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The EU Commission has focused its attention on the cryptocurrencies and crypto-assets taxation. This type of assets has features of creation, growth and exchange of value, which raises issues of consumer and investor protection, money laundering and terrorist financing as well as tax evasion. Since this form of assets can be used for payments and investment purposes, that turns the classification of assets and tax compliance requirements more complex.
The existing rules on administrative cooperation do not cover the area of electronic payments and crypto, therefore the lack of proper exchange of information and cooperation creates prospective loopholes which EU intends to address now.
The existing provisions of DAC provide for an obligation for financial intermediaries to disclose information to the tax administration for exchange of information purposes. However, no such requirement existed for intermediaries to report on crypto assets and e-money transactions. Therefore, the overall degree of tax transparency is low.
The new EU initiative aims at improving cooperation between national tax authorities, targeting tax revenue losses due to the underreporting of revenue generated by crypto-assets and e-money. The Commission wants to ensure that revenues coming from investments in or payments with crypto-assets and e-money will be subject to tax.
To achieve efficient cooperation and reporting DAC8 will need to standardize the requirements and define crypto-assets, identify the relevant intermediaries for tax and common reporting purposes. Relevant reporting obligations will be imposed on crypto-asset service providers.
The goal is to limit the possibilities to take advantage of potential loopholes while at the same time avoiding harm to innovation by imposing too heavy compliance burden on businesses. In this regards, standardized requirements can keep compliance costs to a minimum by providing a common EU reporting standard.
Regulating such an environment requires understanding which stakeholders are involved, what activities should be subject to this regulations, as well as how the Member States currently qualify crypto-assets in order to apply the relevant tax provisions.
On 10 March 2021, the EU Commission has launched a public consultation to strengthen rules on administrative cooperation and expand the exchange of information in the area of e-money and crypto-assets. The EU Commission asked the stakeholders whether cryptoasset service providers should be subject to reporting obligations and whether the reporting rules should be the same for all providers – or some exemptions should be introduced. Such discussions will be covered through an update of the EU directive on administrative cooperation (DAC).
The consultation is already closed. Many reputable institutions have given their opinions (KPMG UK, European Banking Federation, Coinbase, etc), which are currently under consideration of the Commission.
Besides the consultation the Commission examines the existing practice and legislation on mandatory reporting on crypto assets and e-money to national tax authorities.
Current status and implementation.
The Commission’s DAC8 adoption was planned for third quarter 2021. No new updates have been provided in this respect yet, as well as no draft directive has been published yet.
The Directive is a legislative act setting objectives that all EU countries must reach and transpose into their national legislation within a specific time frame. Therefore, upon acceptance DAC8 will have to be implemented into national legislation of all EU Member states.
Obviously, DAC8 will bring additional regulatory requirements, administrative burden and costs covering KYC and reporting requirements for service providers in relevant business, as well as a disclosure obligation for cryptoasset owners.
Nevertheless, it is expected that the overall effect of DAC8 on tax revenues will be positive for society. Introduction of transparent rules of cooperation between tax authorities and reporting of tax information on crypto- assets and e-money will give to tax administrations more instruments to check that taxpayers pay their taxes.
When it comes to costs of compliance, an EU wide common reporting standard for crypto-assets and e-money will likely keep to a manageable level the compliance costs and burdens for the markets operating in different EU countries rather than potentially 27 different reporting requirements.