Since the late 1990s, the world’s taxpayers have been affected by two macro trends:
the growing fiscal voracity of the States; and
the increasingly frequent attacks on people’s privacy.
When we say “attacks on privacy” we are not only referring to the constant cases of theft of private information (and its subsequent publication), but also to the growing pressure on tax havens and also to laws such as the US Patriot Act, US Corporate Transparency Act, FATCA and especially the Common Reporting Standard (or simply “CRS”), which is a kind of FATCA on steroids.
Unfortunately, hand in hand with the pandemic, the protests against restrictions on individual rights and Russia’s invasion of Ukraine, two new trends appeared that were just as damaging to ordinary citizens as the previous ones: the demonization of wealth and advances against private property.
For example, millions of Russians have had their assets seized and frozen simply because of their nationality, including by Switzerland, which has broken its characteristic neutrality by choosing to crack down on private property.
For those who find the defense of the property rights of Russian citizens very “extremist”, look at what happened to the Canadian citizens who supported the truckers’ marches against Trudeau or, rather, in favor of greater individual freedoms.
But the topic does not end there, and that is why we have decided to write this column.
Given that, with the excuse that cryptocurrencies are functional to the evasion of sanctions by the Putin regime – something technically unlikely if we analyze the liquidity of the cryptocurrency market and irrelevant in the face of the rights that it is intended to subjugate – it has been decided for accelerating regulatory processes such as the MICA Regulation of the European Union, restricting transactions to certain wallets, and even advancing on an exchange of information between states, the aforementioned “CRS”, specifically on exchanges and other cryptoactive intermediaries.
CRS for dummies
Let’s start by explaining, then, What is CRS?
In a simple way, it is a global, reciprocal and automatic system that leaves practically no fiduciary structure or unregulated situation and that leaves very few loopholes. The biggest of them is, without a doubt, the non-adherence of the United States.
The automatic exchange of tax information is, forgive the redundancy, automatic.
This implies, and it is important to be very clear here, that absolutely no request for information from anyone is necessary. In other words, once CRS comes into force between two specific countries, the data will flow annually between their tax authorities.
Seated this, let’s analyze what information is going to be exchanged, what precautions are going to be taken, etc.
Take the case, for example, of Switzerland and Argentina, an exchange that – it is worth clarifying – came into force in 2019 and covered information corresponding to 2018. What we are going to explain from here on will be replicated for the rest of the adherents to the CRS system (currently more than 100 countries and jurisdictions, including Uruguay, Panama, BVI, Cayman Islands, etc.).
Every year, in the month of April, Swiss banks will deliver certain information about their foreign clients (in this case, with tax residence in Argentina) to the Swiss tax authorities. Once this information is compiled, and without request of any kind, the Swiss tax authorities will send this information to their colleagues in Argentina. This will happen in September of each year.
The information to be exchanged is basically the following:
personal information of the client (name, address, tax identification number, place and date of birth, etc.);
bank identification number;
Bank account number;
the account balance at the end of the year; and
profits made during it.
The financial products in which taxpayers have invested or what they have spent their money on will not be reported.
The information is exchanged encrypted and can only be used for tax purposes. At least in theory…
If any of the countries, let’s say Argentina, does not protect the information received or uses it for other purposes, the other country, in this case Switzerland, could interrupt the provision of information. This is something that has not yet happened with respect to any country.
What happens, for example, if I have the financial assets in the name of a company or a trust?
So far, we have seen the simplest case, that is, the one in which the account abroad (in this case in Switzerland) is opened in the name of the Argentine taxpayer.
In the event that the account is in the name of a company or a trust, roughly the following would happen:
If the company is a passive income company (basically the typical offshore companies incorporated for the purpose of holding financial assets), Swiss banks will have to provide the aforementioned information regarding each of the individuals who qualify as “ controlling person”. In the case of companies in which someone has at least 25% of the shares, that or those person(s) will be the “controlling persons”, or controllers. Each of them was reported to the country of her residence. If there is no person who meets this requirement, the directors of the company will be informed.
If the company is active, that is, if it develops a commercial/business activity that generates active income, then said company will be excluded from the tax information exchange regime.
In the event that the account was opened in the name of a trust, or a company whose shares had been placed in trust, then the bank must not report anything, but the trustee must do so, in this case, not to the authorities Swiss tax authorities but to those corresponding to your domicile.
