholder concerns relates to the broad definition of crypto assets.
- The scope of CARF could lead to intermediaries not being subjected to AML KYC procedures.
- Non-fungible tokens (NFT) should not be included in the CARF because it’s still an emerging asset class.
- CARF should not cover stablecoins as there are no meaningful capital gains to be realised.
The definition of crypto assets under the proposed Crypto-Asset Reporting Framework (CARF) is overly broad which goes on to include assets other than those used for payments and investment, according to Lawrence Zlatkin, Vice President, Tax, Coinbase. He was of the opinion that only crypto assets that deal with payments and investment should be covered by the CARF.
Zlatkin was speaking at a panel discussion held as part of the public consultation meeting put together by the Organisation for Economic Co-operation and Development (OECD). The OECD was seeking input on the proposed framework that was floated in March this year.
The discussion was focused on the scope of crypto assets and reporting crypto-asset service providers under the CARF, how consistent it is with other definitions of virtual assets, and the implications for the industry. The other members on the panel were:
- James Gillespie, Policy Advisor, HM Treasury, United Kingdom
- Erika Nijenhuis, Senior Counsel, U.S. Department of the Treasury, Office of Tax Policy
- Lisa Zarlenga, Partner, Steptoe & Johnson, representing the Chamber of Digital Commerce
It was moderated by Philip Kerfs, Head of Unit, International Co-operation Unit, International Co-operation and Tax Administration Division, OECD Centre for Tax Policy and Administration.
OECD is one of the most influential economic bodies in the world with over 35 countries as members including the US, UK, and several European countries, among others. The decisions taken by OECD have global implications and serve as a blueprint for emerging economies like India.
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What was proposed under CARF?
The OECD released a public consultation document for a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto assets. The framework also proposed amendments to the Common Reporting Standard (CRS) for the automatic exchange of financial account information between countries.
CARF provides for the collection and exchange of tax-relevant information between tax administrations, with respect to persons engaging in certain transactions in crypto assets.
It covers crypto assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries, as well as asset classes relying on similar technology that may emerge in the future.
“Individuals and entities that, as a business, provide services to exchange crypto-assets against other crypto-assets, or for fiat currencies, must apply the due diligence procedures to identify their customers, and then report the aggregate values of the exchanges and transfers for such customers on an annual basis,” read the press release from OECD.
What were the concerns expressed at the meeting?
Highlighting differences between the FATF (Financial Action Task Force) recommendations and the CARF, James Gillespie said that the question of defining a virtual asset and a crypto asset is fairly complicated.
FATF definition: “…an asset which is digitally traded or transferred and capable of being used for a payment or investment purpose. The definition doesn’t specifically require cryptographically-secured technology and covers a broad range of assets potentially,” Gillespie explained.
CARF definition: Erika Nijenhuis said that CARF’s definition narrows the scope from FATF’s definition.“[Crypto asset] is a digital representation of value. It relies on cryptographically-secure distributed ledger to validate and secure transactions. It is also a broad definition which takes into account the special risks posed by cryptographically-secured assets that are transferred on a blockchain to tax administration and tax compliance,” Nijenhuis stated.
Lack of symmetry in regulations: “I don’t know why we should have different rules for FATF and for CARF. It just creates more complexity for people and persons who have to implement these rules. The focus on payment and investment is a sound one,” Zlatkin added.
Privacy concerns: “Asking for more is not necessarily better, because governments have to digest more information, build systems themselves to understand and interpret, and apply risk parameters. (The framework) should be limited in scope to identify levels of risk, to identify the taxpayers, and then impose burdens on them to demonstrate why they did or did not report adequately. For example, in CARF, for retail transactions, what individuals actually do could potentially be viewed by most taxpayers as an invasion of privacy,” Zlatkin said.
Ensure tech neutrality: Zarlenga proposed that the CARF should consider crypto assets that are “actively traded on an established market”. “We would suggest tech neutrality. In other words, there are a lot of assets that are covered here that would not be subject to tax information reporting if they were physical assets. It’s especially true with NFTs,” Zarlenga explained.
