Member states will have the tools to obtain the necessary information to ensure that tokenized assets are treated like traditional assets and to establish a level playing field with fair taxation
Article published on BeBeez Magazine n. 13 Sept. 23rd 2023, from the paper “The Directive 2011/16/EU on administrative cooperation in the field of taxation of crypto-assets: The DAC 8“
di Antonio Lanotte,
Chartered Tax Advisor and Senior Auditor – Advisory Board at Vernewell Group – Lecturer Vernewell Academy; Panel of Experts – EUBOF; Advisory Council – Blockchain for Europe; Tax Technology Committee – CFE Bruxelles (see here a bio).
The European Parliament approved on Sept. 13 the new text of the Directive on Administrative Cooperation (DAC), based on the text voted by Ecofin last May and expanding the scope of the directive to include the exchange of information on crypto-assets. The directive in its new version, known as DAC8, thus updates again the text originally written in 2011 to facilitate administrative cooperation between tax Authorities and the exchange of information only in relation to earned income, pension income and certain other payments. The last previous update was in 2021 (DAC7 or EU Directive 2021/514), which introduced new rules to improve cooperation procedures by inckuding the reporting of sales and services made through digital platforms.
Now DAC8 goes a step further and specifically sets out requirements for crypto-assets service providers on tax reporting. Under the newly approved text, member Sates must put in place a system that requires crypto-assets service providers to report on transactions on an annual basis; in addition, the exchange of national best practices between tax Authorities should be encouraged. Reporting should be relatively detailed. Investors, taxpayers and platforms will need to confirm that everyone is aware of their obligations and rights and what this entails. Companies offering crypto-assets services will have to report their clients’ transactions to national authorities, both for domestic and cross-border transactions. All, however, starting in 2026.
This is an action deemed necessary by EU Authorities given the exponential growth in the value of the crypto-assets market over the past 10 years and given the fact that tax fraud, evasion and avoidance is a major challenge for the EU. In fact, it is estimated that member States lose up to €170 billion a year due to tax fraud, evasion and avoidance. Below is a detailed analysis of what is new in the directive.
Some background
Crypto-assets are a digital representation of a value or right, which can be transferred and stored electronically, using Distributed Ledger Technologies (DLT) or similar technologies (such as blockchain). The EU Market on Crypto-Assets Regulation (Regulation (EU) 2023/1114 or MiCAR) (see here a previous artcle by BeBeez, editor’s note.) represents a breakthrough for the EU crypto-asset sector: Germany, Austria and France, among others, have already established licensing regimes for crypto-assets. Ireland has created a simple AML registration requirement. Others have no regulatory framework for crypto-assets.
With the entry into force of MiCA , unregulated offshore companies will no longer be able to target EU consumers. As explained in an in-depth article published in BeBeez Magazine No. 12 last Sept. 9, MiCA-regulated crypto-assets companies will gain significant market share in the EU over unregulated offshore competitors. Regulatory clarity in crypto-assets, in the midst of global uncertainty, could attract capital, talent and companies willing to start the tokenization process. This emerging sector could become an opportunity for the EU’s economic and technological revitalization.
For the taxation of crypto-assets internationally, it is useful to review the October 10, 2022 Crypto-Asset Reporting Framework (CARF), published by the OECD. This document leverages existing regulatory and tax frameworks, such as the OECD’s Common Reporting Standard and the Financial Action Tax Force (2021’s General reccomandations, 2019’s Virtual currency reccomandations, 2021’s Updates), which established the global standard for know-your-customer (KYC) procedures.
The Directive DAC8
The main aim of the directive is to ensure consistency between OECD and EU rules to increase the effectiveness of information exchange while reducing administrative burdens. DAC 8 adheres to the CARF and the OECD reporting standards. It will require cryptoasset service providers to collect information on transfers and comply with the new reporting rules, including the more stringent requirements for reporting Tax Identification Numbers (TINs). Crypto-Assets Service Providers (CASPs) and Crypto-Asset Operators (CAOs) are both included in the directive, a distinction from other European regulations such as the MiCA regulation and the anti-money-laundering package.
CASPs covered by MiCA may exercise their activity in the Union through passporting (“licensing”) once they have received their authorisation in a Member State . In order to foster administrative cooperation in this field with non-Union jurisdictions, CAOs that are situated in non-Union jurisdictions and provide services to EU crypto-asset users, such as NFT service-providers operators providing services on a reverse-solicitation basis, should be allowed to solely report information on crypto-asset users resident in the Union to the tax authorities of a non-Union jurisdiction insofar as the reported information is correspondent to the information set out in this Directive and insofar as there is an effective exchange of information between the non-Union jurisdiction and a Member State. CASPs authorised under MiCAR could be exempt from reporting such information in the Member States where it is holding the authorisation if the correspondent reporting takes place in a non-Union Jurisdiction and insofar as there is an effective qualifying competent authority agreement in place .
The TIN is essential for member States to match the information received with the data in their national databases, facilitating identification of the taxable persons concerned and assessing the correct taxes. Therefore, it is important that Member States require that TIN is indicated in the context of exchanges related to financial accounts, advance cross-border ruling sand advance pricing agreements, country-by-country reports, reportable cross-border arrangements, and information on sellers on digital platforms and crypto-assets. However, when the TIN is not available, such an obligation may not be fulfilled by the competent authorities of Member States .
The Commission is entitled to produce reports and documents, using the information exchanged in an anonymised manner, so as to take into account the taxpayers’ rights to confidentiality and in compliance with Regulation (EC)1049/2001 regarding public access to European Parliament, Council and Commission documents. The publication of anonymised and aggregated country-by-country report statistics, including on effective tax rates, on an annual basis for all Member States contributes to improve the quality of public debates on taxation affairs .
Last but not least, to guarantee an adequate level of effectiveness in all Member States while implementing Council Directive2014/107/EU and Council Directive (EU)2016/881 most particularly, minimum levels of penalties should be established in relation to two conducts that are considered grievous: 1. namely failure to report after two administrative reminders and 2. when the provided information contains incomplete, incorrect or false data, which substantially affects the integrity and reliability of the reported information . Therefore a set of minimum penalties for non compliance that are considered to be high, especially for smaller reporting cryptoasset service providers.
Conclusive Remarks
In conclusion, DAC8 is needed for several reasons. Crypto-assets are relatively new technology, making it important for member Sstates to have the tools necessary to get information needed to ensure that these new assets are treated more or less the same as traditional assets, and to establish a level playing field with fair taxation. There was no crypto-asset exchange of information before DAC 8. For these reasons Member States shall adopt and publish, by 31 December 2026 at the latest, the laws, regulations and administrative provisions necessary to comply with this Directive.
They shall immediately inform the Commission thereof. They shall forthwith communicate to the Commission the text of those provisions. For taxable periods starting on or after 1 January 2027, Member States shall ensure that the TIN of reported individuals or entities issued by the Member State of residence, where available, is included in the communication of the information . Information is important for crypto-assets because trading them on a platform usually will not transpire in the trader’s country of residence. The trader’s tax Authorities will be unaware from a lack of information. Some taxpayers may not even know that they must declare this trading. DAC8 is therefore an important system for putting in place the means to get this information to tax authorities. Furthermore for the purpose of complying with the reporting requirements, each Member State shall lay down the adequate rules to require a Crypto-Asset Operator (CAO) to register within the Union. The competent authority of the Member State of registration shall allocate an individual identification number to such Crypto-Asset Operator.
