On March 22, the OECD issued proposals to further tighten information exchange rules in the Common Reporting Standard (CRS) and to start a Crypto-Asset Reporting Framework (CARF).
Olim and other Israelis already know that if they don’t report foreign investment income to Israel’s Tax Authority, they are likely to be caught. This is because financial institutions in over 100 countries are required to routinely report account information to tax authorities around the world.
As for timing, a public consulting period ended on April 29, and the OECD is reviewing comments received before formulating a final set of recommendations for governments to start adopting.
Crypto-Asset Reporting Framework (CARF)
The OECD now wants to target crypto-assets such as cryptocurrencies (bitcoins, etc.) and cryptography-based tokens such as non-fungible tokens (NFTs) because they may be used for illicit activities or to evade tax obligations. The proposed CARF framework will be pretty comprehensive – rules, commentary, treaties and more information-exchange technology.
Therefore, it is proposed to add rules about crypto-assets to the existing “due diligence” checks done by financial intermediaries under existing anti-money laundering rules. There would be two exceptions: (1) closed-loop crypto-assets intended to be redeemed against goods or services within certain limits, and (2) digital currencies issued by central banks.
Businesses that provide exchanges or services effectuating transactions in crypto-assets for customers, brokers and dealers would be covered by the AML/KYC rules if they have nexus in a country adopting these rules. Nexus includes tax residency, incorporation, organization, management, place of business or a branch in such a country.
Reportable transactions would include: (1) exchanges between crypto-assets and fiat (governmental) currencies, (2) between different crypto-assets, (3) reportable retail payments, (4) transfers of crypto assets, (5) wallet addresses. That is on top of users’ identity, country of residence or effective management, controlling persons unless they are excluded persons, etc.
Excluded persons include groups with stock regularly traded on a stock exchange, governmental entities, international organizations, central banks and many financial institutions (which are already heavily regulated).
Proposed amendments to the CRS
The proposals aim to bring digital products within the scope of the CRS as they represent a credible alternative to holding money or financial assets. Also, general due diligence procedures will be strengthened.
Proposed crypto-asset changes include
- Amending reportable depositary accounts to include electronic money products (digital representations of fiat currency) and central bank digital currencies.
- Derivative contracts referencing crypto-assets in financial assets subject to due diligence and reporting by financial institutions.
- Investment in crypto-assets by investment funds and wealth management funds in CRS reporting.
- Exclusion of reporting of financial assets sales under the CRS when reporting is required under CARF.
Other notable CRS changes proposed include
- Reporting “controlling persons,” allowing a distinction between those with an interest through ownership, control or as beneficiaries as opposed to those that have a managerial role e.g. senior management officials, protectors and trustees. It seems tax administrations want to know who has an equity interest and who doesn’t, so they can “assess whether taxable income or wealth is to be allocated to the “controlling person” (or not). Comment: Will this undermine the centuries-old trust concept?
- Whether the account is a joint account as well as the number of joint holders, to enable a tax administration to allocate income and balances between the holders “as appropriate.”
- Clarifying existing rules to say that investors in funds can be considered customers conducting a business. Comment: Could this be used to increase the rate of taxation?
Financial institutions may not rely on self-certification it has reason to know is incorrect or unreliable, for example, if an individual says they do not have a residence for tax purposes, or if he/she holds residence or citizenship on the basis of local investments or against a flat fee without requiring significant physical presence.
THE OECD seems to be going for overkill with both CARF and CRS proposals for a confused public to comply with. It remains to be seen what is finally recommended and when individual countries like Israel may adopt these changes.