Coupled with the growth in the digital economy as well as crypto-assets and e-money in particular, the European Union (EU) has proposed a new Directive on Administrative Cooperation (DAC) known as “DAC8”.
It is expected that DAC8 will introduce uniform disclosure requirements for e-money and crypto intermediaries (e.g. crypto exchanges) to ensure tax authorities across the EU have increased visibility in respect of the evolving digital economy and crypto-assets in particular. DAC8 could impose significant mandatory reporting requirements on e-money and crypto intermediaries in respect of their customers.
DAC8 is being introduced to enhance tax compliance in the digital economy and to assist tax authorities identify circumstances where tax may be due from persons deriving income and gains from crypto assets and e-money.
From the perspective of tax authorities, there is currently a deficit in terms of information available to in respect of crypto assets and e-money. The decentralised global nature of these assets as well as the current lack of a sufficiently robust regulatory framework may be resulting in a loss of tax revenue across the EU whether this arises though evasion, aggressive avoidance or lack of knowledge on the part of taxpayers.
Notwithstanding the crypto crash in the first half of 2022, given the notable increase in people investing in crypto assets and e-money in recent years, including first time investors, there is a real risk that many crypto investors are simply unaware of their tax obligations. In this regard, the existence of a perceived disconnect between the physical and digital worlds is a possible contributory factor.
Similar to previous EU mandatory reporting requirements, such as DAC 6, DAC8 is expected to introduce uniform disclosure requirements, possibly in the form of a new annual reporting obligation for e-money and crypto intermediaries (e.g. crypto exchanges) with an EU nexus (e.g. intermediaries tax resident or with a place of management or a permanent establishment in the EU). In order to avoid inadvertently creating a competitive advantage for intermediaries operating outside of the EU, the nexus rules could be broadly drafted to capture any intermediaries providing services to EU based customers.
Intermediaries will likely be required to file returns containing details of their customers’ acquisitions, disposals and income earned during a period. At the time of writing, the exact form and regularity of the reporting requirements under DAC8 is to be confirmed, as are the intermediaries subject to DAC8 reporting.
Additionally, DAC8 may also impose significant information gathering requirements for e-money and crypto intermediaries as the information to be reported on any DAC8 filing might extend beyond that currently held by these intermediaries. Any requirement on intermediaries to hold further personal information on their customers may also give rise to additional data protection considerations for intermediaries subject to DAC8. Given the relatively nascent nature of the crypto industry, whether the ultimate DAC8 obligations will prove too onerous or otherwise for some crypto intermediaries remains to be seen.
The public consultation for DAC8 closed in June 2021 and feedback from the consultation process is expected in September/ October 2022. It is unclear at present when the DAC8 reporting requirements will become effective but further details are anticipated later in 2022.
Given the global nature of crypto-assets and e-money, other organisations and countries are also grabbling with the issues surrounding crypto-assets and e-money. The Organisation for Economic Co-operation and Development (OECD) is also in the process of creating a crypto-asset reporting framework (CARF) and it is our understanding that the OECD’s approach and DAC8 will be broadly aligned. The United States of America recently enacted new tax reporting provisions for crypto-assets and it is possible further countries will also follow suit in introducing domestic crypto reporting regimes.
Mandatory reporting to tax authorities is likely only to be one strand of additional regulations that will come to bear on the crypto industry. In addition to DAC8, the EU is currently in the process of the introducing a single licensing regime in the form of the Markets in Crypto-Assets (MICA) regulation, which is expected to promote market stability and enhance levels of consumer and investor protection.
Regardless of whether the prices for various cryptocurrencies are going to the moon or otherwise, it would appear that the global reporting obligations landscape for crypto-asset and e-money intermediaries is only set to increase significantly in the near future.
We can assist in monitoring the progress of DAC8 and keep you informed of any relevant updates.
Once the draft DAC8 legislation is made available, we can assist in implementing effective processes to ensure DAC8 risks are identified and managed accordingly as follows:
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