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Understanding Who is a Reportable Crypto Asset User (CAU)
- Role that makes the person a controlling person of an entity
- RCASP own name and address if any
- Break down reporting by each type of Crypto-assets for which they have effectuated relevant transactions
Which Jurisdictions Are Pledging to Join CARF and What’s Next?
On November 10, 2023, 48 countries released a joint statement pledging to implement the Crypto-Asset Reporting Framework (CARF), a new international standard designed for the automatic exchange of information on crypto-asset transactions between tax authorities.
Key Points:
• Objective: The CARF seeks to improve tax transparency and address tax evasion involving crypto-assets.
• Commitment: Participating countries have vowed to promptly incorporate the CARF into their national legal frameworks.
• Timeline: The target is to begin information exchanges under the CARF by 2027.
What Information is Reported for CARF in Crypto Transactions?
- If purchased with fiat: report the amount paid.
- If exchanged for other crypto: report the fair market value.
- Sale for fiat: report the amount received.
- Exchange for other crypto: report the fair market value.
- Fair market value of the purchase.
- Report the fair market value of the transfer.
- Specify the type of transfer (e.g., airdrop from a hard fork, other airdrops, staking income, loan disbursements, or exchanges for goods/services).
- Report the number of units transferred instead of the number of transactions.
- Retain wallet address details to assist authorities in tracing specific transfers.
- RCASPs include any individual or entity engaged in effectuating an exchange of crypto assets. Financial institutions (FIs) holding accounts may not necessarily be involved in effectuating transactions related to the assets they hold.
- Beneficial owners remain hidden until they engage in transactions involving their holdings. Under the Crypto-Asset Reporting Framework (CARF), beneficial ownership is identified at the time of exchange, not at account opening.
- Relevant services must be provided as part of a business. This excludes individuals or entities offering services infrequently or for non-commercial reasons, such as those validating distributed ledger transactions. For example, crypto miners are not RCASPs as they work for themselves, not on behalf of clients.
- RCASPs must “effectuate an exchange transaction,” but CARF does not define “effectuate.”
- The dictionary defines “effectuate” as “to do something or make something happen” or “to cause or bring about; to put into effect or operation.”
- CARF examples of effectuating an exchange include acting as a counterparty or intermediary, such as:
- Dealers trading on their own account to buy and sell crypto assets.
- Operators of crypto ATMs.
- Exchanges acting as market makers and earning bid-offer spreads.
- Brokers executing buy/sell orders for clients.
- Individuals or entities subscribing to crypto assets.
Trading Platforms and Control
- Making a trading platform available can qualify as RCASP activity if the platform allows users to effectuate transactions. However:
- Simply providing a bulletin board for posting buy/sell orders is not RCASP activity.
- Creating trading software does not qualify unless users use the software to effectuate exchanges.
- A trading platform itself is not an RCASP unless it exercises “control or sufficient influence” to comply with CARF’s due diligence and reporting obligations. CARF does not clarify what constitutes “control or sufficient influence.”
- RCASPs are entities that functionally provide services as a business, effectuating exchange transactions for or on behalf of customers, regardless of the technology involved.
- The definition of RCASPs under CARF aligns with the broader scope of Virtual Asset Service Providers (VASPs) under FATF’s anti-money laundering recommendations, which include services like advising or portfolio management.
How does CARF Reporting differ from CRS and FATCA
- Reporting on relevant transactions, not balance
- Individuals can be reporting RCASPs
- Look through of investment entities
- Separate reports for each currency
- No reporting on passively held crypto – waiting for submarine to surface
Status of Jurisdictions Pledging to Join CARF.
- Criteria for joining the Global Transparency Forum?
- Only 58 countries, including the USA, have pledged to implement CARF—will peer reviews pressure others to join?
- Will China and Hong Kong commit to implementing CARF?
- Will CASPs relocate to jurisdictions that do not participate in CARF?
What Crypto Assets Are Out of Scope for CARF Reporting?
