EUROPEAN COMMISSION

Brussels, 8.12.2022

SWD(2022) 401 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Initiative to strengthen existing rules and expand the exchange of information framework in the field of taxation so as to include crypto-assets

Accompanying the document

Proposal for a Council Directive

amending Directive 2011/16/EU on administrative cooperation in the field of taxation

{COM(2022) 707 final} - {SEC(2022) 438 final} - {SWD(2022) 400 final} - {SWD(2022) 402 final}

Table of Contents

1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT    

2. PROBLEM DEFINITION    

2.1 What are the problems?    

2.2 What are the problem drivers?    

2.3 How will the problem evolve in the absence of an EU policy initiative?    

3. WHY SHOULD THE EU ACT?    

3.1 Legal basis    

3.2 Subsidiarity: Necessity of EU action    

3.3 Proportionality: The added value of EU action    

4. OBJECTIVES: WHAT IS TO BE ACHIEVED?    

4.1 General objectives    

4.2 Specific objectives    

5. WHAT ARE THE AVAILABLE POLICY OPTIONS?    

5.1 Baseline scenario (Option 0)    

5.2 Recommendation for the implementation of a global standard (Option 1)    

5.3 EU legislative initiative – Six options regarding the type of reporting and the impact of having a threshold for SME- (Options 2-7)    

5.4 Options discarded at an early stage    

6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?    

6.1 Overview of options    

6.2. Economic impacts    

6.2.1. Benefits    

6.2.2.    Costs    

6.2.2.1 Impact on CASPs    

6.2.2.2 Impact on tax administrations and Commission    

6.2.3.    Impact on sector’s competitiveness and SMEs    

6.2.4.    Social and environmental impacts    

7. HOW DO THE OPTIONS COMPARE?    

8. PREFERRED OPTION    

9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?    

9.1 Indicators for monitoring and evaluation    

9.2. Monitoring and reporting    

ANNEX 1:    PROCEDURAL INFORMATION    

ANNEX 2:    STAKEHOLDER CONSULTATION    

ANNEX 3:    WHO IS AFFECTED AND HOW?    

ANNEX 4:    ANALYTICAL METHODS    

ANNEX 5:    IT SOLUTION    

ANNEX 6: STRENGTHENING OF ADMINISTRATIVE COOPERATION BETWEEN TAX AUTHORITIES    

ANNEX 7:    OVERVIEW OF DIFFERING PENALTIES APPLIED BY MEMBER STATES    

ANNEX 8:    BIBLIOGRAPHY    

Glossary

1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT

In the political guidelines for the European Commission, President von der Leyen stressed the Commission’s commitment to stepping up the fight against tax fraud, evasion and avoidance to ensure an economy that works for people 1  and where everybody pays their fair share. Fair and efficient taxation not only promotes social justice for citizens and a level playing field for businesses but also ensures that citizens and businesses can fully reap the benefits of the Internal Market. The COVID-19 pandemic has added greater urgency to the need to protect public finances and to ensure fair burden sharing.

On 15 July 2020, the European Commission adopted an Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy 2 (hereafter referred to as the “Tax Action Plan”). The Tax Action Plan contains measures to reinforce the fight against tax abuse, to help tax administrations to keep pace with a constantly evolving economy and to ease the administrative burden for citizens and companies. Furthermore, the Tax Action Plan envisages improving administrative cooperation between national tax authorities in existing as well as newly developing areas. 

The European Parliament has on several occasions stressed the political importance of fair taxation and of fighting tax fraud, evasion and avoidance. For example, in a resolution 3 from 2019, the European Parliament called on the Commission to do more to fight tax fraud, evasion and avoidance including through greater administrative cooperation and exchange of information between Member States. More recently, the European Parliament published a resolution about implementing the EU requirements for the exchange of tax information highlighting aspects to improve administrative cooperation, some of which are addressed by this initiative. 4

Fair taxation and the fight against tax fraud, evasion and avoidance are priorities shared by the Council and the European Parliament. Better administrative cooperation and greater exchange of information between tax administrations are essential in the fight against tax avoidance and evasion. Major progress has been made over the past years in this respect.

The mechanism for cooperation and exchange of information within the EU for the purpose of direct taxation is framed by the Council Directive 2011/16/EU on administrative cooperation in the field of direct taxation 5 (hereafter referred to as “Directive 2011/16/EU” or “DAC”). Through the provision of an efficient mechanism for administrative cooperation and exchange of information between Member States, the DAC aims at protecting the financial interests of the Member States and the EU while fighting against tax fraud, evasion and avoidance. To this effect, it ensures a proper functioning of the Internal Market, greater transparency, as well as an overall fair taxation system. The scope of DAC has been extended six times over the last years in order to meet new challenges and adjust to new economic realities. 6

Table 1 – DAC evolution

The mechanism for the exchange of information under DAC is in most instances based on a two-step approach: 1. reporting to the tax authorities by the taxpayer or a third party (e.g. financial institution or service provider), and 2. exchange between the tax authorities concerned of the information that has been reported.

New challenges are constantly arising and may not be covered by the existing scope of the DAC. In particular, the emergence of alternative means of payment and investment, such as crypto-assets, which may pose new risks of tax evasion, are not covered. Therefore, this impact assessment presents policy actions to expand the exchange of information within the EU to cover income or revenue generated by these new means of payment and investment.

Crypto-assets are digital assets based on distributed ledger technology and cryptography. Crypto-asset markets have been growing fast over the past years. In September 2020, the European Commission adopted a proposal for a Regulation on Markets in Crypto-assets (hereafter referred to as “MiCA”) 7  , which will have, once agreed by the legislators, the effect of expanding the EU regulatory perimeter to a range of crypto-asset activities. The inherent cross-border nature of crypto-assets requires strong international administrative cooperation, so as to ensure effective regulation. The proposed MiCA legislation regulates the market for crypto-assets and provides for the conditions for access to the EU market for crypto-assets. This framework, once adopted, would replace national rules currently governing for example the issuance, trading and custody of crypto-assets. This framework does not by itself provide a basis for tax authorities to collect and exchange the information that they would need in order to tax crypto-asset income. This being said, the planned DAC8 proposal would build on this proposed framework, including on the definitions of crypto-assets and service providers.

The Commission’s package of legislative proposals to strengthen the EU’s Anti-Money Laundering/Countering the Financing of Terrorism framework (hereafter referred to as “AML/CFT”) 8 includes a proposal to extend the scope of obliged entities subject to AML rules, to the virtual asset service providers regulated by MiCA. The AML package adopted by the Commission in July 2021 aims at extending the EU AML rules to all crypto-assets service providers (hereafter referred to as CASPs). This means that CASPs will have to ensure the availability of certain information relative to crypto-assets (for example as the name of the payer, the payer's payment account number, the payer's address, customer identification number or date and place of birth). Information gathered for AML purposes can be useful for tax authorities, which is demonstrated by a previous amendment to DAC (DAC5) which provides a basis for the use of AML information for tax purposes. However, the information gathered for AML purposes is not fully sufficient for tax purposes. It is intended for other purposes than taxation and neither the information collected, nor the procedure for collecting it are adapted to the needs of tackling tax fraud, evasion and avoidance. 

The EU initiatives, in particular the proposed legislation on MiCA and the Anti-Money Laundering (AML) package, contribute to better regulating the crypto-assets market, improving traceability and greater transparency at large. However, it does not improve transparency for tax purposes, as envisaged by the proposal for DAC8.

An amendment of the DAC is therefore necessary in order to provide for clear reporting obligations with information that is relevant for tax purposes, due diligence rules and a specific mechanism for exchanging information between Member States, which would not be provided by the MiCA Regulation nor by the AML package. 

The OECD initiative, which is currently still under negotiation at the international level, aims at introducing greater tax transparency on crypto-assets. It is important to ensure consistency between the international OECD and EU rules in order to increase effectiveness of information exchange and to reduce the administrative burden. However, an OECD framework would not eliminate the need for an EU framework. In particular, a future OECD standard is not expected to be binding and would therefore not achieve the same coordinated regulation across participating Member States. It has been standard practice to bring OECD agreements into EU law through directives and it has been used for DAC2, 3, 4, 6 and 7. There is a need to ensure a coordinated approach within the EU with as few variations as possible. There is furthermore a need to ensure that the exchanges of information on crypto-assets can be integrated into the existing EU system of exchange of information. Finally, only an amendment to the DAC can ensure the necessary coherence of rules on reporting and exchange for tax purposes with the previously mentioned EU initiatives (proposal for a MICA regulation and AML package). 

The European Court of Auditors (ECA) published a report 9  examining the legal framework and implementation of the DAC. This report notes that “Cryptocurrencies are excluded from the scope of information exchange. If a taxpayer holds money in electronic cryptocurrencies, the platform or other electronic provider supplying portfolio services for such customers are not obliged to declare any such amounts or gains acquired to the tax authorities. Therefore, money held in such electronic instruments remains largely untaxed.” 

It is important to clarify that this initiative focuses on the reporting and exchange of information between tax administrations on the income obtained by the users of crypto-asset services and the use of this information by tax administrations, to ensure the proper application of domestic tax rules. It does not aim at setting out new rules regarding the actual taxation of such proceeds based on each Member State’s national rules, nor does it cover the taxation of the profits made by the CASPs and whether they, as companies, pay their fair share in relation to those profits. Those aspects may be addressed through separate initiatives and work streams.

A legislative initiative addressing the issue of exchange of information on crypto-assets (DAC8) is likely to include some fine-tuning of existing concepts in the DAC and filling in some gaps. Areas that could be covered touch upon a further strengthening of administrative cooperation between tax authorities, a review of the current compliance framework, a clarification of the reporting and exchange rules applicable to information about e-money and the opening up of the information exchange on cross-border tax rulings to further types of rulings. Those improvements are briefly presented in Annex 6 but are not economically assessed in this impact assessment.

2. PROBLEM DEFINITION

The following analysis has been performed in order to estimate how significant the problem is, although the actual lack of available data has made this analysis challenging. Also, the problem drivers have been examined and the evolution of the problem - in the absence of an EU policy initiative – has been assessed. A problem tree chart has been included to visually present the problem, its drivers and consequences.

Figure 1 Problem Tree 

2.1 What are the problems?

The key problem that this impact assessment focuses on is that tax authorities lack information to monitor the proceeds obtained using crypto-assets and the potential tax consequences of those.

In other words, there is a lack of information available to tax administrations regarding crypto-assets, while the crypto-assets market has gained in importance over the last years. The crypto-assets market capitalization has increased substantially and rapidly, reaching more than EUR 1.8 trillion in 2021. 10 Although Bitcoin 11  maintained a very high market share in the early years, its relative importance has decreased lately due to the increasing use of other new cryptocurrencies, such as Ethereum. In September 2021, Bitcoin’s market share was around 42,8%, followed by Ethereum (18,8%) and Cardano (3,69%). 12

Crypto-assets, like more traditional financial products, are a stock of wealth and can be taxed as such. But more generally, it is the capital gains arising from the trading of crypto-assets that are in principle subject to taxation under the national law of Member States. Those capital gains arise either when (i) crypto-assets are traded for other crypto-assets or (ii) a fiat currency is traded for crypto-assets and back to a fiat currency. The trading can be carried out using crypto-asset service providers or between individuals or entities directly. Information on the details of these transactions is available through the service providers when they are involved. In cases where no service provider is involved, the information is more difficult to obtain and would require detailed knowledge of the information on the blockchain.

The fact that there is no reporting (or underreporting) and the lack of exchange of data related to revenues and income gained by investments in and transactions made with crypto-assets means that tax administrations lack the necessary information to ensure that taxes are imposed and effectively paid by taxpayers. Whilst it is difficult to precisely quantify this particular tax gap, it represents a current and future problem that needs to be addressed keeping in mind that the use of these assets is expected to increase substantially in the future. There is also significant potential for eroding the proper functioning of the existing exchanges under DAC2 13 , which is a key tool in ensuring tax transparency on cross-border financial investments and tackling offshore tax evasion.

The majority of Member States already have legislation 14  or at least administrative guidance in place to tax capital gains obtained through crypto-asset investments. However, they often lack the necessary information that would enable them to do so. 15  Figure 2 shows the estimated capital gains, both realised and unrealised, of Bitcoin owners in 2020, ranked by realised capital gains. In 2020, the total realised capital gains by EU citizens amounted to EUR 3.6 billion and the total unrealised capital gains to EUR 9.1 billion, according to a study by Thiemann (2021). 16  

Assuming that the realised capital gains had been reported by the taxpayers and taxed at a rate of 25% (without any tax exemptions) by the relevant Member State, tax revenues of about EUR 0.9 billion could have been collected in 2020, taking only into consideration Bitcoin. The lack of reporting rules at national level, as well as the lack of exchange of information between Member States means that non-compliant taxpayers are difficult to detect, which leads to revenue losses. At the same time, there is no information available about how much realised capital gains have actually been taxed by the Member States. This makes it challenging to determine the exact impact of the proposed initiative.

It is relevant for the assessment of the problem and its impacts to note that there are already reporting obligations on financial institutions and certain assets, but they are clearly not sufficient. The existing provisions of DAC2 lay down an obligation for financial intermediaries to report financial account information to tax administrations that are then required to exchange this information with other relevant Member States.

Crypto-assets are currently not considered a reportable information under DAC2 and thus within its scope (or its equivalent at the international level, the Common Reporting Standard or CRS). They neither represent money held in a depository accounts or in financial assets as they are not considered a commodity or security under the domestic law of most Member States. In addition, crypto-asset service providers are in most cases not considered to be covered by the existing definition of “financial institutions” under DAC2. Currently, tax administrations have few tools available to verify whether the proceeds earned through investments in crypto-assets are properly declared and, if so, whether the correct amount has been declared. As pointed out by the European Parliament, “defining tax bases requires being in possession of a full picture of a taxpayer’s situation”. 17  Consequently, there might be an incentive to invest in crypto-assets rather than in traditional financial products with the aim to avoid DAC2/CRS reporting.

National tax administrations may use the information received related to crypto-assets through the exchange of information proposed under this initiative for a range of purposes, such as imposing taxes, conducting risk-assessments and tax audits relating to different tax categories including indirect taxes like Value Added Tax (VAT). The most relevant tax for the calculation of the benefits derived from this proposal are linked to income tax due to the potential capital gains that taxpayers may obtain.