Now yes, are we going towards a CRS for crypto assets?
What you intend to do now always dire OECD, creator and promoter of the CRS, is that said automatic information exchange system also covers operations and accounts with crypto assets, something that has surprised many but that we always anticipated would happen. Why would the OECD stop with financial assets? What would be the reason to do it?
Specifically, the OECD is promoting a set of amendments to the CRS regime, in order to cover not only crypto assets, but also other alternative products and intermediaries to those of the traditional financial system. Broadly speaking, the Crypto-Asset Reporting Framework (“CARF”), which is currently in draft status, consists of the following points;
expand the CRS information exchange regime to other types of assets, including cryptographic ones, without giving a precise definition, and essentially imposing the obligation on exchanges and other types of intermediaries, also expanding those required to report; and
intensify the KYC requirements and identity control by the intermediaries that offer the service in order to effectively individualize the user that must be reported.
What should they report?
The draft speaks of four types of “relevant transactions” that must be reported:
exchanges between crypto assets and fiat currencies;
exchanges between one or more forms of crypto assets;
reportable retail payment transactions; and
crypto asset transfers.
Another relevant issue is how these transactions should be reported, since emphasis is placed on “usability” by the tax administrations. In this sense, it is established that the transactions will be reported segregated by type of cryptoactive and distinguishing between input and output transactions, in addition to the type of operation they represent (for example, airdrops).
MICA
MICA – Markets in Crypto Assets – is one of the proposals that is part of a package of measures that the European Commission seeks to sanction within the framework of the digital transformation of the financial system.
Specifically, MICA proposes to regulate crypto asset service providers, known as “exchanges” or by the name of the “Virtual Assets Services Providers” license, focusing on the process of issuing and trading crypto assets.
These days this regulation has emerged in the media due to some controversial points, including the possibility of prohibiting currencies that use “proof of work”, a mechanism implemented by Bitcoin and other currencies. Fortunately, that possibility has been ruled out until at least 2025. Unfortunately, time flies.
Another controversial point of regulation that in principle will be voted on this week in the European Parliament is the imposition of information duties on exchanges of transactions that are carried out in excess of one thousand euros. If approved, intermediaries must inform the address that receives said withdrawals, the identity of the person who receives them, and even admits the possibility of preventing or restricting shipments to/from self-custodial wallets, a proposal that the FATF had already raised a few years ago. a few months
Conclusions
Progress on people’s freedom is imminent and essentially on their property rights, among which are crypto assets. What today begins with an information regime is already becoming a restriction on the trade and use of cryptocurrencies, ignoring and subjugating the financial freedom of people to choose what and how to reserve their money. Let it be clear, each person is free to protect their money in a bank, in an exchange or in a self-protected wallet, admitting the risks of each option, of course. In addition, these restrictions would imply restricting access or even excluding those who, thanks to decentralization, have been able to access financial services.
That said, the regulatory landscape does not appear to be very friendly to crypto assets, regardless of whether such restrictions are sanctioned or not, it is clear which direction regulators will take.
Given the advances made by states regarding their ownership and essentially their decentralized custody, from the point of view of protecting privacy and financial freedom that many people have always associated with this type of asset, it will be increasingly necessary to planning on its tenure and administration.
Obviously, the “self-custody” of this type of asset outside of regulated exchanges, that is, in wallets with their own private keys, presents its own challenges and, whoever decides to go down that path, should think very carefully about how to transmit its wealth to future generations.
It seems that the holders of this type of asset are going to face sooner than many of them thought the risks faced by the holders of other types of assets (lack of privacy, inheritance issues, tax optimization, asset protection and problems related to to the lack of legal certainty). When this happens, we will be available to give them a hand.
Disclaimer: The information and/or opinions expressed in this article are the sole responsibility of Martín Litwak and Camila Da Silva Tabares and do not necessarily represent the points of view or the editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
Martin Litwak is a lawyer specializing in international estate planning and investment fund structuring. He is the founder of Untitled (formerly known as “Litwak & Partners”), a law firm and Legal Family Office. He currently serves as CEO of the firm. He is also the CEO of Smart Structuring, a Blockchain platform that allows trusts to be stored and managed.
Camila Da Silva Tabares works in the Corporate & Funds area of Untitled SLC. She has a Diploma in Management & Strategy in Cybersecurity and in Estate Planning & International Taxation.