Cover financial institutions: “I would suggest that financial institutions that are covered by Common Reporting Standard (should continue to) report under CRS and not under CARF with respect to those assets. There is a sort of anti duplication rule in the amended CRS that suggests that financial intermediaries that report an asset under CARF then (they) don’t have to report under CRS. We would suggest that it should be reversed,” Zarlenga said.
Phased implementation: “We’ve argued for phased implementation of many of these rules because the market is evolving and it changes fairly significantly,” Zlatkin suggested, adding that he would prefer that the CARF initially focus on “what we know as opposed to what we don’t know”.
Which intermediaries should be subject to information reporting?
Kerfs said that the comments received by the OECD had the following concerns:
- CARF should not cover or shoehorn decentralised exchanges within the scope of these rules. They should be left for a later stage because it’s difficult to include them right now.
- A sandbox regime or a transitory regime should be set up for smaller start-up exchanges to accommodate the newcomers in the sector.
Gillespie described that a virtual asset service provider under FATF requirements has to conduct one of five types of activity or operation on behalf of another person. They are:
- Exchange of virtual assets for fiat or vice versa,
- Exchange of one virtual asset for another type of virtual asset,
- Transfer of virtual assets,
- Safeguarding administration of virtual assets,
- Participation in the provision of financial services in relation to the issuance of a virtual asset.
DeFi exchanges are difficult to control: “It’s a lot harder once you migrate into the world of DeFi. It’s not entirely clear who controls DeFi platforms. They’re often software protocols and not designed to be controlled. They’re decentralized in terms of scope. The entities that set up the protocols or can adjust (these protocols) aren’t necessarily controlled by various persons. There’s no definition of control. They may not view themselves as having customers,” Zlatkin argued.
Represent a small percentage: “We don’t apply (the CARF) to decentralised platforms at this time. (We should) continue to study them and see where they end up. I would point out that even with all the hype surrounding DeFi and decentralised exchanges, they still represent a small percentage of the transactions. I don’t think it will hurt the tax transparency system to wait just a little while and see where they land,” Zarlenga said.
Not calling for ignoring DeFI: “I don’t know if DeFi should be the focus of CARF itself. We’re not saying that people (should) be allowed to engage in tax avoidance and find shelter in DeFi. That’s actually contrary to the interests of our exchange as well. I just think we have to develop more innovative solutions. We should try to leverage the technology with identity tokens and establish mechanisms within the software protocols to reincorporate taxpayers into the world of reporting. I don’t know that CARF is the right avenue or vehicle to do that today,” Zlatkin said.
‘Need tougher Nexus Rules’
What are Nexus Rules? It means that an exchange based in a tax haven that serves European customers will have to abide by European norms, a report in CoinDesk explained.
Zlatkin and Zarlenga endorsed efforts to ensure that companies do not set up bases in jurisdictions that do not follow CARF in order to avoid compliance.
“I don’t think people or entities or persons or other structures should be designed to avoid them. We would endorse broader nexus rules that create a level-playing field among all participants in this world. I don’t think we would argue for entities migrating to places where there is no reporting and circumvent these rules,” Zlatkin said.
Zarlenga echoed Zlatkin’s comments and said that she does not want to create a competitive edge for jurisdictions that do not adopt CARF in order to attract companies.
Should CARF be more stringent?
When Nijenhuis asked whether the industry would like to see stringent enforcement of CARF, Zlatkin said that the industry would encourage more than just naming and shaming.
“You need to have a regime. We don’t want to have entities incorporate or exist and thumb their noses at this whole process. We’re going to invest sufficient resources to implement this. This is expensive. I would argue for more harder measures than just soft naming and shaming,” Zlatkin said.
Zarlenga cautioned that the crypto industry is mobile. “They can be set up anywhere. You may need to be a little stronger with this industry than maybe other endeavours,” she added.
Implementation of blacklists
Gillespie said that there are no uncertainties on whether CARF can implement blacklisting for jurisdictions with poor standards.
“There is quite a bit of knowledge about where these exchanges are located and what their controls are like and on top of this, you can use blockchain analytics to identify which addresses are located with which exchanges or wallet providers,” he added.
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