The consequences of the lack of reporting and exchange of information on crypto-assets indirectly affects all EU citizens and businesses. Tax fraud, evasion and avoidance lead to fewer resources to fund public services such as education, healthcare, pensions and infrastructure. To maintain the level of public services, everybody must contribute according to the legal framework in force. To support and sustain the recovery from the deep economic crisis caused by COVID-19, it is necessary to ensure that a fair taxation system contributes to this objective. Compliant taxpayers, who pay their fair share of taxes, are particularly affected as they may be asked to pay higher taxes and/or they may have to accept a lower level of public services. Cost reduction achieved by not paying taxes is not an acceptable practice in the EU or elsewhere. Furthermore, the absence of a reporting standard for crypto-assets could be considered an incentive to invest in such products since users/investors would not be subject to the same verification regime as other traditional financial assets. This may affect the level playing field, fairness and integrity of the EU Internal Market.

2.2 What are the problem drivers?

The problem related to the lack of information available to tax authorities regarding the proceeds obtained using crypto-assets has various drivers and causes:

The lack of centralized control for crypto-assets, hybrid characteristics, and the rapid evolution of the underlying technology and its form present challenges from a taxation perspective. The said characteristics mean that reporting and taxation obligations are unclear and can be easily avoided. These assets escape current definitions in tax law in part due to the targeted nature of those definitions. Furthermore, users or investors can use this form of assets for payment as well as trading purposes, which is different from how traditional assets are traded and invested and which makes its taxonomy and the potential tax compliance framework more complex to design. These difficulties follow from the need to identify the relevant intermediaries, the reportable event, the valuation of crypto-assets and the available information, among other things. Like traditional financial assets, income or capital gains derived from crypto-assets may be subject to taxation depending on each Member State’s legal framework. However, proper enforcement of tax obligations relies on high-quality reporting and the ability of tax administrations to have access to the information.

The crypto-asset market is highly mobile and digitalised. Crypto-assets are traded all over the world through service providers that, in turn, have great mobility since they can be located anywhere in the world. The cross-border nature of crypto-assets means that reporting rules at national level are unlikely to adequately capture all necessary information.

It represents overall an emerging market. The first cryptocurrency, Bitcoin, was launched in 2009. As of today, there is a huge number of crypto-assets and CASPs and total crypto-asset users have increased from 5 million in 2016 to at least 100 million in 2020 with a market capitalization of total cryptocurrencies reaching EUR 1.8 trillion in September 2021. The crypto-asset markets are very dynamic. New crypto-assets with new features appear almost every day all over the world. There are more than 9,000 different crypto-assets currently available. Although this is both an emerging and rapidly evolving market, the Commission proposals such as MiCA provide for the necessary level of consistency and clarity by defining what crypto-asset service providers and crypto-assets are.

Pseudo-anonymity. Overall, in the crypto-asset markets, the level of transparency for tax purposes is deficient. This new technology is used to create, hold and transfer crypto-assets without traditional third-party intermediaries clearly covered by existing legislation. The lack of a central authority, combined with pseudo-anonymity applying in some cases, may lead to risks of tax fraud, evasion and avoidance. The Commission proposal for a Regulation on MiCA establishes uniform requirements for transparency and disclosure for crypto-asset service providers and issuers. The proposed new AML rules will also require CASPs to identify their customers through customer due diligence measures, to comply with new information obligations linked to crypto-assets transfers and to report possible suspicious transactions involving crypto-assets. 18  The DAC8 proposal intends to solve the pseudo-anonymity feature from a tax perspective. 

In addition, there are substantial valuation difficulties due to the high level of price fluctuations, which poses a major problem to the computation of the overall holdings and capital gains for tax purposes. For instance, Bitcoin investors have experienced considerable volatility over the last ten years. The current absence of financial markets regulation for crypto-assets, pending adoption of the Regulation on MiCA, feeds into its volatility. This volatility may have been curbed to some extent as a result of the implementation by Member States of the Fourth and Fifth Anti-Money Laundering Directive 19 , but is still significant. Apart from daily volatility, in which double-digit increases and decreases of its price are common, there were periods when the crypto-assets’ price changes have outpaced even their usually volatile swings, resulting in massive price bubbles. The unstable value of crypto-assets makes it difficult for tax administration to carry out their core tasks. The value is one of the essential data components that tax administrations need to be able to perform a high-level risk assessment. 

2.3 How will the problem evolve in the absence of an EU policy initiative?

In the absence of an EU policy initiative, the underreporting of income and revenues will increase in proportion to the growth of the crypto-asset market. Bearing in mind that this market is growing at a double-digit annual pace, the relevance of this proposal is clear. Tax fraud, evasion and avoidance and the associated loss of tax revenues affect Member States’ resources and therefore their capacity to develop their policies. Indirectly all citizens are impacted.

In the absence of a European framework for the reporting and exchange of information on crypto-assets for tax purposes, some Member States may decide to implement a domestic reporting framework for crypto-asset transactions. However, such domestic reporting framework would not be sufficient given the international and highly mobile character of the market. Furthermore, Member States are likely to take different approaches to reporting and there will be no efficient exchange of such information amongst them. This would increase the risk of tax fraud, evasion and avoidance.

With regard to peer-to-peer transactions, the risk of tax fraud, evasion and avoidance is even higher given that these transactions cannot be traced. The risk is that crypto-asset users could decide to change to peer-to-peer transaction in order to evade reporting. Consequently, the main difficulty stems from the fact that no CASPs are in-between and therefore, no reporting is possible.

According to the targeted consultation of the Member States, most Member States have not yet introduced any tax provisions or guidance at national level concerning the reporting of crypto-assets for tax purposes. The introduction of divergent reporting requirements would result in a more complex business environment: for a hypothetical CASP operating across 27 Member States. Costs of compliance with 27 different requirements would be higher than having to deal with one standard for reporting. Eventually, this would also create distortions in the Internal Market. If a CASP is based in a Member State without any requirement for reporting, yet operating in several Member States, it may have a competitive advantage vis-à-vis a CASP that provides the same services but is based in a Member State with a reporting requirement. More subtly, distortions may be created by differences between regulatory frameworks leading to a different compliance burden depending on the Member State.

3. WHY SHOULD THE EU ACT?

3.1 Legal basis

The legal basis of DAC relies on Articles 113 and 115 of the Treaty on the Functioning of the European Union (TFEU), which aim at ensuring the proper functioning of the Internal Market. Article 113 of the TFEU provides a legal basis for the harmonisation of indirect tax systems of Member States, as far as needed to ensure the functioning of the Internal Market and to avoid distortion of competition. Article 115 of the TFEU provides for the approximation of such laws, regulations or administrative provisions of the Member States, which directly affect the establishment or functioning of the Internal Market and make the approximation of laws necessary.

The aim of the DAC is to ensure a legal instrument of high quality for enhancing administrative cooperation in the field of direct taxation, in order to allow functioning of the Internal Market by reducing the negative effects of tax avoidance and evasion. Applying the same conditions, the same methods and the same practices for administrative cooperation facilitates the work and efficiency of the authorities in the fight against tax fraud, evasion and avoidance in the European Union.

3.2 Subsidiarity: Necessity of EU action

Based on their current national legislations, most Member States may not be able to access information about crypto-asset users that are not resident in that Member State. This is relevant for the taxation of the capital gains from crypto-assets, where taxation rights are usually based on the users' tax residency.

According to the current state of play of the Member States’ legislation, the national legal basis is insufficient for effectively collecting information from CASPs. In some countries, there is no legislation for third party reporting. In other countries, the current state of legislation does not cover CASPs residing in other countries and through which their residents engage in crypto-asset transactions.

Furthermore, there are uncertainties as to whether domestic legislation applies to and can be enforced upon CASPs resident outside the jurisdiction. Given that crypto-assets markets are internationalised and that CASPs can easily operate remotely, this calls for a coordinated EU action. There is a need to act at the EU level to ensure that Member States can effectively access information on their tax residents, irrespective of the location of the service provider.

3.3 Proportionality: The added value of EU action

Given the need to act and the nature and extent of the problem set out in chapter 2, an EU approach to tax transparency on crypto-assets appears to be the best solution in order to avoid a patchwork of reporting requirements unilaterally implemented by some or all Member States. The information needs to reach the Member State where the income and revenues are due to be taxed. Still, it is often likely to be held by intermediaries located in another Member State or even in third countries.

Since the scope of a new reporting framework should define the (i) type of CASPs in scope, (ii) the crypto-asset users in scope, (iii) content of the information and (iv) timing of collection of the data, a coherent and comprehensive solution at EU level would result in a relatively lower administrative burden for both tax administrations, reporters and taxpayers. Furthermore, to ensure coherence, to reduce administrative burden for reporting entities and administrations and in order to close potential loopholes considering the volatile nature of the assets in question it appears justified to also include domestic CASPs and users in the scope.

Given the developments at the international level, in particular work led by the OECD, some form of regulation is likely to be introduced by Member States at a certain stage. The fact that today there might be a lack of regulation in certain Member States does not imply that an EU initiative would cause disproportionate burden for administrations or reporting entities. Quite the contrary, the introduction of new EU provisions and procedures is expected to be less burdensome overall than the introduction of 27 different frameworks.

The added value of EU action is broadly confirmed in the public consultation where the vast majority of respondents from different categories and sizes stated that CASPs should have the same reporting obligations for tax purposes throughout the EU in terms of laying down a single set of rules.

4. OBJECTIVES: WHAT IS TO BE ACHIEVED?

4.1 General objectives

The general objective is to ensure a fair and efficient functioning of the Internal Market where all taxpayers pay their fair share of taxes.

In general, it can be observed that tax authorities characterise the crypto-assets market as a tax opaque market. This initiative will increase the transparency of the crypto-asset market by providing tax administrations with information that can reduce tax fraud, evasion and avoidance and better ensure a level playing field with the more traditional financial markets.

The crypto-asset market continues to increase in popularity. This new market brings with it benefits but also challenges, particularly when it comes to taxation and the risk of non-compliance with tax obligations.

The crypto-asset market is an international market where users worldwide invest through different CASPs established in or outside the European Union. Its international nature leads to cross-border transactions, which makes it difficult for tax administrations to access tax-relevant information without an exchange of information.

Extending and clarifying the reporting obligations concerning the creation, transactions and holdings of crypto-assets will provide legal certainty and increased transparency for the crypto-assets market, in a manner that enables tax administrations to reduce tax evasion, avoidance and fraud. This initiative therefore also aims at safeguarding Member States’ revenues.

This initiative should therefore benefit national treasuries and tax administrations. At the same time, users and service providers will benefit from such an initiative because of the harmonised reporting framework across the EU. This will avoid a situation where individual Member States put in place national reporting frameworks, which may differ from jurisdiction to jurisdiction and would make it hard and more burdensome for service providers to comply. This element is one that applied equally to previous DAC amendments.

This proposal intends to set a reporting framework regarding crypto-assets exchanges. The proposal does not regulate how Member States tax the users’ capital gains, the holdings or any other direct or indirect tax related to crypto-assets.

A CASP may be established in a jurisdiction that is not currently taxing any income derived from crypto-asset transactions, but its users might be tax resident in a different jurisdiction that taxes income derived from crypto-assets transactions.

4.2 Specific objectives

Specific objectives are to enhance the relevant information available to tax administrations to perform their duties more effectively and to reinforce the general compliance with the provisions of the DAC. This would allow tax administrations to monitor the risk of non-compliance with tax rules and ensure proper tax collection. More specifically, the initiative will improve the ability of Member States to detect and counter tax fraud, evasion and avoidance.

The initiative would require CASPs to report relevant information to tax administrations across the EU thereby ensuring a level playing field across the Union.

Tax authorities' tasks to ensure the correctness of tax returns and to counter tax fraud, evasion and avoidance relies upon good quality and relevant information. If tax officers have the information they need, at the right time, to check that crypto-asset users declare what they obtained, it will be possible for them to better assess the tax due and ensure that tax is paid.

In addition to the ability to actively detect and counter tax fraud, evasion and avoidance, this initiative, once adopted, would also have deterrent effects. There is evidence that taxpayers are aware of a higher probability of being caught for avoiding and evading taxes 20 with automatic exchange of information measures in place. Automatic exchange of information is a most effective tool to foster voluntary compliance. 21  In other words, by increasing the probability of detecting non-compliance, the initiative is expected to provide an incentive to declare and pay taxes owed.

The monitoring of the implementation and the effects of the initiative will be carried out through yearly assessments where Member States provide quantitative and qualitative information to the Commission, including references to key performance indicators.

5. WHAT ARE THE AVAILABLE POLICY OPTIONS?

The starting point is the baseline scenario, against which various options are assessed. This chapter describes the options identified.

The baseline scenario is based on the assumption that the EU level would not act and would leave any potential action or non-action to the Member States.

A soft-law approach would establish some requirements for Member States to act but would not be legally binding, thereby providing them with some leeway to design an appropriate solution for the existing problem.

A legislative option would imply a legally binding framework to encompass reporting by CASPs and the relevant exchange of information. Concerning the expansion of the scope of DAC to crypto-assets, the EU would intervene to regulate the adoption of reporting and exchange of information obligations, building on the work of the OECD and existing EU proposals. 22 In the broad lines, CASPs would be subject to reporting obligations under the DAC, and would therefore be required to collect information on users and report such information to the tax authority. Tax authorities would then be required to exchange this information with the relevant other Member State(s).

In practice, the obligations that would fall on CASPs under the DAC would be largely equivalent to the ones already imposed on reporting subjects under DAC, such as financial institutions under DAC2 or digital platform operators under DAC7. Those obligations would mainly consist of collecting and verifying relevant data to identify taxpayers and their respective Member State of residence and reporting information relative to the proceeds and holding of crypto-assets.

Figure 3. Overview of Reporting and Exchange Mechanism

The design of the legislative options is influenced by the following building blocks:

-Which crypto-assets are in scope?

Crypto-asset definitions commonly refer to digital or virtual assets based on distributed ledger technology (DLT) and cryptography as part of their perceived or inherent value. Additionally, these assets can be held and transferred in a decentralised manner without the intervention of traditional financial intermediaries. These two key elements distinguish crypto-assets from traditional financial assets already covered under DAC2.

The proposal for a Regulation on MiCA defines crypto-assets as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” 23  

The group of crypto-assets covered by the scope of the initiative is to a great extent similar to that of the proposal for the Markets in Crypto-Assets (MiCA) Regulation. The general definition used is the same and includes payment tokens, asset-referenced tokens and e-money tokens defined as follows:

·The most well-known crypto-assets covered by the suggested definition, such as Bitcoin or Ethereum and Litecoin, are designed to serve as a general purpose store of value, medium of exchange or means of payment, and/or unit of account. They are sometimes referred to as “crypto currencies” or “payment tokens”.