- Closed-loop crypto asset: A crypto asset restricted to a specific network (i.e., a closed loop) for purchasing goods or services with participating merchants. Because of its limited redemption rights, it presents a low risk of tax evasion.
- CBDC: A crypto asset that represents a claim on fiat currency issued by a central bank or monetary authority. It functions similarly to funds held in a traditional bank account.
- Specified electronic money product: A digital representation of fiat currency, issued in exchange for an equivalent amount of funds, used for payment transactions. Under regulatory requirements, it is redeemable on demand for the same value in fiat currency. This category covers crypto assets that do not result in any gain or loss relative to the underlying currency.
What is the Crypto Asset Reporting Framework (CARF)?
As CRS had been relatively successful in identifying beneficial owners rather than legal owners, the OECD decided to adopt CRS. There are two problems copying CRS for digital assets:
- Digital asset industry operates differently from conventional industry
Many governments have not yet determined how to comprehensively regulate the digital asset industry. The architects of CARF needed to determine the roles different parties played before they could analogize those parties to their conventional financial institutions. - While payment processing remains a backbone of the banking industry, the main revenues come from cash management and wealth management.
The non-digital financial industry entails the conversion of the means of payment into financial products that yield income streams. In contrast, the digital asset industry is rarely used as payment media, and digital currencies tend not to be exchanged for goods and services. The value of digital assets as an investment depends on the appreciation. As such, the powerful incentive to hold assets with a custodial bank to process income payments generated by earnings is missing for digital assets.
Finally, keeping assets safe in a cold wallet is considered safer than entrusting digital assets to a hot wallet. Accordingly, the digital asset reporting regime must rely on alternative sources of ownership information. The decentralization of the blockchain and the capacity to process transactions on a peer-to-peer basis with non-custodial wallets means digital asset holdings are hidden, not visible to tax authorities.
So, how can we identify the beneficial owners of these assets? It is like hunting submarines, we wait for them to surface.
When Does Crypto Get Reported? CARF and Transaction Triggers.
- Crypto assets tend to be converted into fiat currencies before usage. So, an investor holding millions in digital assets may find them functionally worthless until they are spent, except when used as debt collateral. To be converted to fiat, the crypto user needs to use an exchange.
- Therefore, CARF targets crypto exchanges as the core reporting party, referred to as reporting Crypto-Asset Service Providers (RCASPs). Crypto exchange clients are the parties to be reported under CARF, also known as crypto asset users.
- Crypto exchange transactions are the relevant exchanges that generate the financial information to be reported. However, crypto exchanges alone are insufficient for the collection of client information.
- The OECD needed to rope in other parties with closer proximity to crypto beneficial owners. As a result, the RCASP definition extends to parties that operate as counterparties or intermediaries in those transactions, as these parties are likely privy to beneficial ownership information when crypto exchanges are not.
Key Differences for Investment Entities between CARF and CRS Explained
- Invests, administers, or manages financial assets or money for others;
- Trades in financial assets, such as money market instruments, foreign exchange, or commodity futures;
- Manages portfolios for individuals or groups; or
- Has gross income that comes primarily from investing, reinvesting, or trading in financial assets.
How Chinese Residents Use Private Structures to Hold Outbound Direct Investments?
A Chinese resident, whether an individual or corporation, can file an Overseas Direct Investment (ODI) project under the name of their entity (for instance, AB Cement Construction) with the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).Afterward, they must register the project with the State Administration of Foreign Exchange (SAFE) to send funds out.
What is Article 29’s role in the OECD Convention on Mutual Assistance in Tax Matters?
Serbia and the Philippines already signed the Multilateral Convention on Administrative Assistance (MCAA). Additionally, both countries have Double Tax Agreements (DTAs), also called Double Tax Treaty (DTT), making exchange on request possible.Svalbard, under the sovereignty of Norway, is the only territory excluded from the MCAA and has no DTAs because its tax rate is only 8%. Additionally, Svalbard is not part of the Intergovernmental Agreement (IGA). It is not blacklisted, except by Portugal, and is not a member of the EU, Schengen, or NATO. Furthermore, it has 31 self-determining rules covering areas such as tax, immigration (see Svalbard Treaty), and the environment, etc.
