Proposed EU ‘validation’ of OECD cryptoasset reporting framework and other DAC amendments

June 2023 | EXPERT BRIEFING | FINANCE & INVESTMENT

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On 8 December 2022, the European Commission (EC) proposed establishing a reporting framework which would require cryptoasset service providers to report transactions made by European Union (EU) resident clients, as well as extending the scope of the mandatory automatic exchange of information to e-money.

The reporting framework would be set up by a seventh amendment to the Council Directive 2011/16/EU on administrative cooperation in the field of taxation, the Directive on Administrative Cooperation (DAC), which is the main framework for other data exchanges between tax authorities. This new proposal for amending the DAC, DAC8, also puts forward a number of other changes to improve the existing exchange of tax information.

The DAC8 proposal, once adopted as a Directive with the required unanimity, which is likely to occur on 16 May 2023, should be transposed into member states’ national law by 31 December 2025 and, with a few exceptions, will come into effect on 1 January 2026.

It should be noted that this article is based on the text published by the EC on 8 December 2022 and that it is very likely that in the final approved text some provisions, especially those referring to other changes, may differ or even be dropped.

Reason for the DAC8 proposal

The emergence of alternative means of payment and investment, such as cryptoassets and e-money, threaten to undermine the progress made on tax transparency in recent years and pose substantial tax evasion risks. It has therefore become necessary to update the DAC to expand its scope to include these new methods of payment and investment.

Moreover, some inefficiencies and the need to improve several areas have been highlighted by the European Court of Auditors and the European parliament and taken into account in the DAC8 proposal.

OECD work on cryptoassets and e-money

The DAC8 proposal should be seen in the context of the parallel work undertaken by the Organisation for Economic Co-operation and Development (OECD) to agree on a standard for the exchange of information for tax purposes in relation to cryptoassets, namely the OECD Crypto-Asset Reporting Framework (CARF), and extending the scope of the Common Reporting Standard (CRS) to cover e-money, which resulted in an agreement in August 2022 and was welcomed by the G20 in November 2022.

In April 2021, the G20 mandated the OECD to develop a framework for the automatic exchange of tax information on cryptoassets. In August 2022, the OECD approved the CARF which provides for the reporting of tax information on transactions in cryptoassets in a standardised manner, with a view to automatically exchanging such information.

In August 2022, the OECD also approved amendments to the CRS to bring certain electronic money products and central bank digital currencies (CBDC’s) into scope. In light of the CARF, changes have also been made to ensure that indirect investments in cryptoassets through derivatives and investment vehicles are now covered by the CRS.

The DAC8 proposal is based on the CARF and consistent with it, but one of its main differences is that providers of cryptoasset services active in the EU must be regulated by the EU Markets in Crypto-Assets (MiCA) Regulation to be in the scope of DAC8.

The DAC8 proposal also contains a switch-off mechanism for those reporting cryptoasset service providers that have already declared reportable transactions in their non-EU jurisdiction, under the condition that the respective third-party jurisdiction is recognised and has implemented and enforces the CARF (or equivalent) legislation.

Rules on exchange of information on cryptoassets

The most relevant rules contained in the DAC8 proposal relate to the exchange of information on cryptoassets and e-money, but these are not the only new provisions that can be found in this proposal, as outlined below.

Currently, the DAC lays down obligations for financial intermediaries to report financial account information to tax administrations that are then required to exchange this information with other relevant member states. However, most cryptoassets are not subject to reporting under this Directive because they do not constitute money held in depository accounts nor financial assets. In addition, cryptoasset service providers are, in most cases, not covered by the existing definition of financial institutions under the DAC.

The characteristics of cryptoassets makes it very difficult for tax authorities to trace and detect taxable events. The problem is intensified when trading is carried out using cryptoasset service providers located in another country, or when it is done directly between individuals or entities established in another jurisdiction.

The DAC8 proposal sets up rules on reporting and exchange of information covering cryptoassets and their users. Cryptoasset service providers with clients residing in the EU are obliged to report regardless of their size or location. Therefore, third country cryptoasset service providers are required to report information on cryptoasset transactions involving EU resident users, unless the switch-off mechanism comes into play.

Reporting steps. As a first step, the proposed DAC8 rules require cryptoasset service providers to collect and verify information in line with due diligence procedures laid down in the proposal.