·“Asset-referenced tokens” aim to maintain a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets and subsequently act as a means of payment to buy goods and services and as a store of value. It is suggested to report and exchange information on these crypto-assets under the new regime for crypto-assets. Examples are LAToken, Salt and Tether. Asset-reference tokens together with e-money tokens make up what is called “stablecoins”.

·“E-money tokens” are crypto-assets with a stable value based on only one fiat currency that aims to function in a similar way to electronic money. However, different from e-money, e-money tokens referencing one fiat currency which is legal tender do not provide their holders with a claim on the issuers of such assets. 

·“Central bank digital currencies” refers to digital currencies representing a claim on an issuing Central Bank. 

·Equity tokens are digital tokens or "coins" that represent  equity  shares in a corporation or organization. Debt tokens are tokenized assets that represent debt instruments such as real estate mortgages or corporate bonds.

·Non-fungible tokens: A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a digital  ledger  ( blockchain ). NFTs can be associated with reproducible digital files such as photos, videos, and audio. NFTs use a digital ledger to provide a public  certificate of authenticity  or  proof of ownership , but it does not restrict the sharing or copying of the underlying digital file. The lack of interchangeability ( fungibility ) distinguishes NFTs from blockchain  cryptocurrencies , such as  Bitcoin .

Two types of assets would not be reported under the crypto-asset reporting obligation framework, given their features: 

o“Utility tokens” are intended to provide digital access to a good or service, available on DLT, and are only accepted by the issuer of that token. 24  Utility tokens are issued with non-financial purposes to digitally provide access to an application, services or resources available on distributed ledger networks. Due to the absence of financial purposes these assets are rarely relevant for tax purposes. A start-up can create utility tokens for access to the services or products it is developing. Filecoin (FIL) is an example of a utility token. FIL holders gain access to the platform’s decentralized cloud storage services.

o“Non-marketable crypto-assets" are not traded in a publicly available market or do not require intervention by a CASP. These assets are not covered by the initiative due to the fact that they are not usually subject to trading. An example is Sorare, a fantasy football trading card game, where users can exchange the cards of real players and manage their team to win prizes every week. The cards are all non-marketable and are stored on blockchain.

-Which CASPs are in scope regarding reporting obligations?

CASPs are defined as any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis. 25 They can perform exchanges between crypto-assets and fiat currencies or exchanges between one or more forms of crypto-assets. The above definition is narrower than the definition provided in the proposal for a MiCA Regulation. This is because services such as “providing advice”, covered in the MiCA Regulation proposal, do not have any relevance for establishing holdings or capital gains that would be relevant for tax purposes. The “issuance” of crypto-assets is not covered either since it is not a transaction that will give rise to a measurable capital gain. 

CASPs can be, among others, exchanges, brokers and dealers, trading platforms (DEFi) as well as crypto-asset ATMs. They play a crucial role in facilitating a market for crypto-assets and are therefore best placed to collect and report information relevant for assessing tax liabilities (i.e. capital gains and income), including details of gross proceeds. In general, these intermediaries have access to the value of the crypto-assets and the transactions carried out.

The proposal would contemplate that the new reporting and exchange framework will impose reporting requirements solely on CASPs that are in the professional business of conducting exchanges of crypto-assets. CASPs already fall under the scope of obliged entities under the Financial Action Task Force (FATF) Recommendations 26 and are consequently expected to efficiently collect and review the required documentation of their customers on the basis of the AML/KYC 27 requirements.

In order to determine which CASPs are in scope regarding reporting obligations, two dimensions are being considered: size and location. As far as size is concerned, it can be envisaged whether (i) all CASPs should report, irrespective of their size, or whether (ii) an exclusion based on size should be introduced (i.e. SME CASPs).

As far as location is concerned, it can be considered whether non-EU based CASPs should be subject or not to the reporting obligations 28 , in addition to EU-based CASPs. In this respect, it should be noted that, once adopted, the Regulation on MiCA will oblige CASPs operating on the EU market to have their services authorized in the EU. 29 This would facilitate the identification of non-EU based CASPs. 

CASPs that would be subject to an equivalent reporting standard, following an agreement on a standard in the OECD, may be excluded from the scope of EU obligations. This would require an equivalence decision from the EU, similar to what has been adopted in the context of DAC 7 for reporting by non-EU digital platform operators.

-Which type of reporting?

CASPs can provide services related to different types of crypto-assets, and to different types of transactions such as acquisitions, sales and transfers of crypto-assets but also safekeeping of assets and provision of financial services related to i.a. issuance of assets. The inclusion of crypto-asset transfers 30 under the reporting and exchange framework would help catch transfers to cold wallets and track the wealth of a particular taxpayer. It would assist tax authorities to reconcile information reported from several CASPs, in case a taxpayer uses multiple providers for acquiring and/or selling crypto-assets.

The reporting requirements need to take into account the characteristics of the asset and the type of information to be reported. Most crypto-assets are subject to very frequent transactions and their value can vary significantly even within very short timeframes. However, some crypto-assets are more stable in value and are in most cases not subject to daily multiple transactions. Two examples of the latter category are Central bank digital currency (CBDCs) and e-money tokens which are not subject to high fluctuations in value and are used mainly for payment purposes.

Different reporting possibilities could be considered for crypto-asset reporting:

The reporting of balances is an option under which the CASPSs would provide information about the crypto-assets balances of each user. This type of reporting is similar to what is required under DAC2 for traditional financial assets, where information is exchanged on end-of-year account balance.

For assets that are characterised by a stable value and which are not subject to very frequent transactions, such as CBDC and e-money tokens, it would not be necessary to require detailed reporting. For such assets, it would be sufficient to require reporting of balances and other relevant information, similar to what is the case under the current provisions of the DAC for financial assets.

In terms of reporting of transaction-based information, three alternatives can be considered in terms of level of granularity: reporting (i) on a fully aggregated basis, (ii) on a transaction-by-transaction basis, (iii) on an aggregated basis with some breakdowns (hybrid option).

During a meeting organised by the Commission services in November 2020, Member States expressed diverging views on the desired level of granularity of reporting of gross proceeds derived from crypto-asset transactions. Most Member States favoured a fully aggregated reporting of gross proceeds that would both have a deterrent effect and allow tax authorities to perform a high-level tax risk assessment before further investigation. Other Member States were in favour of an approach whereby the concrete tax liabilities of taxpayers could be identified, requiring a transaction-by-transaction reporting scheme.

With an aggregate reporting, tax administrations would receive a global picture of the value of and proceeds derived from all crypto-assets held by a taxpayer. Furthermore, the data transferred to the tax administration would be compressed and limited. However, this information may not always be sufficient to allow tax administrations to assess the actual tax liability associated with specific transactions in crypto-assets and it may require additional requests for further information resulting in time-consuming contacts between tax administrations and reporting entities.

With a transaction-by-transaction reporting, tax authorities would receive for each taxpayer an overview of each transaction it has engaged over the year (with information on type of transaction, type of crypto-asset, value and proceed of each transaction). Tax administrations would therefore have immediate access to all available information, which would remove the need for follow-up contacts with other Member States or with CASPs also to ensure the necessary tax treatment in other tax areas such as indirect taxation. However, the volumes of information would be considerable and it would entail high administrative burden and costs for tax administrations.

In a “hybrid” or middle-ground scenario, reporting would be in-between aggregate gross proceeds reporting and full transaction-by-transaction reporting. It would require aggregate reporting on acquisitions, transfers and disposals per type of crypto-asset. It would also require distinguishing between crypto-to-crypto and crypto-for-fiat transactions to enhance the usability of the data for the receiving tax administrations. Additional financial information would be provided for further granularity, such as the number of transactions, the number of units transacted and the amount of any fees and commissions withheld by the CASPs in respect of relevant transactions.

If relevant, the reporting on transaction-based information can be complemented with information on balances.

On the basis of these building blocks, various options are assessed in the following analysis.

The proposed IT implementation choices 31 are feasible no matter which policy option is chosen. The feasibility of the IT solution depends neither on the size of the CASPs, nor on the types of crypto-assets in scope nor the reporting method. The issue to determine with regard to the IT solution is more about the efficiency of the different IT solutions in achieving the initiative’s objectives.

5.1 Baseline scenario (Option 0)

Under this option, the EU would not act. However, other actors, mainly the Member States as well as the OECD, might still act. The use of crypto-assets has been growing a lot recently. While some Member States have not yet addressed the problem domestically, it does not mean that they will not act in the near future. Different approaches to the reporting for tax purposes across the EU may also have a negative effect on the crypto-asset market and the issuance and use of crypto-assets.

The OECD is currently working on developing a new international standard intended to impose reporting obligations on CASPs and subsequent exchange of information between jurisdictions. A new international standard would include an obligation for CASPs to collect and provide tax authorities with certain aggregated information. The granularity of the information that CASPs would be required to provide would enable tax authorities to carry out effective tax risk assessments and provide visibility on transactions and holding patterns. Member States are likely to rely on this to implement rules at national level. However, there is a risk of divergences among the Member States’ legal frameworks that would jeopardize the coherence of the system for exchange of information within the EU as established by the DAC. It would also put at risk the integrity of the EU market in crypto-assets as regulated by the proposed MiCA Regulation. The OECD standard would not necessarily be adapted to the domestic provisions, leading to the reporting of third country CASPs risking to be less effective.

5.2 Recommendation for the implementation of a global standard

Under this option, the Commission would propose a legally non-binding recommendation addressed to Member States to implement consistent rules addressing the lack of reporting and exchange of information related to the taxation of income or revenue generated through the use of crypto-assets. Such a recommendation would call on the Member States to implement a future OECD standard and, to the extent needed, be complemented by guidance adapting such rules for the Internal Market. A non-legally binding option may imply that Member States do not implement the international standard uniformly, giving rise to differences that could affect the functioning of the Internal Market.

5.3 EU legislative initiative – Six options regarding the type of reporting and the impact of having a threshold for SME- (Options 1-6)

Under the EU legislative option, the reporting and exchange of information would apply to all crypto-assets, which are relevant from a tax perspective (i.e. all crypto-assets except non-marketable crypto-assets and utility tokens). 

Under this option, the coverage would not include certain types of crypto-assets in the scope. This would be based on the fact that non-marketable crypto-assets and utility tokens are not traded on exchanges and mostly do not have a value outside the context of their issuer. Their use does generally not have any tax consequences and the information would therefore not be useful for tax administrations.

As discussed above, the reporting would focus on transactional information, which would allow tax administrations to make a more precise risk assessment. Considering that many users make many transactions within short time frames, a reporting of information based on balances only would in many cases require tax administrations to ask the CASPs for more detailed information, thus creating a second round of more detailed reporting. For the CASPs, the option would mean that less information would need to be reported initially, which would keep the administrative burden low. However, due to the likely frequent need for more detailed information, there would be an increased administrative burden in the second step of follow-up requests for information.

Regarding the type of transactional information to be reported, we may distinguish three sub-options: Aggregated reporting, transaction by transaction and hybrid. In all cases, a SME 32 threshold is analysed against any of these three sub-options making them in total six sub-options.

Option 1. Transaction by transaction.

Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, introducing a reporting obligation on all CASPs that have EU users. In this case, the information would be reported on a transaction by transaction basis which means that each and every transaction made by a CASP for a crypto-asset user will have to be reported.

Under this option, CASPs would report the data concerning each transaction with crypto-assets owned by EU users. In the same way, as under Option 3 and 5, all CASPs would need to report as far as they intermediate EU users’ transactions, regardless of where they are located.

The reported information would consist of detailed transactional information per crypto-asset user. Consequently, the level of information would be so precise that tax administrations would not need to seek additional information to calculate the taxes due by crypto-asset users. However, the mass of data that would have to be managed by CASPs and tax administrations would entail higher investments in IT infrastructure to guarantee its functionality and operability, resulting in higher costs than other options.

Option 2. Transaction by transaction with a SME threshold.

This option is similar to the previous one, but it introduces a threshold for CASPs that are SMEs. In this case SMEs would not need to report.

The costs associated to the initiative could be contained by introducing an SME threshold as the amount of information would be reduced. However, these thresholds would constitute a loophole in the system as some users would prefer to use SME CASPS to avoid having information concerning their crypto-assets transactions reported, even though large value transactions could still be performed through SME CASPs. 

Option 3. Fully aggregated reporting:

Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, introducing a reporting obligation of fully aggregated information on all CASPs that have EU users. Fully aggregated information would provide a general picture of the crypto-asset user’s transactions, which could only be used for risk assessment purposes. In case of need for additional information, tax administrations would have to request it from CASPs through a second round of reporting on request. Consequently, the fully aggregated option would require follow-up action from the tax administration concerning taxpayers that present a higher level of risk.

The absence of a threshold on the size of the CASPs would result in a more significant volume of information being reported to tax administrations. This would result in a higher administrative burden for tax administrations, but would equip tax administrations with different means to combat tax fraud, evasion and avoidance. However, this would lead to additional administrative burden for the CASPs of a smaller size, which would be proportionately more burdensome than for CASPs of a bigger size.

Option 4. Fully aggregated reporting with an SME threshold:

This option introduces a SME threshold to allow smaller CASPs not to be subject to the reporting obligations.

A threshold on the size of CASPs would have two effects. Firstly, tax administrations would get a lower amount of information as more minor entities would not be reporting. Secondly, for CASPs below a specific size, it would mean that the administrative burden of reporting, which would be more significant as a share of the overall administrative burden than for larger CASPs, would be removed. However, there could be incentives for those users who intend to conceal their crypto-assets tax information to act through those SME CASPs.

Option 5. Hybrid or middle ground option:

In the hybrid or middle-ground option, the tax administrations would receive more granular information than in a fully aggregated reporting system, allowing tax administrations to perform a high-level risk assessment and calculate the crypto-asset user’s capital gains. The type of additional data to be reported would be, for instance, the number of crypto-assets exchanged, the type of crypto-assets exchanged and the costs charged by CASPs for the transactions. As in the other options, all CASPS would need to report no matter where they are established, and only non-marketable crypto-assets and utility tokens would be out of scope.

The main advantage of this reporting method is that the amount of information to be managed by tax authorities and CASPs would be moderate as they would not be obliged to report each transactional data. However, it would allow tax administrations to obtain the data required to limit the follow-up requests for information to the CASPs. The detailed information would in many cases suffice to directly calculate the potential capital gains of a user.

