INTRODUCTION OF THE OECD CRYPTO-ASSET REPORTING FRAMEWORK

RELEVANT ENTITIES IN THE BVI WILL NEED TO PREPARE FOR AN EVOLVING REGULATORY ENVIRONMENT FOR DIGITAL ASSETS

By KAYLA LAIDLAW

The Organisation for Economic Co-operation and Development (OECD) released its final guidance on the Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standard (CRS) on 10 October 2022, following a period of public consultation that took place earlier in 2022.

The CARF was developed in response to the rapid growth of the digital assets market, and represents a new tax transparency framework that provides for the reporting and automatic exchange of information on digital asset transactions and the users undertaking such transactions.

The introduction of the CARF marks an important shift in the regulatory attitudes and environment for digital assets globally, and will need to be carefully considered by relevant entities within the BVI.

BACKGROUND

The OECD’s CRS was adopted in 2014, with an aim of increasing global tax transparency and improving cooperation between tax administrations through the exchange of financial account information. BVI-resident reporting financial institutions have been required to comply with the CRS requirements since 2016, including the establishment and implementation of due diligence procedures to document and identify reportable accounts, as well as reporting certain information on each reportable account annually.

Since the introduction of the CRS, financial markets and investment practices have continued to evolve— particularly in the area of digital assets—and in many instances the reporting of digital assets has not been adequately covered by the existing CRS rules. As digital assets can be transferred and held without

interacting with traditional financial intermediaries and without the oversight of any central administrator, tax administrations have reduced visibility regarding the activities carried out within the digital assets sector. This increases the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed, and poses a risk to global tax transparency objectives.

In response to these gaps and risks, the OECD has developed the CARF, designed to ensure the collection and automatic exchange of information on transactions in relevant crypto-assets. The key aspects of the new framework include the following:

• Digital assets subject to reporting;

• Intermediaries and service providers required to collect and report information;

• Transactions subject to reporting; and,

• Due diligence procedures to identify reportable customers.

SCOPE OF ASSETS TO BE REPORTED

The CARF targets assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries. The definition of “crypto-assets” under the CARF covers any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. In addition to cryptocurrencies, this includes stablecoins, derivatives issued in the form of crypto-assets, and certain non-fungible tokens (NFTs).

The final rules define “relevant cryptoassets”—the crypto-assets for which reporting will be required—as excluding any crypto-asset that is a central bank digital currency or a specified electronic money product, which will be subject to reporting under an expanded CRS framework. The rules also exclude from the reporting requirements any crypto-asset that the service provider has adequately determined cannot be used for payment or investment. It is anticipated that the OECD will continue developing guidance to support the consistent application of the CARF, including the criteria for adequately determining whether a cryptoasset can or cannot be used for payment or investment purposes.

SCOPE OF INTERMEDIARIES AND SERVICE PROVIDERS REQUIRED TO REPORT

The due diligence and reporting requirements imposed under the CARF will specifically apply to entities or individuals that provide services effectuating exchange transactions of crypto- assets for or on behalf of customers. These service providers may include crypto-asset exchanges, brokers, dealers, market makers, and operators of crypto-asset automated teller machines (ATMs). The entities and individuals that will be required to comply with the CARF reporting requirements are also likely to fall within the scope of the Financial Action Task Force (FATF) definition of a “virtual asset service provider,” meaning they already should be in a position to collect and review customer documentation following the enactment of Virtual Asset Service Provider (VASP) legislation.

The final guidance includes a significant clarification that investment funds investing in crypto-assets and entities solely engaged in the creation and issuance of crypto-assets, although potentially falling within the broad definition of a service provider, are not intended to be caught within the scope of the new requirements.

SCOPE OF TRANSACTIONS TO BE REPORTED

The CARF outlines a relatively complex transactional reporting regime, requiring annual reporting aggregated by asset type on the following types of transactions:

• Exchanges between crypto-assets and fiat currencies;

• Exchanges between one or more forms of crypto-assets; and

• Transfers (including reportable retail payment transactions) of crypto-assets.

Reportable information comprises demographic information on the customer as well as financial information on each transaction, including details such as crypto-asset type and transfer type. Where exchanges of crypto-assets are made for fiat currency, the reportable acquisition amount or disposition gross proceeds amount is equal to the fiat currency received net of transaction fees. For crypto-to-crypto transactions, retail payments, and transfers, the service provider is responsible for determining and reporting the fair market value of the crypto-assets in fiat currency at the time of the transaction and in a consistent manner. The documentation released by the OECD includes detailed valuation rules that will need to be considered by relevant entities.

DUE DILIGENCE PROCEDURES TO IDENTIFY REPORTABLE CUSTOMERS

The due diligence procedures included in the CARF are based on the CRS requirements and existing anti-money laundering/ know-your-customer obligations included in the FATF recommendations. Relevant service providers will be required to use self-certification forms and information on file to determine the tax residency and reportability of individual and entity

customers (referred to in the CARF as “crypto-asset users”), as well as the natural persons controlling certain entity crypto-asset users.

IMPLICATIONS AND NEXT STEPS

For the CARF requirements to take effect in practice, the OECD needs to establish a framework of international agreements (similar to the CRS multilateral competent authority agreement framework). The CARF requirements will then need to be adopted into domestic law within participating jurisdictions. While such adoption is currently optional, as with other OECD tax transparency regimes it is reasonable to expect there will be international pressure to adopt the rules, particularly in no or nominal tax jurisdictions such as the BVI. While waiting for implementation timelines to be agreed internationally, BVI entities can (and should) begin assessing the potential applicability and impact of the new requirements, as well as preparing their internal procedures and systems to reduce the implementation effort when the time comes. Facilitating effective and efficient compliance with the CARF requirements will be a key component in continuing to position the BVI as a leading jurisdiction for digital asset businesses.

Kayla Laidlaw

Tax Advisory Director, Deloitte BVI

Ms. Laidlaw is focused on assisting clients across the Caribbean region with meeting their global and local regulatory and information reporting obligations. Kayla has extensive experience bringing Deloitte’s wide range of FATCA, Common Reporting Standard (CRS), Country-by Country Reporting (CbCR), and Economic Substance (ES) offerings to entities in the BVI, Cayman islands, and Bermuda. She has also assisted with the implementation of regulatory reporting portals and the related administration and oversight processes for various tax authorities in the region.