Update on the US CARF Pledge and Switzerland’s Recent Actions
Will the United States Join the Crypto-Asset Reporting Framework (CARF)?
Many believe that the United States will never join the CARF (Crypto-Asset Reporting Framework). Additionally, data can only be given to 51 countries according to the Treasury’s list of countries regarded as safe to receive data. Implementing CARF would open the door to a reciprocal exchange of information for all financial assets.
Switzerland published its list of countries for CARF, but notably omitted the United States, despite its support of others pledging to implement CARF.
Can You Really Re-Settle an Irrevocable Trust? Reasons and Benefits Explained
- A settlor wishes to move to a jurisdiction where trust disclosure is less onerous. Moving to a non-participating Custodial Institution will result in no CRS (Common Reporting Standard) reporting, and there will be no FATCA (Foreign Account Tax Compliance Act) reporting if there is no IGA (Intergovernmental Agreement).
- A change in the legal jurisdiction of the trust is desired to enable more liberal investment or asset management powers.
- A jurisdiction change due to simplified trust administration or more advantageous income tax treatment.
- A settlor wishes to change the age of when a beneficiary comes into control of assets or wishes to change a beneficiary designation, such as in cases of divorce.
- Modifying the terms of trusteeship, such as investment powers or how they are compensated.
- A merging multiple trusts may be desirable to reduce costs and create a better management structure.
- Trust termination date needs to be extended protect one or more beneficiaries.
Will Hong Kong be Encouraged by the OECD to Implement CARF?
Yes, because the OECD Global Forum bases its invitations to join the Crypto-Asset Reporting Framework (CARF) on the Financial Action Task Force (FATF) report on status and number of Crypto-Asset Service Providers (CASPs).
Interestingly, China does not have Crypto-asset Service Providers (CASPs), yet it has tens of millions of undeclared crypto holders through foreign CASPs.
What is Outlook of the Non-participating Asian Countries Implementing CRS?
What is the outlook of the non-participating Asian countries implementing the Common Reporting Standard (CRS)? Cambodia, Fiji, Palau, the Philippines, Uzbekistan, Vietnam, North Korea, Taiwan, Bangladesh, East Timor, Kiribati, Kyrgyzstan, the Solomon Islands, Tajikistan, and Turkmenistan.
- The Philippines is far advanced to implement CRS with the OECD Global Forum on Transparency for Tax Purposes.
- Cambodia is next in line.
- Taiwan reports CRS on a bilateral basis with 32 countries, but not with Hong Kong, Macau, and China until the “straights issue” is resolved.
Let’s talk about the General Anti Avoidance Rules (GAAR)
Generally speaking, the General Anti-Avoidance Rules (GAAR) apply to income tax and not to the Automatic Exchange of Information (AEOI) or the Common Reporting Standard (CRS).
OECD Update on Singapore’s Residency, CRS Indicia, and Centre of Vital Interests
Multiple Residences Under OECD Guidelines
Clients can have multiple residences based on the OECD Model Convention on Income and Capital, specifically permanent homes, Centre of Vital Interest—personal and economic, habitual abode, and nationalities.
CRS Addendum Warning
The OECD CRS addendum in 2017 warning of multiple residences, but the scheme allows the client to provide documentary evidence on only one. Schemes can be misused to undermine the CRS due diligence procedures. Consequently, this may lead to inaccurate or incomplete reporting under the CRS, when not all jurisdictions of tax residence are disclosed to the Financial Institution.
Potential Misuse Scenario
Such a scenario could arise where an individual does not actually, or not only reside in a jurisdiction, but claims to be resident for tax purposes only in such jurisdiction and provides his Financial Institution with supporting documentation issued under the scheme such as a certificate of residence, ID card, or passport.