Option 7. Hybrid or middle ground option with a SME threshold:

Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, and for all CASPs that have EU users. The information here would be reported on a middle ground basis.

The introduction of a SME threshold would mean that SMEs do not incur the costs to aggregate and report the information. However, as in the previous analyses, this option would not avoid creating a potential loophole and distorting the EU market of crypto-assets. The effort that SME would need to perform to comply with this information requirement would be within the proportionality framework, and therefore, it would be justified not to have any threshold on SME.

5.4 Options discarded at an early stage

Some of the options highlighted above were considered as not a viable way forward either because there was no deemed added value or because experience with similar approaches has proven ineffective in the past:

Table 2 Options Discarded

6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?

6.1 Overview of options

The expected impacts of the options presented are discussed in more detail in the following section. These cover economic impacts (costs and benefits) on CASPs, national tax administrations and the Commission, impacts on sectors competitiveness and SMEs, as well as social and environmental impacts. All the policy options have been assessed against the baseline scenario.

The table below provides an overview of available policy options considered in the analysis.

Table 3 Policy options

6.2. Economic impacts

The various options focus on improving the reporting and exchange of information relative to crypto-assets transactions. Still, there is a lack of official statistics on service providers and the underlying transactions they tend to facilitate, which would be needed to estimate the economic impacts of the initiative in a reliable manner. We do, however, estimate as much as possible both the benefits and the costs of the measure on the basis of reasonable and sound assumptions combined with extrapolations based on available data. Despite the said limitations, these estimates can still provide a solid basis for policy-making purposes and the achievement of the objectives under this proposal. This should be taken as the best effort by the Commission services, to assess the most significant impacts of the initiative.

6.2.1. Benefits

One of the key aims of this initiative is to prevent tax fraud, evasion and avoidance stemming from crypto-asset transactions. As previously discussed, revenues earned through these are currently under-reported. Better reporting and exchange of information should therefore have a positive impact on the revenues to be collected by tax administrations, which we try to estimate.

Central to the benefits estimation stands the concept of capital gains. 33  Realised capital gains accrue when the selling price of a crypto-asset exceeds the price of their initial purchase and the asset is sold or exchanged. 34  Such income may be subject to tax. The estimates provided hereafter are therefore based on the previously mentioned exchange dynamics. Information related to Bitcoin has been used due to its prevalence on the cryptocurrency market and the availability of data. Data regarding other crypto market players is difficult to acquire and it is doubtful whether it would be reliable. Detailed information on the methodology used to estimate the benefits and the employed assumptions can be found in Annex 4.

In 2020, the total realised capital gains by EU citizens from Bitcoin amounted to EUR 3.6 billion according to a study by Thiemann (2021). 35 , 36  The employed data had been tracked by Chainalysis (a blockchain data platform) who are considered a trusted source of information. 37  The distribution of capital gains across the Member States is uneven. Member States have different approaches when it comes to taxing realised capital gains, with some Member States not taxing them at all. The above-mentioned study has found that, by applying a uniform 25% tax rate on realised capital gains from Bitcoin across all Member States, approximately EUR 0.9 billion of tax revenue could have been collected in 2020. The alternative scenario, the one applying the actual tax rates on realised capital gains in the Member States, has produced similar results yielding roughly EUR 0.85 billion of tax revenue.

For simplicity reasons and taking into account the narrow difference in tax revenues between the two analysed approaches in the study, our benefit estimations are henceforth based on the application of the 25% uniform tax rate on total capital gains from all crypto-assets. However, since crypto-assets are prone to high volatility, as explained in the previous chapters, we have also performed a sensitivity analysis by introducing two additional rates of 15% and 35%. Besides this, and as explained in chapter 5, we have excluded non-marketable crypto-assets and utility tokens (as these types of crypto-assets are not relevant for tax purposes). The benefit estimates and the corresponding sensitivity analysis are presented in Table 4 below, while the rationale behind the estimated figures and the employed assumptions are detailed in Annex 4.

Table 4 Tax revenue estimates from realised capital gains in 2020 and sensitivity analysis

When applying different uniform tax rates (as shown in the table above), the estimated tax revenues range between EUR 1 and 2.4 billion. These figures should be interpreted with caution as crypto-assets (i.e. Bitcoin) may suffer even greater value oscillations (according to the available statistics) than what has been captured by our sensitivity analysis. This considerable volatility of the crypto-assets’ value hinders reliable growth projections. Besides capital gains, crypto-assets could be subject to other types of taxes (e.g. wealth tax) and these additional tax revenues have not been reflected in the above estimates due to lack of data. Moreover, the benefit estimates cannot take into account behavioural responses and arbitrages. For example, some users might rely on peer-to-peer transactions instead of relying on services transactions, which could obfuscate reporting and identification of crypto-asset generated profits.

Nevertheless, the crypto market has grown exponentially thus far and it is likely to continue expanding. It can therefore be expected that the related tax revenues should increase over time as well.

The estimated benefits in relation to the available options are summarised in the table below.

Table 5 Assessment of benefits per policy option

Even though the above benefit estimates give a quantitative indication concerning the impact of this legislative initiative, their materialisation may come with certain risks. In particular, the main risk lies with the actual use of the information obtained by Member States. While Member States are expected to take this new information into account to ensure proper taxation, there are variations across Member States regarding their ability to make the best use of the data.

6.2.2.Costs

Requirements for CASPs to report data and for tax administrations to exchange them will entail costs. The costs can be categorised as:

·One-off, substantive compliance costs, incurred when a new (IT) system is introduced or when the existing one is being updated (i.e. development costs).

·Recurrent administrative and, for tax administrations, compliance measure costs, to operate the systems once it has been set up and to ensure it works as expected.

The cost analysis is built upon the costs of setting up and operating DAC2, 38 which resembles most of the reporting obligations of this initiative. Additionally, the IT costs for tax administrations (see Annex 5) have been predicted with a relatively higher degree of precision due to the experience gained with previous amendments of the DAC. Even so, these calculations must overall be approached with caution considering the absence of precise information on the market structure and scope of the transactions on the market. However, since the costs estimates must consider specificities of the crypto-market, additional assumptions and extrapolations had to be introduced. These were based on the analytical documents and statistics from Chainalysis (a blockchain data platform), Binance (a crypto-currency exchange) and Coin Market Cap (a price-tracking website for crypto-assets). The need for combining various sources of information is a result of the restricted availability of data, which consequently reduces the overall certainty of the projected costs. The computed estimates are therefore indirect and as such, fragile. Annex 4 provides additional information on the categories of costs and benefits and on the assumptions made.

In order to quantify the costs for service providers, as well as tax administrations, the following factors needed to be estimated:

·The number of service providers (and accounts) facilitating transactions. Such a figure may vary depending on whether there are exemptions and thresholds. If the overall scope is broad and some exemptions are introduced, the number of reportable service providers will be lower than if the scope were without exemptions.

·The cost of complying with the initiative, ideally per service provider and tax administration. The hypothesis is that, the more users (i.e. accounts) a certain provider has, the higher the costs. Therefore, providers with a relatively low number of accounts will bear lower costs than larger market players. At the same time, we would expect that the costs, one-off and recurrent, for one tax administration running controls on a higher number of accounts to be higher than for an administration running controls on fewer of them.

We estimate that there are around 168 CASPs with EU users. In addition to this, we quantify the number of active accounts under the available service providers. It should be noted that for the sake of estimation, we use the available data on Bitcoin users (for CASPs). There, we assume that the number of accounts equals the number of users, even though having one or more accounts per user and investing in other cryptocurrencies on top of Bitcoin remains a possibility. Furthermore, in the absence of precise market data on crypto-assets, we have assumed that each asset category to be excluded represented a 3% market share (similar to benefit estimation). Given that two types of assets are to be excluded, this represents 6%. A sensitivity analysis has been performed as well to account for crypto-asset value volatility that may affect the customer base of a CASP, and for the possibility of providing additional information (second round requests) to the tax administrations should they ask for it explicitly.

The table below shows the summary of the estimated costs for CASPs. To estimate these, several assumptions have been used (see Annex 4). Detailed information in relation to the policy options considered is provided in the next section.

Table 6 Summary of estimated costs for CASPs and sensitivity analysis (in EUR million)

In terms of IT implementation, three solutions can be envisaged (see Annex 5 for details): (i) a decentralised system, which is the approach taken in DAC 1, 2 and 4 with bilateral exchanges of information between Member States, (ii) a centralised system, which has been implemented for DAC3 and DAC6, where the information is made available by one Member State to the other Member States via a central Directory, and (iii) a single access point, which would be a completely innovative solution, whereby CASPs would directly report into a central system accessible to all relevant Member States. The proposed IT implementation choices are feasible no matter which policy option is chosen. The feasibility of the IT solution depends neither on the size of the CASPs, nor on the types of crypto-assets in scope nor the reporting method. The question here is more about the efficiency of the different IT solutions in achieving the initiative’s objectives.

The type of IT solution comes with different costs both, for the Commission and the national tax administrations. These are summarised in the table below and explained in more detail in the coming sections.

Table 7 Summary of estimated costs for tax administrations and European Commission (in EUR million)

Largely, the risk of non-materialisation of the estimated costs is rather limited. The forthcoming initiative would oblige tax administrations to make adjustments to their IT systems and include efforts to process and exchange the received information from CASPs. These actions will entail costs and as such, they have been accounted for in this impact assessment.

6.2.2.1 Impact on CASPs

As displayed in Table 5, one-off cost estimates for CASPs will vary between EUR 233.1 million and EUR 284 million, or roughly between EUR 1.4 million and EUR 1.7 million per service provider respectively. The total recurrent costs, on the other hand, are estimated to range between EUR 20.3 million and EUR 24.9 million, or roughly between EUR 120 000 and EUR 150 000 per entity respectively. These estimates cover all CASPs with EU users (see Annex 4).

The costs 39  are largely dependent on their customer base (on how many users they will need to report). It should be stressed that these estimates, including on number of users, are based on several assumptions and they do not necessarily reflect the actual costs service providers will incur, especially those having to report a relatively low number of transactions. Additionally, there is a risk, though limited, for CASPs to pass through their costs onto consumers. In particular, due to the increased costs arising from this initiative, service providers might raise their service fees paid by their customers so as to offset (partly) the newly incurred costs. However, this is likely to be minimal since the crypto-market offers a possibility of transacting with crypto-assets without intermediation. 

Table 8 Assessment of costs per policy option (CASPs)

6.2.2.2 Impact on tax administrations and Commission

The estimated costs incurred by tax administrations and the European Commission are largely dependent on the IT solution needed for the reporting by CASPs and the subsequent exchange of information by tax administrations. These have been quantified and the relevant information is available in Table 6 above and Annex 5.

One-off costs by tax administrations in the EU-27 when processing crypto-asset transactions are estimated to range between EUR 500 000 and EUR 64.8 million or between EUR 18 000 and EUR 2.4 million per tax administration on average, depending on the IT solution chosen. The estimated recurrent costs vary approximately between EUR 100 000 and EUR 6 million on a yearly basis, or between EUR 3 700 and EUR 220 000 on average per Member State. These estimates are extrapolated from the costs incurred by Member States under previous editions of DAC. They broadly aim at estimating costs for information on all crypto-assets in the EU.

Furthermore, the type of reporting and scope under the various options, will also affect recurrent costs for tax administrations. These are qualitatively assessed, however, and summarised in the table below.

Table 9 Assessment of costs per policy option (tax administrations)

Besides tax administrations, the Commission would also bear costs. In any legislative option, on the basis of current and past experience, it is likely that the Commission would incur development costs for defining the common EU reporting specifications (i.e. the type of data to be reported, collected and exchanged), and for setting up new and/or adapting the existing IT systems to enable the exchange of information. Commission’s one-off costs could vary between EUR 500 000 and EUR 1.4 million.

The recurrent costs for the European Commission are estimated to range between EUR 100 000 and EUR 200 000 on a yearly basis, and mainly relate to operating and maintaining the IT system for data storage and exchange relative to crypto-assets. There are different IT solutions for exchange of information available, which influence the costs range and are described in more detail in Annex 5.

6.2.3.Impact on sector’s competitiveness and SMEs

The rapid digitalisation of the economy suggests that the economic role of CASPs as facilitators in crypto-asset transactions is becoming increasingly relevant. The users engaging in such transactions through service providers appreciate the speed of exchanges, availability of the amenities and anonymity.

It cannot be excluded that this legislative initiative may affect the competitiveness of certain service providers that, in a baseline scenario, do not currently have any reporting obligations. Looking ahead, it is expected that reporting rules will however be put in place in more countries, even in the absence of a European initiative. The proposal aims at providing a single set of rules throughout the EU, thereby reducing the compliance burden at least for those operators that are active in various countries and subject to different rules. Introducing reporting rules could also affect the service providers’ customer base. The initiative could decrease the number of users that transact via the service providers, most likely from those users who want to avoid complying with their tax obligations. On the other hand, the initiative could increase the trust in the system and attract new users who appreciate reputational and trusted providers. This would positively affect the competitiveness of CASPs, and could compensate, in part, for the loss of the clients favouring unregulated environments.

A level playing field requires all to be subject to the same rules, which makes the competition fair and efficient. That is, the available policy options do not differentiate between CASPs based on location, meaning all service providers with EU users will have to report and face the same compliance costs. The EU initiative would also level the playing field within the EU as it would also prevent competitive disadvantages arising from possible differentiated reporting requirements across the Member States. In addition to ensuring fairness within the crypto-asset market, it would also positively affect competition with respect to the traditional financial institutions. This is because CASPs would be subject to reporting obligations like traditional financial institutions.

When CASPs are SMEs, they tend to face a relatively higher administrative burden when fulfilling tax requirements due to their relatively small size and limited resources. However, since most of the information that needs to be collected is already collected for AML/KYC purposes, it is largely available to CASPs for their daily operations. Furthermore, the crypto market matures relatively fast and so do the SMEs by becoming big players on the market (provided they enable transactions of high value increasing their turnover). Regardless of the size, SMEs can still have large user bases since high digitalisation facilitates the management and processing of vast volumes of transactions. Impact on SMEs and competitiveness as per available policy options is qualitatively described in the table below.

Table 10 Policy options impacting competitiveness and SMEs

6.2.4.Social and environmental impacts

Expanding the automatic exchange of information and administrative cooperation would yield positive social and environmental impacts. As discussed above, the proposal is expected to lead to an increase in tax revenues, which can be used to fund (green) economic and social policies of the Member States. The initiative would also contribute to a positive perception of tax fairness and to fair burden sharing across taxpayers, while at the same time resulting in more trust and transparency from the side of the intermediaries.

