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Crypto Watch: OECD Unveils System for Cross-Border Info Swaps

Seeking to prevent crypto assets from being used in tax evasion and other financial crimes, the Organization for Economic Cooperation and Development (OECD) recently presented a new system of information exchanges between national governments. The move is intended to bolster the OECD’s existing Common Reporting Standard (CRS). CRS is the OECD’s answer to the U.S. Foreign Account Tax Compliance Act (FATCA). Therefore, you can expect some of these reporting requirements to appear in future Internal Revenue Service (IRS) rulemaking projects.

In Response to Rapid Adoption

Dubbed the Crypto-Asset Reporting Framework, the new system was delivered to finance ministers and central bank governors from Group of 20 (G-20) countries at the officials’ meeting in Washington, D.C. Currently, the United States is a member of the OECD, but has its own rules and adoption process.

Responding to a G-20 request, the OECD developed the framework for reporting and subsequent automatic exchanges of information among taxing jurisdictions regarding crypto assets. In addition, the statement said the OECD is updating its CRS (its equivalent FATCA model), to cover digital financial products.

The OECD stated its new transparency initiative arrives at a time of “rapid adoption” of crypto assets tied to a variety of investment and financial uses. It added that, unlike traditional financial products, crypto assets can be transferred and held without intervention from banks and other intermediaries. In addition, no central authority monitors such transactions.

“The crypto market has also given rise to new intermediaries and service providers, such as crypto asset exchanges and wallet providers, many of which currently remain unregulated,” the statement added. As a result, crypto assets have not been covered by the CRS, “increasing the likelihood of their use for tax evasion while undermining the progress made in tax transparency” through the adoption of the standard.

“The common reporting standard has been very successful in the fight against international tax evasion,” OECD Secretary-General Mathias Cormann said in the statement. He pointed out that, in 2021, more than 100 jurisdictions exchanged information on 111 million financial accounts, covering an estimated $10.8 trillion in total assets.

Additional Transparency

The framework will add transparency to transactions involving crypto assets by enabling annual sharing of relevant information with the tax administrations of jurisdictions where an individual or entity resides. The framework will target any digital representation of value that relies on blockchain or similar technology to cryptographically secure a distributed ledger for validating transactions.

In its statement, the OECD said it anticipates carve-outs for assets that can’t be used for payment or investment purposes, as well as for assets that are “already fully covered by the CRS.” Entities or individuals that provide services effectuating exchange transactions in crypto assets for, or on behalf of, customers would be obliged to report under the framework.

Model Rules

The crypto asset framework also contains model rules that can be transposed into domestic legislation and commentary to help administrations implement those rules, according to the OECD.

Over 100 countries and territories with taxing power participate in the CRS, which the OECD implemented in conjunction with the 2010 enactment of FACTA in the United States. Under FATCA, countries are required to exchange bank account information with the U.S. federal government, which isn’t a CRS party.

In May, at a conference in Washington D.C., an official with the U.S. Department of the Treasury described similarities and differences between digital asset reporting systems then being proposed by the United States and the OECD. Erika Nijenhuis, Senior Counsel in the Treasury Department’s Office of Tax Policy, said that a plan included in the Biden administration’s fiscal 2023 budget filled a “gap” in the crypto asset reporting framework for which the OECD had sought public comment beginning in March.

A Telling Reminder

The OECD has risen to prominence on the world stage recently because of its central role in the Global Tax Deal, which remains a work in progress. The organization’s move to further regulate crypto assets is a telling reminder of the growing popularity and inherent risks of these digital-based investments. You can expect to see these type of rules incorporated (at some point) into the U.S. requirements in filing FBARs.

For assistance meeting FBAR requirements, please contact our international tax advisors at Moore Doeren Mayhew today.

Contacts:

steve-wedge-blog

Steve Wedge

Melissa LaVenia

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