What are the Types of Fees of a Custodial Institution?
What is the income test of a custodial institution that has nothing to do with assets held on behalf of someone else. Can custodial institution fees be paid to unrelated third parties?
The rules recognize six types of fees. This may fall under the fifth of six custody-type fees: financial advice on financial assets that may potentially be held.
Insights into Nominee Account Holders and Custodial Institution Accounts
Who is the account holder if a nominee holds the account for a Custodial Institution? Who are the financial accounts for CRS and CARF when a trust is a non-participating Custodial Institution?
Understanding Account Holders in Custodial Institutions
Normally, the account holder is the Custodial Institution as it is a Financial Institution. There is no look-through of the Custodial Institution, whether participating or non-participating.Under the Common Reporting Standard (CRS), the Custodial Institution trust treats the person it is holding the accounts for, specifically the beneficiaries of the trust. Importantly, there is no equity interest for Custodial Institution trusts as this applies only to a Professionally Managed Investment Entity (PMIE).
Singapore’s U-Turn on Settlor reporting What Prompted the Change?
Singapore update in CRS FAQs Guidance
Singapore’s IRAS deleted its controversial guidance that permitted a nil CRS report for settlors of irrevocable trusts. Why did they make this U-turn? The CRS guidance F9 now refers to the OECD Implementation Handbook. So, can trustees still interpret this to report a nil?
Reporting Obligations
They must report the total trust property value for settlors of irrevocable trusts, even if the settlor is not a beneficiary. The OECD Implementation Handbook on pages 104-111, paragraph 259 states that if the Financial Institution has not otherwise recalculated the balance or value for other reasons, then the account balance for settlors and mandatory beneficiaries may be the value of the interest upon acquisition or the total value of all trust property.
Determining Financial Information reporting
In paragraph 261, it is noted that the Financial Information to be reported will depend on the nature of the interest held by each account holder. Where the trust does not otherwise calculate the account value held by each Account Holder or does not report the acquisition value, the account balance or value to be reported is as shown in Table 7. However, if the account value is recalculated, then the settlor’s value will be the amount settled and if the account value is not recalculated, then the total value must be reported.
Why do many erroneously believe a Corporate Director indicates a Managed Entity?
- A managing investment entity is a non-reporting Financial Institution, because it does not maintain financial accounts; in other words, it does not keep accounts on behalf of account holders.
- A managing investment entity is defined as one that either (i) trades or manages financial assets, or (ii) Administers Financial Assets.
- Trading in money market instruments, such as cheques, bills, certificates of deposit, derivatives, etc.; foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;
- Individual and collective portfolio management;
- In contrast, a managed Investment Entity is a reporting Financial Institution, because it maintains financial accounts (not financial assets), which is its equity interest.
- At least 50% of its gross income is attributable to investing, reinvesting, or trading in financial assets,
- The entity is managed by a depository institution, a Custodial Institution, a Specified Insurance Company, or a managing Investment Entity.
b) Financial Assets Managed: Regarding condition (b), an entity that primarily earns income from Financial Assets is a managed Investment Entity, if it has a discretionary wealth management agreement with a managing Investment Entity that primarily earns its income from trading or investing in financial assets. Notably, there is absolutely no de minimis threshold on what percentage of the entity’s assets must be managed by the managing Investment Entity. If you can find an asset manager who will manage one cent in total on a discretionary basis, then this counts as being managed by a managing Investment Entity.
Let’s Clarify: Does Your Self-Directed Untaxed Investment Entity Bypass CRS?
Do not confuse the location of taxed and untaxed Financial Institutions.
Where a Financial Institution, other than a trust, does not have a residence for tax purposes—for instance, because it is treated as fiscally transparent or is located in a jurisdiction without income tax—it is still considered to be subject to the jurisdiction of a Participating Jurisdiction. Thus, it is a Participating Jurisdiction Financial Institution if:
(a) It is incorporated under the laws of the Participating Jurisdiction;
(b) It has its place of management, including effective management, in the Participating Jurisdiction; or
(c) It is subject to financial supervision in the Participating Jurisdiction.