The EU would be directly tackling the challenge of unreported income earned through service providers active in EU Member States. Tax evasion matters to a vast majority of the EU citizens. 40  The perception of tax fairness, together with the EU’s role in shaping it, is expected to improve with such an initiative. The same reasoning applies to benefits in terms of fair burden-sharing as the Member States would ensure that taxes due are effectively collected. 

The total environmental effects are unclear but likely to be minimal given that the proposed initiative only introduces a reporting and information exchange obligation for existing players without provisioning, for example, the use of technology behind crypto-assets.

Furthermore, the existing DAC includes specific provisions and safeguards on data protection in line with the GDPR. The reporting under previous iterations of the DAC concerns different types of income, financial assets, the content of rulings decided by the tax authorities, reports from multinationals, arrangements facilitated by intermediaries and income from transactions using on-line platforms. The reporting in all of these categories has been considered to be in line with the provisions of the GDPR. Any legal initiative based on further amendments to this Directive will then continue to follow and respect these provisions and will have to comply with GDPR from the start. In terms of information reported, it is worthwhile noting that under this legislative proposal, reporting entities will be transmitting user/account details as well as information related to crypto-assets proceeds and holdings. As a consequence, crypto-asset users that carry out transactions using CASPs will be subject to reporting of a number of basic points of information. This is the same situation as under the current provisions of the DAC, where persons investing in shares or saving in a bank account will be subject to the same kind of reporting. The information included typically covers information needed to identify the taxpayer (i.e. the Tax Identification Number(s), the first and last name of the user, the primary address of the user, the date of birth of the user) and then specific information about the transaction. The information will be made available to the relevant tax administrations.

Thus far, one of the main benefits for taxpayers of crypto-asset exchanges was the pseudo-anonymity of its users, and only a relatively restricted number of service providers have been asking for taxpayers’ identification numbers (TIN) upon their registration. 41 TIN information, together with information such as first names and surnames, are the most important data to ensure that the information exchanged can be used for the purpose of tax control. 42  This information will be given to the tax administrations by CASPs. This does not mean that tax authorities will not be engaging in processes of their own to find taxpayers behind the transactions.

From the public perspective, an EU legislative proposal would also lead to an indisputable percentage of cost savings and public revenue gains due to the relevant information that will reach tax authorities. There would possibly be a better compliance effect stemming from taxpayers who know that tax authorities have access to the information related to their transactions with crypto-assets. 

7. HOW DO THE OPTIONS COMPARE?

This section compares the impacts of the available options (see section 6.1). The options are assessed against the criteria of effectiveness in reaching the policy objectives, efficiency (in terms of costs and benefits) as well as coherence with other EU policies, namely GDPR. For each category, the options have been rated on a scale from minus three to plus three. The baseline is used as point of comparison, and it is scored as zero. The same zero mark has been given to categories that produce no effects whatsoever under the available options. Scores one, two and three indicate limited, sizeable and strong impacts 43 respectively, while the signs (pluses and minuses) reflect their positive or negative direction. The table below shows the summarised assessment and displays ranks between different options.

Table 11 Comparison of options

As displayed in the above tables, all options would contribute to the safeguarding of tax revenues in the Member States. The available options also improve the effectiveness aspects by increasing the fairness and transparency of tax systems’, reducing cross-border tax evasion and improving the overall functioning of the internal market.

Without a binding regulation on EU level, there is a risk that the functioning of the Internal Market is not ensured in the same way as in the presence of binding EU legislation. This is also the case when SMEs are being excluded (Options 2, 4 and 6) as there is an obvious lack of level playing field.

The efficiency of different options varies since the type of reporting, as well as the application of a size threshold, affects CASPs and tax administrations oppositely (i.e. what is more costly for CASPs is more cost-saving for tax administrations and vice versa). In particular, providing a larger amount of information to the tax administrations (Options 1 and 2) may result in more control and taxes, but the additional costs stemming from the excess of data possibly leading to overburdening may not outweigh the benefits. 44  For service providers, reporting detailed (transaction-by-transaction) information is relatively easy with lesser costs since the data provided is raw, while data aggregation would require additional costs (Options 3 and 4). Hybrid reporting (Options 5 and 6) provides for a middle-ground solution when it comes to bearing costs as it considers data aggregation (more work on the CASP side) while processing additionally requested raw data only when relevant (more work for tax administrations). Size thresholds also affects costs for both CASPs and tax administrations. This is due to positive correlation between the two variables (number of service providers needing to report and costs).

The deterrent effect and tax collection are improved with more detailed information and with a wider scope. Reporting of information on transactions rather than balances will therefore have a stronger deterrent effect and will improve tax collection. The increased scope and the transactional reporting will also improve the ability to detect and counter tax fraud, evasion and avoidance as there is more information on a wider scope of taxpayers. In the end, this will contribute to safeguarding tax revenues and bolster the fairness of the tax system.

To sum up, all options share certain similarities once contrasted with the baseline scenario. Nevertheless, larger effectiveness and efficiency gains for service providers and tax administrations are obtainable under hybrid reporting and with no differentiation in terms of size.

The absence of a threshold would mean that SMEs face an administrative burden, which is proportionately heavier than for larger CASPs. However, the fast evolution of the market and the participating entities’ growth pattern mean that CASPs can easily and quickly grow in size. As the market grows fast, they could within a very short time change from being out of scope to being in scope, which would make it difficult for CASPs to collect the necessary data on short notice. Setting a threshold to leave out of scope CASPs that have a more limited size is therefore not necessarily a better option for SMEs. In addition, this threshold could lead to a non-desired fragmentation of the market and imply risks of not detecting transactions that are potentially significant from a tax perspective.

8. PREFERRED OPTION

The above analysis indicates that Option 5 hybrid reporting by all CASPs, irrespective of size, is the most appropriate option to meet the objectives of the initiative. The status quo baseline scenario is the least effective, efficient and coherent. When compared with the baseline scenario, having an EU mandatory common standard would ensure that all EU tax administrations have access to the same type of information. In other words, an EU legislative initiative would put all tax authorities on an equal footing. A legislative initiative is also the only one that allows for the automatic exchange of information at the EU level, based on common standards and specifications.

The approach outlined under Option 5, once implemented, would allow the tax authorities where a crypto-asset user is a resident to verify that the user has accurately reported their proceeds obtained through crypto-asset transactions. Besides, it would positively influence sector competitiveness because it would level the playing field between actors of the traditional financial sector and crypto-assets, as well as bring a higher degree of tax fairness, increasing trust in all sector players.

This proposal would design a legal framework to report and exchange tax-related information efficiently, effectively, and securely.

All CASPs regardless of their size and location need to collect and report information on their customers that are resident in the EU. This would ensure a level playing field in the Internal Market. Moreover all CASPs offering their services to EU resident users would have to be registered in the EU in accordance with the proposed Regulation on MiCA.

This initiative would not set a threshold for reporting obligations to apply, which would reduce the risk of creating loopholes and contribute to creating a level playing field in the global crypto-asset market. CASPs already need to gather information for AML/KYC purposes hence they are already obliged to identify their customers. The administrative burden linked to data collection would therefore remain limited for service providers.

Concerning the scope in terms of crypto-assets, the preferred option would aim at setting rules for the exchange of information concerning marketable crypto-assets.

Concerning the transmission and reporting of information for crypto-assets, the preferred option would be a middle-ground between aggregate reporting and transaction-by-transaction reporting. Some additional data such as number of transactions or any commissions or fees, would be collected as well in order to enable a faster, more accurate and effective tax assessment by tax authorities. This system would allow tax administrations to enhance the usability of the data and increase the efficiency of implementing risk analysis for tax purposes. For two types of crypto-assets, CBDCs and e-money tokens CASPs would exchange information on balances and not on transactions, under similar conditions to those that apply to financial assets. The IT solution that would best facilitate reporting and exchange of information with the best available balance between costs and usability benefits for all parties involved – CASPs, the Member States and the Commission – is the one of Central Directory (already used for exchanges under DAC3 and DAC6).

The preferred option would be proportionate and would not go beyond what is needed to achieve the goals. The data that crypto-asset service providers would need to provide, according to the experience with previous DACs, is the minimum required to ensure that tax administrations can adequately execute their tax control commitments. The cost-benefit ratio is positive: the expected return in terms of additional tax revenues is higher than the estimated costs. While there is an administrative burden for businesses and tax administrations linked to the proposed initiative, it is less burdensome than having a patchwork of national rules. The impact on personal data protection is in line with data protection rules, and the expected effect on the sector’s competitiveness and the overall social impact is deemed positive.

Concerning the administrative costs related to the ‘one in, one out’ approach, there will be administrative costs for crypto-assets service providers. The total one-off costs for crypto-assets service providers are estimated at EUR 259 million (or EUR 1.5 million per CASP) while the recurrent costs are estimated at 22.6 million for all CASPs but it is estimated that they will not surpass EUR 135 000 per entity on a yearly basis. However, as a result of the directive crypto-assets service providers will benefit from homogeneous reporting requirements throughout the EU, rather than having multiple standards across each Member State. They will not be faced with burdensome individual information requests as the preferred option provides tax administrations with the right level of information and the process to report the information will be very much automated and digitalised.

It would also respect the principle of subsidiarity, as the main problem – which is that tax authorities lack the information necessary to monitor the income obtained using crypto-assets – requires EU solutions, providing new tools to enable tax administrations to do their job efficiently. In the absence of administrative cooperation, a Member State on its own would not be able to ensure the correct compliance of its residents. Therefore, the possibility for tax authorities to obtain the necessary information clearly offers EU added-value, over and above what can be achieved at the individual Member State level.

9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?

9.1 Indicators for monitoring and evaluation

The table below gives an overview of the objectives, the indicators to measure whether they will be achieved, the tool for monitoring them and the operational objective. In the medium term, the initiative is expected to have a positive impact with respect to the general objectives presented in chapter 4.

Table 12 Indicators for monitoring

9.2. Monitoring and reporting

The results of the yearly assessment by Member States are presented and discussed in the Expert Group on Administrative Cooperation in Direct Taxation Commission. The yearly assessment is conducted on the basis of the relevant provisions of the DAC and its implementing regulation.

As the implementation of the initiative is likely to start after 2022, the Commission will report on this initiative as part of the third report to the European Parliament and the Council on the effectiveness and efficiency of the application of the DAC, currently due by 1 January 2028. 45

The initiative's overall success would mean Member States’ tax authorities obtain the necessary information to complete one of their core missions, which is to efficiently control and assess the correctness of taxpayers' income tax returns. In other words, it would improve the ability of Member States to detect and address cross-border tax fraud, tax evasion and tax avoidance. Currently, tax authorities lack the necessary information to control the correctness of the capital gains resulting from crypto-assets declared. Success would also mean that taxpayers would be deterred from non-complying with their tax obligation, would change their behaviour and correctly report their income.

The data used to measure the success of this initiative, such as the number of controls carried out based on data tax administrations gather via the initiative, the additional tax revenues secured thanks to the initiative or the rate of compliance, are collected mainly through the yearly assessment of the automatic exchange of information. Based on existing provisions of DAC, each Member State has to complete annually a questionnaire (“the DAC yearly assessment”) by providing information on the effectiveness of the automatic exchange of information and the practical results. This questionnaire will be expanded to include this initiative. Similarly to what exists for other provisions of DAC, the Commission will determine, by means of an implementing regulation, a list of statistical data which shall be provided by the Member States for the purposes of the evaluation of this initiative. In particular, the outcome of a Fiscalis Working Group on Key Performance Indicators for DAC will be used in order to improve indicators and controls of the performance of the initiative. This would measure for instance the number of times information received is used as part of a compliance intervention and the number of times the tax base of a taxpayer is adjusted as a result of received information.

ANNEX 1:    PROCEDURAL INFORMATION

DG TAXUD, PLAN/2020/8658.

The initiative is part of the Action plan for fair and simple taxation supporting the recovery strategy 46 and listed in the Commission Work Program 2021, Annex I, priority: “An economy that works for people”, initiative number 15.

Organisation and timing

An inter-service steering group was set up to steer and provide input to this impact assessment report. The steering group met 3 times before the report was submitted to the Regulatory Scrutiny Board.

Consultation of the Regulatory Scrutiny Board

On 11 October 2021, a draft version of the impact assessment was presented to the Regulatory Scrutiny Board. On 12 November 2021, the RSB issued a positive opinion with reservations. Afterwards, the draft report has been revised in order to take into account the recommendations for improvement, as explained in more detail in the table below.

Evidence, sources and consultations

The evidence for the impact assessment report was gathered through various activities and from different sources:

·Consultation with the Working Party IV Commission Expert group on direct taxation

·Targeted consultation with relevant stakeholders, such as business associations and leading corporations in the global market

·Targeted consultation addressed to tax authorities on the problems covered by the initiative and possible solutions

·Public consultation

·Feedback on the inception impact assessment

·Joint Research Centre (JRC) study 47 : Crypto-currencies – An empirical view from a tax perspective

·Desk research

ANNEX 2:    STAKEHOLDER CONSULTATION

I.Introduction

For the preparation of this initiative, the European Commission designed a stakeholder’s consultation strategy, which is summarized in this synopsis report. The aim of the synopsis report is to present the outcome of the consultation activities and to show how the input has been taken into account.

The consultation strategy encompasses both, public and targeted consultations. Further details are provided in the table below:

Table 2 Overview of consultation activities

The different objectives of the different consultations were to:

-Provide stakeholders and the wider public with the opportunity to express their views on all relevant elements.

-Gather specialised input to support the analysis of the impact of the initiative.

-Contribute to the design of the technical aspects of the future initiative.

-Satisfy transparency principles and help to define priorities for the future initiative.

As reflected above by the different methods of consultation used and the stakeholders’ groups consulted, the stakeholder consultation strategy has formed an integral part of the policy development process. The consultation began with the launch of the Inception Impact Assessment published on 23 November 2020 and continued until 2 June 2021 when the Public Consultation ended.

II.Consultation participation

1.Feedback on the Inception Impact Assessment

The consultation period through this feedback mechanism took place between 23 November and 21 December 2020 via the Commission website 48 . The period started when the Inception Impact Assessment was published outlining the initial structure and options of the project. Nine comments were submitted during this consultation period by individuals, service providers and umbrella organisations for the crypto/e-money sectors.

