DAC8 enters the stage of opinion review, the EU’s encrypted tax regulation is comingDAC8 enters the opinion review stage, EU's encrypted tax regulation imminent.
Authors: Giles Mitchell & Jean Kizito; Translation: TaxDAO
Is the Cryptocurrency Asset Report Framework (CARF) of the Organization for Economic Cooperation and Development (OECD) consistent with the European Union’s Directive on Administrative Cooperation (DAC)? What are the similarities and differences between the two? How will they cooperate in regulating the tax issues of cryptocurrencies?
Over the past decade, the use of alternative payment and investment methods such as cryptocurrency assets and electronic currencies has grown rapidly. This growth has attracted widespread attention from global regulatory authorities, prompting them to issue various proposals and frameworks to ensure that recent progress in tax transparency keeps pace with the evolving financial landscape and to ensure compliance with tax obligations for cryptocurrency assets and electronic currencies. The latest framework that plays a leading role in this regard is the Cryptocurrency Asset Report Framework (CARF) and the Common Reporting Standard (CRS) amendment published by the OECD in October 2022.
Similar to existing tax and regulatory frameworks such as the CRS in 2014 and the Financial Action Task Force (FATF), CARF is a global tax transparency framework for automatic exchange of tax information for cryptocurrency asset transactions. CARF applies the due diligence requirements of the CRS to Reporting Cryptocurrency Asset Service Providers (RCASPs) with reporting obligations, requiring them to provide detailed reports on cryptocurrency asset transactions. In addition to CARF, the proposed CRS amendment also includes cryptocurrency assets in the definition of financial assets, which means that custodians and investment entities will be required to comply with the CRS requirements and report and record all cryptocurrency asset users. Based on the proposed CRS amendment, central bank digital currencies and specific electronic currency products are also included in the definition of institutional deposits, but they are not within the reporting scope specified by CARF.
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CARF is an independent framework consisting of rules and annotations that can be converted into domestic law. In December 2022, the European Commission became the first organization to attempt to convert CARF and the CRS amendment into law. To this end, the European Commission issued the Directive on Administrative Cooperation (Directive 2011/16/EU), also known as DAC, 7th amendment, or DAC8. Although DAC8 uses the Markets in Crypto-Assets Regulation (MiCA) instead of the definitions in CARF, it is generally consistent with CARF and includes the OECD’s proposed amendments to the CRS.
However, there are also some significant differences between CARF and DAC8, which will be discussed in the following sections.
1. Effective Date: CARF currently does not have an effective date, while DAC8 will take effect on January 1, 2026, for RCASPs (identity verification services take effect from January 2025, TIN verification takes effect from January 2027). Financial institutions/RCASPs will need to update their processes and systems to correctly obtain the necessary information for cryptocurrency assets.
2. Extraterritorial Impact: DAC8 requires non-European Union RCASPs providing cryptocurrency services to the European Union to register with EU member states and comply with the due diligence and reporting requirements of the registered member states. Although this does not apply to non-European Union RCASPs operating in jurisdictions adopting CARF (as they will be considered operating within qualified non-European Union jurisdictions), non-European Union RCASPs in countries/regions that have not adopted CARF may need to develop processes and control measures to ensure that their European Union customers comply with DAC8 for record-keeping and reporting purposes.
3. Transaction Blocking: According to DAC8, if an RCASP fails to obtain the required information within 60 days and after two follow-ups, it must block Crypto Asset Users (CAUs) from conducting exchange transactions. This means that the RCASP will need to establish a robust control system to track its document requests and prevent future exchange transactions without receiving valid information. This may be operationally challenging and may conflict with the RCASP’s legal and contractual agreements. In contrast, according to CARF, if an RCASP fails to obtain the required information within 60 days, it needs to report the CAU as a reporter and determine if there are any controlling persons (if there are entities). Although this also requires the RCASP to implement new controls and processes, the impact on the RCASP and CAU may be significantly different from the requirements of DAC8 regarding blocking future transactions.
4. Notification of Reportable Data to Individual Customers: DAC8 requires RCASPs to inform individuals that the data they provide will be used for reporting purposes and then send all reporting information to individuals before submitting the data to tax authorities. The RCASP must also provide all information required by the General Data Protection Regulation (GDPR), similar to the current CRS customer notification requirements applicable in various jurisdictions. CARF does not require this.
5. Penalties: The proposal stipulates that if reporting is not made after two valid administrative reminders, or if the provided information contains incomplete, incorrect, or false data and exceeds 25% of the information to be reported, the minimum penalty should be imposed. These minimum penalty amounts range from 50,000 euros (20,000 euros for individuals) to 500,000 euros. The European Commission evaluates the penalty amounts every five years. Therefore, the RCASP must ensure that its controls and processes are in place to obtain, store, and report all relevant information and confirm its accuracy.
The European Commission has requested that all parties concerned raise any concerns and provide feedback on the proposed DAC8 by March 30, 2023, and is currently reviewing the feedback received.
Implementing CARF and DAC8 may require financial institutions/RCASPs to undertake significant system and process development. This is particularly important for entities that have not been previously registered under FATCA and CRS, as they may lack due diligence and system infrastructure. Some financial institutions may also be RCASPs and may need to report accounts under CARF and CRS. This means that financial institutions/RCASPs need to not only determine which clients’ assets need to be reported but also determine under which regime to report and configure their systems to select the relevant information for each regime.
That is to say, RCASPs and financial institutions falling within the jurisdiction of DAC8 are likely to face greater challenges in implementing and complying with the directive than RCASPs and financial institutions falling within the jurisdiction of CARF (as it stands). As mentioned above, the European Union is the first country or organization to attempt to convert the CARF and CRS amendments into law, and the negotiation period is still ongoing. Therefore, we expect the European Council to make some modifications to the DAC8 directive after receiving industry feedback. Similarly, other countries are also likely to convert CARF and CRS amendments into law and incorporate new or similar nuances, thereby significantly impacting the requirements for financial institutions and RCASPs in these jurisdictions. Therefore, entities currently falling under the RCASP or FI definitions under CARF are best advised to start preparing for the necessary control, process, and system improvements.
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