Where a Financial Institution, other than a trust, is resident in two or more Participating Jurisdictions, it will be subject to the reporting and due diligence obligations of the Participating Jurisdiction in which it “maintains the Financial Accounts.”
How Important is a GIIN when Determining CRS Status?
GIIN is an abbreviation of Global Intermediary Identification Number assigned by the FATCA Registration System. The FATCA Registration System approves:
- Foreign Financial Institutions (FFIs)
- Financial Institution (FI) branches
- Direct Reporting Non-Financial Foreign Entities (NFFEs)
- Sponsoring Entities
- Sponsored Entities
- Sponsored Subsidiary Branches
Institutions and entities that assigned a GIIN can use it to identify themselves to withholding agents and tax administrators for FATCA reporting purposes.
Format:
The GIIN is formatted as XXXXXX.XXXXX.XX.XXX and consists of a 19-characters identification number made up of several identifiers. These characters will never contain the letter “O”.
Let’s Talk About Trust with Entity Interest Entities
The CRS commentary on page 178, paragraph C(4), subparagraph clearly 71 states: “If equity interest is held through a Custodial Institution, then the Custodial Institution is responsible for reporting, not the Investment Entity.” So, why, did Swiss authorities interpret this differently?
Why does CRS treat Non-Participating Investment Entities as Transparent Passive NFEs?
The anti-Avoidance Clause says that interests in other types of Financial Institutions (FIs) are equity and debt interests if the class of interest was established to avoid reporting. However, this is an objective criterion.
Therefore, equity and debt interests in FIs will likely be held by senior management, due to shareholder thresholds, except for Special Purpose Vehicle (SPV) FIs, which may have different structures.
This means that generally speaking, there is no look-through of non-participating FIs.
Strategies to Manage Cash to Maintain Non-Reportable Active NFE Status vs. Reportable Passive NFE.
OECD CRS Classification of Cash:
This issue is tricky, because the OECD CRS-related FAQ says that when cash is held for the production of income, even if it does not produce the income but has the potential to do so—for instance, interest—then it is classified as passive.
However, it is a subjective test, because if it could be shown that the accumulating cash is held for purposes other than producing passive income, such as building an office, then it is not passive.
Converting Passive NFE to a Non-Reportable Active One: Key strategies
Internally generated IP cannot be an asset: The International Financial Reporting Standards (IFRS) – IAS 38 on internally generated intangible assets such as Intellectual Property opines that costs to generate such type of intangible asset cannot be an asset and must be expensed in the year of incursion as it is impossible to distinguish these costs from operational costs. Therefore, the only costs that may be amortised are developmental costs, such as laboratory.
Externally acquired IP: must be amortised over a realistic short term.
Externally acquired IP assets: can be amortised in a balance sheet and amortised over a realistic short term. However, the intangible asset cannot appreciate unless it can be shown that there is an active market and a demonstrable price for the intangible asset.
Key Differences Between Passive and Active NFEs: Why Do They Matter?
- An Active NFE generally refers to an entity that operates an active trade or business with less than 50% of its passive income (gross) or less than 50% assets that produce passive income.
- A Passive NFE generally refers to entities, organisations, or companies that are in receipt of passive income or hold passive assets.
A Quick Overview of the Common Reporting Standard (CRS)
The Common Reporting Standard (CRS) is a new information-gathering and reporting requirement for financial institutions in participating countries or jurisdictions.
The Common Reporting Standard (CRS):
- Helps fight against tax evasion and protect the integrity of tax systems.
- Seeks to establish the tax residency of customers.
- Identify customers who appear to be tax residents outside of the country or jurisdiction where they hold their accounts and products.
- Report certain information to our local tax authority. They may then share that information with the tax authority where you are tax resident.