2.Targeted consultation

2.1. Targeted consultation via an expert group (Working Party IV)

The Working Party IV met on two occasions on 13 November 2020 and 24 March 2021 in order to discuss the future possible amendments to DAC.A draft concept paper “Possible expansion of the exchange of information framework in the field of taxation to include crypto-assets and e-money” prepared by TAXUD D2 on crypto-assets and e-money was discussed. Participating Member States took the floor and expressed their support for an expansion of the existing DAC to encompass the sharing of information reported on crypto-assets and e-money. However, Member States emphasised the importance of closely following the work of the OECD on the same subject in order to avoid two different reporting frameworks.

In order to complement the discussions with the Member States, a questionnaire, which was based on the draft concept paper and issues that were raised during the November 2020 meeting, was circulated to the Member States for input.

2.2.Targeted consultation via private stakeholders’ meeting

On 23 March 2021, a meeting with six representatives of different service providers and delegates of 24 Member States (BE, BG, DK, DE, EE, IE, EL, ES, HR, IT, CY, LV, LT, LU, HU, MT, NL, AT, PL, RO, SI, SK, FI, SE) was held virtually. Large as well as small service providers active in different sectors were represented: crypto-asset exchanges, other types of CASPS and digital assets associations.

The objective of the meeting was to gather views from stakeholders on their current experience with respect to reporting requirements based on national provisions, as well as to gather their views on a possible EU initiative to provide tax administrations with information on taxpayers who generate income and revenues through crypto-assets and e-money. Ahead of the meeting, a questionnaire was issued.

3.Public Consultation

The public consultation was launched on 10 March 2021. It remained open until 2 June 2021 respecting the usual 12 weeks limit.

In addition to the general identification questions, the public consultation questionnaire consisted of 36 questions which covered all elements of the impact assessment; problem, subsidiarity, options and impacts of the initiative. Stakeholders could also upload additional contributions. In order to increase the visibility of the public consultation, the Commission promoted this consultation on social media. Despite the diversity of channels used, the number of contributions received remained small. Such a limited response to the public consultation could be explained by the rather widespread support and non-contentious character of the initiative at stake or the still small but growing market.

In total, 33 responses were received, coming from the following respondents:

Annex figure 1: categories of stakeholders commenting on the public consultation

Source: responses to the public consultation questionnaire

In terms of breakdown by country of origin of the respondents, the chart below shows a diverse representation:

Annex figure 2: Stakeholder’s origin country

Source: responses to the public consultation questionnaire

With regard to the publication of privacy settings, 2 respondents agreed to the publication of their personal details and 31 answered as anonymous participants. From the point of view of the size of the organizations involved, 7 are micro (1 to 9 employees), 4 small (10 to 49 employees), 4 medium (50 to 249 employees) and 8 large (more than 250 employees).

From the replies received, at least 7 of them acknowledged using crypto-assets for investment and/or payment purposes.

Twelve position papers were submitted by stakeholders in addition to the answers provided by them to the standardized questionnaire. Position papers were submitted, mainly, by business associations.

III.Methodology and tools for processing the data

The consultation activities allowed for the collection of data of both qualitative and quantitative nature, which were processed and analysed systematically. Qualitative data was structured according to key themes. Quantitative data (including survey responses and figures provided by stakeholders) was processed using an Excel spreadsheet, and analysed using statistical methods, ensuring the appropriate protection of personal data without publishing the information of the respondents that did not provide their consent.

IV.Consultation result

1.Inception Impact Assessment feedback

Overall, the initiative to create a common EU framework for reporting obligations was welcomed by the majority of stakeholders involved. Several comments concerned the need for clearly defining crypto-assets and e-money, as well as the service providers in scope of the amendment to the DAC. Most agreed that MiCA’s definitional framework should be used as starting point. Furthermore, stakeholders pointed out the need for aligning any action with the ongoing work being undertaken by the OECD and the FATF on the regulation of cryptocurrencies.

Some stakeholders insisted on keeping the global approach - “combat tax evasion by taxpayers seeking to hide their assets in offshore accounts and at the same time ensures a global level playing field”. It was highlighted that the principles of subsidiarity and proportionality should be the drivers when scoping out the amendments to the DAC.

There was widespread agreement on the need for providing a harmonized, fair and robust tax system. While a precise and targeted regulation is needed to address illicit activity, it is important that such a regulation is proportional and not prohibitively complex to adversely affect crypto-assets as an important component of the financial services industry.

2.Targeted consultation

2.1Targeted consultation via expert group (Working Party IV) 49

The expert group of Working Party IV met in November 2020, where the European Commission presented for the first time the proposal to expand the scope of the DAC to include crypto-assets and e-money. The corresponding concept note on expanding the scope of automatic exchange of information to crypto-assets and e-money was presented and discussed with the Member States during this meeting.

In general, Member States expressed strong support for the expansion of the scope of automatic exchange of information to include crypto-assets and e-money. Questions raised by the Member States mostly revolved around the level of detail of such reporting, the extent of such reporting (in terms of assets covered, intermediaries covered, etc.) or the consistency with the OECD work in this area.

The transfers from one wallet to another wallet held by the same taxpayer was seen as the only valid exemption. Another aspect raised was the consideration of data protection in case of reporting on transaction-by-transaction basis. In this context, some Member States highlighted that an aggregate approach would be easier to reconcile with GDPR obligations.

The questionnaire circulated to Member States consisted of questions about the treatment of crypto-assets and e-money as well as their tax treatment in each specific Member State. Regarding the treatment of e-money, Member States agreed that e-money providers just like financial institutions must determine whether they are a reporting Financial Institution according to DAC2. Thus, most Member States apply the CRS related FAQs to E-money providers. In terms of crypto-assets, the outcome of the questionnaire showed that most Member States have not introduced specific provisions for crypto-assets and even those who have find it difficult to obtain the necessary information for taxation based on their national legislation.

Member States considered that the expansion of the scope of reportable information under DAC2 may not be entirely sufficient and as such should be adapted for crypto-assets.

Stakeholders expressed a preference to exchange the information on an aggregate basis. Similarly, most of the Member States were in favour of aggregate reporting as a basis for carrying out risk assessments although some still expressed their preference for transaction-by-transaction reporting for the purpose of tax assessments. Furthermore, Member States discussed the possibility of obliging CASPs to report more than once a year or to adapt the standard to the reporting entities or reported taxpayers.

Member States expressed the need for considering the MiCA and AML proposals for extending the scope of the DAC. Some Member States consider that the provisions in these proposals may offer possibilities for the enforcement of reporting obligations for third country CASPs. Regarding cold wallets, Member States agreed that it would be difficult to cover them due to the difficulties in having information on crypto-assets held but not exchanged.

As a summary of both meetings, the Member States agreed on the need to expand the scope of automatic exchange of information to crypto-assets. In addition, the reporting framework including aggregate versus transaction-by-transaction and the reporting frequency remained as open issues.

2.2Targeted consultation via stakeholder’s meeting

On the topic of the crypto-assets in scope, stakeholders highlighted that important discussions on definitions are still ongoing on MiCA and AML. Therefore, the majority of stakeholders signaled the need to follow existing provisions from MiCA and AML, as well as the work done by the OECD on cryptocurrencies. Some stakeholders consider crypto-assets to be similar to financial assets and even money. Therefore, this initiative should only target crypto-assets that are admitted to trading. This is also due to the fact, as stakeholders unanimously say, that information on peer-to-peer transactions cannot be easily obtained through private or cold wallets. 

There was a general consensus on the need to maintain a level playing field with traditional financial institutions subject to DAC2 reporting obligations and thus to avoid unnecessary administrative burdens. There was unanimous support for the view that keeping it simple will help to define a successful reporting standard.

On the reporting, stakeholders supported the idea of reporting aggregate data rather than transaction-by-transaction. According to the stakeholders, it is more appropriate from the IT point of view as there may be an excessive volume of transactional data to be reported. In this regard, the objective should be the targeting of tax evasion and not the collection of mass data that cannot be processed. Consequently, stakeholders also proposed the introduction of a reporting threshold in order to reduce the administrative burden.

Based on the AML/KYC due diligence procedures, stakeholders also confirmed that they could track information by jurisdiction.

In summary, stakeholders and Member States agreed that the expansion of the scope of automatic exchange of information to crypto-assets would increase legal certainty resulting in benefits for stakeholders and tax administrations. Tax administrations will obtain the ability to increase tax revenues and stakeholders may achieve a better-regulated market.

3.Public Consultation

A concerted effort was made to ensure that the views and concerns of all affected stakeholders were carefully considered throughout the impact assessment exercise.

Overall, there has been strong support to lay down a single set of rules across the EU for CASPs, e-money service providers and other financial institutions operating with crypto-assets and to have the same reporting obligations for tax purposes throughout the EU (18 affirmative responses out of 33 – 11 no answers). The reason might be that most of the respondents consider that common reporting obligations in the EU would reduce the administrative burden for service providers and/or users, while, at the same time, ensuring a level playing field with traditional service providers (19 out of 33 confirm this statement – 12 no answers).

In relation to the perception of the problem, 11 respondents from different categories and also sizes of stakeholders (be it EU citizens, business associations, trade unions, companies/business organisations or non-governmental organisations between micro and large of size) confirmed that there is significant lack of reporting for tax purposes of revenues obtained through crypto-assets. Only six disagree and five neither agree nor disagree with this statement. Thirteen respondents of different categories and sizes of stakeholders agree that the lack of tax revenues obtained through crypto-asset investments negatively impacts fair competition between the traditional and crypto-asset economy, whereas 6 EU citizens disagree strongly with this statement. Two respondents neither agree nor disagree.  It seems that this problem comes from the fact that individual Member States are insufficiently equipped to track revenues generated through crypto-assets as pointed out by 13 respondents.

The conclusion is that there is support for an EU action. 

When it comes to introducing harmonised reporting obligations for tax purposes, respondents are of the opinion that the main challenges are the cost of implementation, the complexity of handling and migrating existing accounts and the achievement of a level playing field in the EU. Furthermore, disadvantages for EU companies on a global level need to be avoided. A harmonised reporting framework may result in operations re-locating out of the EU to jurisdictions where reporting is not mandatory. Another challenge for harmonised reporting obligations is the issue of double reporting where the same information is already collected and exchanged under other legislation. Ensuring an accurate, transparent and efficient identification mechanism on the crypto-asset and e-money service providers, as well as the financial institutions involved in these transactions will not be an easy task. Finally, the decentralized nature of cryptocurrencies makes it almost impossible to capture all cryptocurrencies within an EU reporting framework.

In relation to the entities in scope of a crypto-asset reporting framework, 14 respondents of which 28% were EU citizens and the rest divided between the different categories, deem that all entities providing services in the crypto-asset field should be subject to reporting obligations in order to avoid potential loopholes. Only four respondents (two EU citizens, one large business organization and one business association) would allow some exemptions. 13 provided no answer.

With regard to entities that could benefit from a reporting exemption, respondents indicated providers primarily concerned with enabling the use of blockchain without direct links to marketplaces, such as custodial wallet providers without an investment focus, tax reporting services, account software, and portfolio tracking applications as well as small companies.

In relation to crypto-asset operations in scope of reporting, 10 respondents from different categories and sizes of stakeholder deem that all crypto-asset operations should be reported in order to avoid potential loopholes, whereas some respondents (three EU citizens, three business associations and one business organization) indicated supporting some exemptions from reporting. 11 contributors did not provide an answer.

Annex figure 3: Public consultation results – respondents’ opinions on main policy options

Source: responses to the public consultation questionnaire

V.Conclusion

The results of the public and targeted consultations allowed the European Commission to collect a number of views and opinions on the initiative.

Both public and targeted consultations showed wide agreement about the existence of the problems identified in the impact assessment: no reporting of income and revenues earned through crypto-assets.

Regarding the reporting of information on crypto-asset users, a broad majority of stakeholders (Member States, private entities and EU citizens) agreed on the need for a European framework for reporting obligations in favour of achieving a sound level playing field and a true internal market.

As a conclusion, during the different consultations, neither stakeholders nor Member States questioned the need of a reporting framework. In general, there was a unanimous consent in going forward with a legal proposal. The main point of divergence was on the type and granularity of reporting. 

Finally, it is worth noting that the feedback received throughout the public and the targeted consultations has been used to inform the choice of the preferred policy options.

ANNEX 3:    WHO IS AFFECTED AND HOW?

1.Practical implications of the initiative

Under the preferred option, the initiative is meant to provide a legal basis at the EU level for setting up a reporting and exchange system that will allow (i) CASPs to collect and transmit periodically (once a year) to the tax administrations aggregate tax relevant information on its users and their underlying transactions and, (ii) tax administrations to then exchange the reported information with relevant Member States, in order to use it for the administration and enforcement of relevant tax laws (e.g. tax code on personal income).

Due to the existence of other EU initiatives relative to crypto-assets, in particular the MiCA Regulation and AML Package (i.e. Transfers of Funds Regulation), the estimated costs for DAC8 should be considered upper bound as there could be commonalities already taken into account in the estimations of those other initiatives. Furthermore, these figures took into account the volatility of the crypto-assets market as well as cost-savings stemming from the harmonisation of legal requirements.

2.Summary of costs and benefits 

(1) Estimates are gross values relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations of the preferred option are aggregated together); (2) Please indicate which stakeholder group is the main recipient of the benefit in the comment section;(3) For reductions in regulatory costs, please describe details as to how the saving arises (e.g. reductions in adjustment costs, administrative costs, regulatory charges, enforcement costs, etc.;); (4) Cost savings related to the ’one in, one out’ approach are detailed in Tool #58 and #59 of the ‘better regulation’ toolbox. * if relevant

(1)Estimates (gross values) to be provided with respect to the baseline; (2) costs are provided for each identifiable action/obligation of the preferred option otherwise for all retained options when no preferred option is specified; (3) If relevant and available, please present information on costs according to the standard typology of costs (adjustment costs, administrative costs, regulatory charges, enforcement costs, indirect costs;). (4) Administrative costs for offsetting as explained in Tool #58 and #59 of the ‘better regulation’ toolbox. The total adjustment costs should equal the sum of the adjustment costs presented in the upper part of the table (whenever they are quantifiable and/or can be monetised). Measures taken with a view to compensate adjustment costs to the greatest extent possible are presented in the section of the impact assessment report presenting the preferred option.

3.Relevant sustainable development goals

ANNEX 4:    ANALYTICAL METHODS

In this section, we explain the underlying assumptions relevant for estimating both benefit and cost estimates. It is worthwhile noting that the estimates presented below are significantly limited as the data on crypto-assets is scarce.