As a second step, the reporting cryptoasset service providers must report to the relevant competent authority information on the cryptoasset users – those who use the service provider to trade and exchange their cryptoassets. Reporting must take place only in one member state. In particular, information reported by a cryptoasset service provider must be communicated to the competent tax authority of the member state where it is resident for tax purposes or has received its authorisation, or where it is registered.

The third step involves the competent authority of the member state that has received the information from the cryptoasset service provider reporting it to the competent authority of the member state where the cryptoasset user is resident.

Reportable transactions and reportable users. Reportable transactions are exchange transactions and transfers of reportable cryptoassets. Both domestic and cross-border transactions are within scope of the DAC8 proposal. A reportable user is a cryptoasset user resident in a member state that is a reportable person. Excluded persons are, among others, listed entities, international organisations, central banks and financial institutions other than investment entities.

Rules on exchange of information on e-money

DAC2 implemented within the EU the OECD CRS, extending the scope of the mandatory automatic exchange of information to financial information. The provisions introduced by DAC2 have been reviewed to take into account amendments to the CRS which extend its scope to cover e-money products and CBDC’s.

In line with these amendments, the DAC8 proposal lays down rules requiring financial institutions to report on e-money and CBDC’s.

Other amendments to the exchange of information

The DAC8 proposal also contains other provisions aimed at extending the scope of exchange, as outlined below.

Tax rulings for wealthy individuals. Currently, the DAC lays down rules for the automatic exchange of advance cross-border rulings and advanced pricing agreements for persons other than natural persons. Under the DAC8 proposal, this provision is extended to high-net-worth individuals according to the terms outlined below, which depart from the proposal put forward by the EC.

Non-custodial dividend income. In order to close loopholes that allow tax evasion, tax avoidance and tax fraud, member states should also be required to exchange information related to income derived from non-custodial dividends (income from dividends that are not paid or cashed in a custodial account).

Minimum financial penalties. In order to ensure the effectiveness of the DAC, the EC tabled the application of a minimum financial penalty for cases of recalcitrant non-reporting, but it seems this has been dropped.

Use of information exchanges for other purposes. Amendments are introduced to ensure that information reported and exchanged under the DAC can be used for purposes other than direct taxation, in situations where there is an agreement at EU level to use such information to implement sanctions in an international context.

The DAC8 proposal also clarifies that information communicated between member states may be used to assess, administer and enforce customs duties, and for anti-money laundering and countering the financing of terrorism purposes.

Reporting of information on taxpayer identification numbers. A new provision is included requesting that member states ensure that the taxpayer identification number (TIN) of reported individuals or entities issued by the member state of residence is included in the information exchanged.

Next steps

Following discussions by member states on 19 April 2023, some changes have been made to the DAC8 proposal. The requirement to exchange TINs for DAC7 and DAC8 has been removed and the starting period of the TIN reporting requirement for DAC1, DAC3, DAC4 and DAC6 has been postponed. The new minimum penalties regime has been deleted. Regarding the exchange of tax rulings for wealthy individuals, member states have now focused on rulings in which the amount of a transaction or series of transactions of the advance cross-border ruling exceeds €1.5m.

Final remarks

It remains to be seen whether all the amendments will go through, in particular those not pertaining to cryptoassets and e-money. Some institutions have also vowed to include the mere holding of these assets in-scope of the reporting obligations.

An agreement was recently achieved at OECD level to implement a common reporting standard on the reporting of cryptoassets (CARF) and to extend the CRS to e-money and digital currencies. This amendment puts in question the degree of equivalence in the scope of application between the CRS and the Foreign Account Tax Compliance Act (FATCA).

Regarding the rest of the amendments, they continue the trend of widening the scope of automatic exchange of information, with a new focus on individuals, in an international post-pandemic context, where tax competition among member states is shifting from luring multinational groups to digital nomads and wealthy individuals.

Regrettably, once again, member states have lost an opportunity to recognise the rights of taxpayers when amending the DAC, against the backdrop of exchange of information and, generally, additional cooperation among EU tax authorities. The European Court of Justice is, and will continue, to recognise these rights in light of the European Charter of Human Rights.

Eduardo Gracia is head of the tax practice group and Lorena Viñas is a senior lawyer at Ashurst. Mr Gracia can be contacted on +34 91 364 9854 or by email: eduardo.gracia@ashurst.com. Ms Viñas can be contacted on +34 91 364 9417 or by email: lorena.vinas@ashurst.com.

Eduardo Gracia and Lorena Viñas

Ashurst