Benefits

·We first estimate the number of CASPs operating in the EU by assuming the following:

oExchanges are defined as businesses that allow customers to trade cryptocurrency for fiat money or other cryptocurrency. 51  Our assumption is that this definition comes close enough in describing CASPs and thus, we give equal footing to the two notions.

oIn August 2021, there were 672 exchanges worldwide. 52  Therefore, 672 CASPs. 

o25% share of global cryptocurrency value is received by Central, Northern & Western Europe. 53

oBy applying the aforesaid share (i.e. 25%) to the overall number of CASPs, we approximate that there are 168 CASPs with EU users. This assumption is simplistic and significantly limited as users and intermediaries cannot be equaled, but it gives an indication on how many CASPs operate in the EU (the real number might be higher). Any conclusion stemming from it should therefore be interpreted with caution.

·In order to estimate the benefits of introducing a compulsory reporting and exchange of information on crypto-assets, we rely on the findings from a study by Thiemann (2021) on realised capital gains 54 , 55 in the EU Member States. Realised capital gains accrue when the selling price of an asset exceeds the price of their initial purchase and the asset is sold. 56 The study based its findings on Bitcoin data only that had been received from Chainalysis (a blockchain data platform).

·In 2020, EU citizens accrued EUR 3.6 billion of total realised capital gains according to the analysis by Thiemann (2021). This amount is unevenly distributed amongst the EU countries and unevenly taxed (if at all). In the study, a uniform EU tax rate of 25% is therefore applied, leading to an estimated EUR 0.9 billion of tax revenues from Bitcoin.

·In order to estimate tax revenues from all crypto-assets (all options) we assume the following:

oWe approximate Bitcoin market share to 50% (47% dominance according to Coin Market Cap as of 27/6/2021).

oThe other 50% is relative to the remaining cryptocurrencies on the market (almost 11 000 cryptocurrencies in total according to Coin Market Cap).

oIn order to estimate revenues from all crypto-assets, we double the tax revenues previously projected by the above-mentioned study and estimate a new figure of EUR 1.8 billion (EUR 0.9 * 2). Please note that this is a simplifying assumption since cryptocurrencies differ in value and consequently in possible realised capital gains. For a more precise estimate one should dispose of reliable data on cryptocurrencies other than Bitcoin, and employ sophisticated empirical methods. Since we do not have such data, caution in interpreting the results is advised.

oFrom newly estimated tax revenues, we further exclude the transactions under the following crypto-asset categories (i.e. discarded options): non-marketable crypto-assets and utility tokens. Determining their respective shares in the total crypto-asset market, however, is challenging due to lack of official statistics. Bitcoin remains the dominant cryptocurrency representing almost half of the total market according to Coin Market Cap. The market share of the remaining cryptocurrencies is relatively small. To illustrate this better, already the sixth most dominant crypto-asset (XRP) comes with a share of less than 3% in the total cryptocurrency spectrum. As we are unable to sum up different cryptocurrencies per asset type and determine their corresponding shares in the total market, we artificially assign a 3% share per reported asset category (i.e. 6% in total) to be excluded in these options. This assumption is imperfect and might also be inflated. Any estimates deriving from it should be therefore be cautiously interpreted.

oBy reducing the benefits by 3% per asset category, this gives roughly EUR 1.7 billion (EUR 1.8 - EUR 1.8 * 0.06) in tax revenues.

oAs gains from crypto-assets are subject to high volatility, this consequently affects collected tax revenues from such gains. We have therefore performed a sensitivity analysis on the applied 25% uniform tax rate (i.e. adding 15% and 35% tax rates to the analysis). This increase/decrease of 10 percentage points was motivated by the current use of tax rates on capital gains in the Member States (see the table below). As the majority of countries legislates tax rates above 15%, this has been used as the lower bound. A 35% tax rate has been used as the upper bound to maintain the same sensitivity interval from the central rate and to signal that no capital gains are being taxed above this rate.

Table 7 EU country distribution based on legislated tax rates on capital gains

Notes: In cases where countries do not legislate tax rates on capital gains specifically, corporate income tax rate is used instead. Source: Own work based on information from Taxes in Europe Data Base (TEDB).

oBy applying a 15% tax rate and also accounting for the crypto assets on top of Bitcoin (i.e. the other 50% of the market as done above), this gives EUR 1.08 billion (3.6 * 0.15 * 2). We further exclude the two non-considered crypto-asset types, which brings the total amount down to EUR 1.02 billion (1.08 – 1.08 * 0.06).

oBy applying a 35% tax rate and also accounting for the crypto assets on top of Bitcoin (i.e. the other 50% of the market as done above), this gives EUR 2.52 billion (3.6 * 0.35 * 2). We further exclude the two non-considered crypto-asset types, which brings the total amount down to EUR 2.37 billion (2.52 – 2.52 * 0.06).

oWe estimate an absolute difference of EUR 1.35 billion between the lower and the higher bound. Please note, however, that the oscillations in cryptocurrency value may be higher than the ones employed in this sensitivity analysis.

Costs

The methodology employed for the estimation of the costs follows the Standard Cost Model, where each option can be projected and monetised by multiplying the total quantity (estimate) of reportable users (Qs) under each option by a cost (P).

The average costs per service provider, as shown in the equation below, are obtained by dividing the total estimated costs (one-off or recurrent) by the number of service providers that would have to comply. The average costs per tax administrations are obtained by dividing the total costs (one-off or recurrent) for tax administrations by twenty-seven. These are simplifying assumptions and the costs will vary given the size of the service provider and of the tax administration. We lack available data for a more granular estimation.

Table 1 below summarises all the cost estimates for all parties concerns (CASPs, tax administrations and the European Commission). The total costs that would be incurred due to these legislative interventions are grouped according to the available options under the intervention.

Table 8 Estimated costs and comparison (DAC2 vs DAC8)

Notes: (1) The figures in the table are rounded. (2) TA = tax administration in EU. EC = European Commission. (3) For costing details relative to TA and EC see Annex 5. CASPs costs are assumed not to be affected by the IT solution used for reporting/information exchange.

In order to estimate the costs for CASPs, both recurrent and one-off, a number of assumptions needed to be employed.

a)Assumptions used to estimate the number of crypto-asset users:

·According to Binance (2021), there were more than 100 million users of crypto-assets worldwide in 2020.

·Bitcoin remains the dominant cryptocurrency with a 47% total market share (Coin Market Cap as at 27/6/2021). In the absence of the official statistics, we use this dominance indicator and estimate 47 million Bitcoin users worldwide.

·In order to estimate the number of users in the EU or, more precisely, in the internal market, we rely on the data from Chainalysis. As they focus on Bitcoin information, they find that just over 25% of all Bitcoins are held at service-based addresses in Northern and Western Europe. As we lack a more granular, per country, information, we assume that there are roughly 12 million Bitcoin users in EU by applying the same 25% rate to the number of worldwide Bitcoin users.

·We also use a simplifying assumption ‘one user, one account’ in the absence of more precise data, which lets us estimate 12 million accounts in the EU. This assumption is imperfect as a single user can own more accounts simultaneously and/or operate with cryptocurrencies other than Bitcoin. Any further estimates employing this assumption should be interpreted with caution.

b)Assumptions used to estimate total costs

·In order to estimate the total costs for CASPs, we rely on projected DAC2 costs incurred by the traditional financial institutions when implementing the directive. The data employed derive from the Commission’s DAC evaluation report from 2019.

·The DAC2 average cost per account is estimated at EUR 6.4 for automatic exchanges between tax administrations, but the traditional financial institutions incurred 10 times higher costs than the authorities (i.e. EUR 64). A share of 92% and 8% of total costs were relative to one-off and recurrent costs respectively (Commission’s DAC Evaluation 2019).

·In the DAC7 impact assessment, by taking DAC2 as a comparable set of obligations imposed on the reporting subject, it has been assumed that the total costs for the traditional financial institutions were higher than for digital platform operators (in scope of DAC7), given that the costs incurred by financial institutions encompassed the costs stemming from the reporting requirements under FATCA and CRS under which the due diligence procedure is more stringent. Furthermore, given the digital model of platform operators and the development of the IT infrastructure, it was assumed that access to the data was less costly. These assumptions significantly lowered total reporting costs per account. We consider that these assumptions remain valid for CASPs as well. Hence, we assume that the total costs for CASPs will be EUR 25 per account reported, of which EUR 23 for one-off and EUR 2 for recurrent costs (when applying the before said rates as per the Commission’s DAC Evaluation report).

·When multiplying the retrieved costs per account by the number of accounts, this gives total recurrent costs of EUR 24 million (12 million accounts * EUR 2) and total one-off costs of EUR 276 million (12 million accounts * EUR 23).

·Similar to what we did for estimating the benefits, the costs are adjusted by 6% (assumed to be the market share of non-marketable crypto-assets and utility tokens) in the options where the crypto-assets in scope exclude non-marketable crypto-assets and utility tokens.

·By reducing the costs by 3% per assets category, this gives EUR 22.6 million in recurrent (24 - 24 * 0.06) and EUR 259 million in one-off costs (276 - 276 * 0.06).

·Furthermore, we also performed a sensitivity analysis (+/- 10% applied to the above estimated costs. This was done so as to account for (i) price volatility of crypto-assets which can result in having more or less crypto-asset users (depending on the direction of the prices) and (ii) potential need for the second round of reporting requests by tax administrations. This gives one-off cost ranging from EUR 233.1 to 284 million, and recurrent costs from EUR 20.3 to 24.9 million.

c)Assumptions used to estimate the number of CASPs

·We estimate that there are 168 CASPs operating in the EU (see the assumptions made above under the benefits section).

·In order to estimate recurrent and one-of costs per CASP, we divide the estimated cost figures (see section b) above) by 168 for each of the scopes. The retrieved amounts are presented in the table above.

In order to estimate the costs for tax administrations, both recurrent and one-off, a number of assumptions needed to be employed:

·The estimated costs for the exchange of information relative to crypto-assets depend on the IT solution provided. We differentiate between three IT options, the specifications of which are detailed in Annex 5.

·For the decentralized IT solution in particular, we rely on reported DAC2 costs, divided by the number of accounts, which amounts to EUR 5.4 for one-off and EUR 0.5 for recurrent costs (i.e. 92% and 8% respectively of total costs as per Commission’s DAC Evaluation report). We assume that tax administrations will incur exactly the same costs when exchanging information under DAC8 provisions. This gives EUR 6 million (12 million CASP accounts * EUR 0.5) in recurrent and EUR 64.8 million (12 million CASP accounts * EUR 5.4 in one-off costs).

·The total one-off costs for tax administrations when dealing with CASPs are estimated to range from EUR 0.5 million to EUR 64.8 million, while the total recurrent costs are estimated to vary between EUR 0.1 million and EUR 6 million.

In order to estimate the costs for the European Commission, both recurrent and one-off, we assume that:

·CASP related costs will depend on the IT solution provided. We differentiate between three IT options, the specifications of which are detailed in Annex 5.

·The one-off costs for the European Commission when dealing with crypto-assets exchanges are estimated to range from EUR 0.48 million to EUR 1.35 million, while the recurrent costs are expected to vary between EUR 0.1 and EUR 0.21 million.

ANNEX 5:    IT SOLUTION

1.General description of DAC IT solutions

The Directive on Administrative Cooperation (DAC) sets in Section II, the legal basis for the automatic exchange of different types of information between the competent authorities of each Member State.

There are four particularities concerning the reporting and exchange of information of the different DACs:

I)DAC1 and DAC3 exchanges deal with information held by the competent authorities;

II)DAC2, DAC4, DAC6 and DAC7 exchanges deal with information that the competent authority receives from a reporting entity, be it a financial institution, a large multinational enterprise, an intermediary or a digital platform operator;

III)DAC3 and DAC6 information is uploaded by each competent authority on a Central Directory, where it is available to the other competent authorities, and

IV)DAC1, DAC2, DAC4 and DAC7 information is automatically exchanged between competent authorities by using the Commission Communication Network (CCN).

The Commission provides the IT infrastructure making these automatic exchanges possible, i.e. the transmission channel (CCN), the XML schemas and the XSD User Guide. 57 The Commission is a data processor. Except for DAC1 and DAC3, the exchange of information under the other DAC’s consists of a three-step approach: First, the information is collected and reported by a reporting entity; second, it is received by the relevant competent authority and finally, it is exchanged by this competent authority either with other relevant competent authorities or to the Central Directory.

This proposal would introduce a reporting standard to provide competent authorities with essential information about crypto-assets. Regardless of the complexity of the policy options that will be chosen, there are in principle three main IT solutions for implementing an efficient exchange of information:

I.Decentralised system – the traditional DAC three stage approach

-This system would assume that the CASPs report the information to the competent authority of their tax residence or where they are authorised to operate. 58 These competent authorities would in turn then exchange the concerned information with the competent authorities of other relevant Member States. As a result, each EU tax administration receives a maximum of 26 “blocks” of reportable information, which have to be further processed in order to be integrated in the national IT systems and then used for the envisaged purposes (risk assessment, etc.). The exchange (send/receive) takes place at regular intervals (once per year or each quarter), which are generally defined by the Directive. Each competent authority has to set-up and maintain a national IT system implementing the processes described above. This is the option that has been used for the implementation of the provisions laid down in DAC2 and DAC4 and the recently agreed DAC7.

II.Centralised system – the traditional DAC - Central Directory

-As for DAC 3 and 6, this system would assume that the CASPs report the information to the competent authority of their tax residence or where they are authorised to operate. These competent authorities would in turn then upload the reported information to the Central Directory to which competent authority of each Member State can connect for consulting and downloading relevant information (information related to its taxpayers only).

III.Single access point – new IT alternative

-Under this new IT alternative, the reporting entity would no longer report information in a given country but instead directly into a general database (the “Single Access Point”).

-More specifically, the first step would be that the competent authority authorizes/grants access (after receiving the request) to the CASPs to upload data to the Single Access Point maintained by the European Commission. In this phase, the competent authority would check that the requesting CASP fulfils the requirements laid down in the Directive (i.e. registration, TIN, etc.). Once authorized, the CASP may upload the relevant information to the Single Access Point.

-The authorisation to report information to the Single Access Point would be managed by the Member State of residence of the CASP or in the Member State where they are authorized to operate. 

-The reporting of information would happen in a standardised way like for traditional DAC exchanges through an XML schema and a XSD User Guide, XML schema and a XSD User Guide.

-Consequently, CASPs would only be allowed to upload standardised information to the Single Access Point. Competent authorities of each Member State would have the right to access the information.

-As in the Central Directory, the Commission would have limited or no access to the data. Consequently, the Commission would play a data processor role only.

The second and third IT solutions could appear similar as they are both centralised and the infrastructure is provided by the Commission services. However, the difference is the necessity of an intermediary. In the second IT solution, the tax administration has to be in possession of information or data in order to be able to upload it to the Central Directory and make it available to other tax administrations, i.e. the tax administration takes the role of an intermediary between the reporting entity and the central platform.

In the third IT solution there is no intermediary between the reporting entity and the database where the information will be available to tax administrations in the new IT solution. There would therefore be no development costs of a national IT infrastructure for the collection of information and export to the Central Directory. This being said, the national tax administrations are likely to incur a certain level of IT costs as they would need to download in their own national system the data that is made available through the Single Access Point to be able to use them. This means that mainly the reporting entity and the Single Access Point will bear costs for the IT development, be it implementing the reporting format or updating an existing IT interface.

For the three proposed exchange IT solutions, the GDPR requirements remain the same as the information collected and exchanged and the access of Member States to that information will be of the same nature regardless of the method selected.

2.Cost-benefit analysis

Having an IT solution that will allow a proper exchange of information relative to crypto-assets will come with both benefits and costs. As these differ between available IT options, the quantification of costs is based on the cost information (one-off and recurrent) incurred for setting up and operating DAC6, 59 as well as DAC2 60 and DAC7 61 (see the table below). Benefits, on the other hand, have been assessed qualitatively due to limited data.

Table 9 Summary of costs relative to IT solution (in EUR million)

A decentralised approach means that the Member States are responsible for setting up, maintaining and updating their national IT systems so as to abide by the provisions set out in the DAC. The cost estimates stemming from the decentralised approach are based on DAC2 costs incurred by tax administrations, which are further adapted to the population of crypto-asset accounts (see Annex 4). Even though these costs are likely to be substantial, the maximum amount should not surpass EUR 64.8 million in one-off and EUR 6 million in recurrent costs. Due to lack of official data, however, precise estimates on the costs to be incurred in the Member States cannot be made. Moreover, the costs for the Commission under this option are likely to be relatively low. 62

The second option would entail relying on the existing system of information exchange, namely the Central Directory set-up and managed by the European Commission. The total one-off costs of upgrading and updating the Central Directory are estimated to be EUR 480 000, while the recurrent costs would amount to EUR 210 000. Since some IT infrastructure has already been developed and is operational, the projected cost is likely to be similar to those of running DAC6. Moreover, under this option, the national tax authorities are also likely to bear costs as they may extract relevant information from the Central Directory into national databases and have an upgraded (or newly built) IT infrastructure for data downloading and uploading operations. Since precise cost estimates are challenging to make, we assume that such costs could be in the order of millions of euros, but not higher than EUR 12.96 million (one-off) and EUR 5.67 (recurrent). This can be explained by the Commission’s effort to provide a centralised IT architecture that can significantly reduce costs for national administrations.

Finally, a new Single Access Point would bring about greater centralisation since CASPs would be directly linked to the Commission’s IT interface. This new IT solution will likely entail higher costs for the Commission to develop it as the number of connected entities will be higher than usual (i.e. around 168 CASPs 63 vs 27 national tax administrations). Considering the costs incurred for developing the IT interface under DAC6, we assume that the total one-off costs for the Commission will reach EUR 1.35 million as a minimum. The recurrent costs will be approximately EUR 210 000. The Commission costs for developing the Single Access Point are expected to be higher compared to the ones needed to update the Central Directory. However, for the Member States, it remains challenging to precisely assess the costs that will be incurred for adapting their systems to the Single Access Point. While we estimate, as a minimum, EUR 500 000 and EUR 100 000 for the one-off and recurrent costs respectively, we are unable to quantify the cost ceilings which might be substantial (in the order of millions of euros). This is due to the fact that the Member States remain responsible to ensuring that CASPs have fulfilled their legal obligations and might still opt for setting up national databases to store previously extracted data.

Taking into account uncertainty on the actual size of the benefits in the absence of reliable data, no quantification of benefits has been provided. Possible benefits stemming from the initiative can be looked at qualitatively through cost reduction for the Member States. Even though some savings can be obtained via the Single Access Point where the Commission provides the necessary infrastructure and CASPs report directly into the new interface, a reliable cost estimation leading to proper IT solution comparison remains challenging to make. Conversely, some IT infrastructure already exists for the use of the existing Central Directory as this IT solution could be delivered/deployed within a shorter legal base deadline, thus likely having a positive impact on savings. This point is of particular importance in this case where the need to regulate reporting and ensure exchanges of information on crypto-assets is urgent and a prerequisite for other initiatives in the EU as well as in the individual Member States. Similarly, some existing IT infrastructure also exists under the decentralized approach, but the estimated costs are quite high compared to other IT solutions and unlikely to be offset by any possible benefits.

Finally, when it comes to the policy options, the three IT implementation choices are feasible no matter which policy option is chosen. The feasibility of the IT solution depends neither on the size of the CASPs, nor on the types for crypto-assets in scope nor the reporting method. The question here is more about the efficiency of the different IT solutions in achieving the initiative’s objectives.

3.Overall assessment

Each of the proposed IT solutions have advantages and disadvantages. The first two options described above have the advantage of having already been tested and developed, which revealed their strengths as well as their weaknesses while developing or using them for the different DAC exchanges.

For the moment, the first two IT solutions coexist and are used for different DAC exchanges. The new IT solution would become a third alternative for DAC information exchanges.

As already explained, the main advantage of the Single Access Point is the absence of an intermediary tax administration, which means that the information is available in one single platform without additional IT infrastructures at the level of the intermediary. The cost and resources for the intermediary are therefore reduced in terms of implementation and development. Furthermore, there would only be one single IT solution instead of 27 that the reporting entity will have to adapt to. These IT tools would also potentially reduce development costs for compliance, risk assessment, statistics and other tools, which are required to show the respective use of information received through the DAC framework.

Despite the listed advantages of the Single Access Point solution, the traditional Central Directory is considered a better solution because it is already known by Member States and used for DAC3 and DAC6 purposes. Precise calculations of costs are not possible to make as this would be a new and untested solution, but Member States would need to adapt their national systems to new channels for receiving data. Another advantage compared to the Single Access Point is that it can be delivered and deployed with a shorter deadline. It is urgent to start the reporting and exchange of crypto-asset information as other initiatives, whether at EU level or at national level, rely on such information in order to operate and considering the current serious lack of necessary information. Compared to the decentralised solution, the Central Directory solution provides for more flexibility in the future in case the IT solutions will need to be harmonised for the DAC as a whole. The introduction of a Single Access Point would be more appropriate to consider for the DAC including all amendments in order to calculate and reduce costs with a high degree of certainty.

ANNEX 6: STRENGTHENING OF ADMINISTRATIVE COOPERATION BETWEEN TAX AUTHORITIES

In the broader context of the DAC, this impact assessment also presents a further strengthening of administrative cooperation between tax authorities, including a review of the current compliance framework, a clarification of the rules applicable to e-money and the expansion of the exchange of cross-border tax rulings to rulings granted to natural persons.

The European Court of Auditors (ECA) report 64  and the European Parliament resolution 65 pointed at the inefficiencies and the need of improvement in several areas of the Directive including the compliance measures, e-money provisions and rulings. 66

The problems

There are inefficiencies in the current framework on administrative cooperation and enforcement of the DAC provisions, which stem from a lack of clarity concerning some provisions of the legal text underpinning this framework, in particular when it comes to the application of penalties or other compliance measures, or the exchange of information on e-money. Furthermore, the current framework for exchanging cross-border rulings could be made more coherent.

To illustrate the need for clarification of some concepts: DAC established a reporting obligation on a number of actors (such as financial institutions under DAC2, MNEs under DAC4, intermediaries under DAC6, digital platform operators under DAC7). Under the current wording of Article 25a of the DAC, Member States have the obligation to introduce “effective, proportionate and dissuasive” penalties, in case of non-compliance with the reporting obligations.  Non-compliance can consist for example in the absence of reporting, late reporting, incomplete or false reporting, etc. However, as shown in Annex 7, there are significant differences between the Member States’ penalties frameworks set out for non-compliance under the DAC, which may have a negative effect on compliance with the aforementioned principles. Member States having implemented low-level penalties as compared to other Member States do not provide for a dissuasive penalty framework and thus undermine the proper functioning of DAC. Considering the current vague wording on compliance measures in the DAC, the legal basis for infringement procedures in situations where the national measures are not regarded as dissuasive enough is fragile.

Another area which suffers from a lack of a clear and unequivocal drafting are the rules pertaining to the reporting and exchange of information on e-money products. E-money is broadly defined as an electronic store of monetary value on a technical device that may be used for making payments to entities other than the e-money issuer. It acts as a prepaid bearer instrument, which does not necessarily involve bank accounts in transactions. Most Member States interpret the existing provisions on the reporting and exchange of financial information (DAC2) as including e-money within its scope, whereas others do not. This creates the risk of an uneven playing field within the financial sector and across Member States. Although e-money products are mainly used for payment and quick transactions and not for investment, they could also be used to store money and, in the current situation, avoid reporting.

Finally, the existing rules provide for tax transparency on cross-border rulings and advanced pricing agreements (APAs), under DAC 3. Tax rulings and APAs are most commonly associated with legal persons. However, natural persons may also benefit from cross-border rulings on complex tax arrangements. The latter category of cross-border rulings might be of interest to the competent tax administrations of other Member States.

Strengthening the compliance framework and completing the existing framework for automatic exchange of information on e-money and rulings

The ECA report and the resolution of the European Parliament mentioned above both conclude that the lack of a consistent compliance framework, the lack of clear provisions on e-money and the non-inclusion of some types of rulings significantly reduce the efficiency of the DAC. Building upon the findings of those reports, the initiative would include clarifications and fixes to the current administrative cooperation framework to ensure it becomes more effective. These changes mainly concern the following:

a)Compliance framework

As mentioned above, there is a need to clarify the compliance framework provided for in DAC to ensure a more consistent implementation across the EU Member States. It would consist of setting a common minimum level of penalties for the most serious non-compliant behaviours, such as complete absence of reporting despite administrative reminders. It would also provide guidance in the DAC itself as to what effectiveness, dissuasiveness and proportionality should imply for each Member State’s compliance framework. This would establish the basis for guaranteeing a compliance framework that complies with the principles of effectiveness, proportionality, and dissuasiveness. In relation to the principle of effectiveness, the DAC might indicate what broad types of conducts and behaviours might be penalised leaving the Member States with the option to go further, depending on their domestic circumstances. The DAC might also put forward some types of penalties and other compliance measures that serve as guidance for the Member States in the development of their own legal compliance framework. Penalties could be set in proportion to the economic size of the taxpayer/reporting entity and/or to the relevant amount of tax owed.

b)5.3.2.2 E-money

The scope of reporting under DAC2 would be clarified in order to explicitly include tax relevant data on e-money. It would ensure that a single standard for reporting and exchange of e-money data will apply. At the international level, the OECD is also working on amending the CRS to explicitly include e-money.

c)5.3.2.3 Exchanges of cross-border rulings

Rulings provided by Member States’ tax authorities for the benefit of natural persons are currently not subject to reporting and automatic exchange between Member States under DAC. However, covering all taxpayers would be in line with the general logic of the DAC.

Currently, there is only limited information exchange between national authorities on tax rulings for natural persons, if at all. Member States whose tax base is adversely affected by the tax rulings of others cannot react, given that they will not even know of the existence of the respective tax ruling that might cover arrangements leading to base erosion in their jurisdiction. In line with the joint effort to combat tax avoidance, there is clearly a need for greater transparency and information sharing on cross-border tax rulings. 67  

The inclusion of natural persons would limit the possibility for circumvention of the information exchange by adapting the respective setup of the tax structure. Therefore, this initiative would make compulsory the reporting of tax rulings for natural persons with a cross-border element. The obligation to exchange information about tax rulings would in no way restrict or limit the possibility for natural persons to request rulings from the national administration.

ANNEX 7:    OVERVIEW OF DIFFERING PENALTIES APPLIED BY MEMBER STATES

Based on the information gathered through the consultation of Member States, all Member States have legislation in place, which provides for the application of penalties for infringements pursuant to the provisions of the DAC. Additionally, the vast majority of Member States have developed administrative procedures for verifying compliance with the DAC. The measures through which the Member States monitor the fulfilment of the obligations derived from the DAC are, amongst others, desk-based checks and on-site inspections, as well as statistical analysis..

Of the circumstances and factors that some Member States take into account to determine the level of the penalty, the degree of the intentionality of the offending subject is the most frequently applied. Some Member States also consider whether there has been repetitive non-compliance, as well as the size of the subject or the benefit obtained from the offending conduct.

The majority of Member States distinguish between late reporting of information, reporting with minor errors, reporting with false statements or documents, and not reporting at all when designing penalties and compliance measures for infringements of reporting obligations under the DAC.

Although the domestic context must be considered when analysing the differences in the penalties designed for the different DAC’s, it is also necessary to emphasize that to guarantee a level playing field throughout the European internal market, the competent authorities must perform this analysis with a European perspective.

From the table below, we can clearly distinguish significant differences in the amounts of penalties set by different Member States. Particularly striking are the large differences in the amount of minimum penalties that may affect, to a greater or lesser extent, the effectiveness and efficiency of compliance with the rules of the DAC. Although there are significant differences in the maximum amount of sanctions applied, it is considered that this aspect would fall within the discretion of the Member States to make their compliance system stricter in the event of any non-compliance.

To correctly analyse the biggest differences between Member States’ compliance measures in DAC2, it is important to bear in mind that some Member States fix these amounts in relation to the number of accounts or even concerning the data of these accounts. Differences of the penalties’ calculation must be considered when assessing the differences between the minimum and maximum penalties established by Member States.

Under DAC4, large multinational enterprises with a total consolidated group revenue of more than EUR 750.000.000 are obliged to submit annual Country-by-Country (CbC) reports. The failure to comply with the domestic law transposing DAC4 can lead to minimum penalties as low as or even below EUR 1.000. This very low minimum amount of penalties does not provide a great dissuasive effect on obliged subjects. In most cases, the cost of complying with this rule will exceed the amount of the minimum penalties.

The same arguments can be used to analyse the penalties provided for breaches of DAC6, where the highest minimum penalty does not exceed EUR 6.000. At the same time, a minimum amount of penalties below EUR 1.000 is widespread among Member States.

Table 10 – Overview of penalties in Member States.