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Financial services operational tax update - Q4 2022

Martin Killer Martin Killer

Ongoing regulatory changes and the evolving financial product landscape are bringing new tax challenges for many financial institutions. Martin Killer looks at the operational tax risks for financial services in Q4.

While many tax administrations and international organisations, such as the Organisation for Economic Co-operation and Development (OECD), are trying to broaden the scope of tax information reporting regulations to emerging financial sector products, traditional financial institutions continue to face the challenges of managing operational tax risks.

New information reporting regulations for the crypto asset industry with the Crypto Asset Reporting Framework (CARF), changes to the Common Reporting Standard (CRS) and the US Qualified Intermediary (QI) Agreement, as well as another deferral of some of the US Section 871(m) rules are all expected to feature in the final quarter of 2022.

Expansion of tax information reporting obligations

Faced with the rapid rise of the use of crypto-assets and blockchain transactions, governments have begun to consider the tax implications. The OECD and the European Commission simultaneously initiated international reviews of the taxation of crypto assets and electronic money providers.


The European Commission proposes to enforce the reporting of information to tax administrations through a new directive, DAC 8. It would allow national tax administrations to obtain access to data allowing them to identify taxpayers who make significant use of crypto assets and currencies by implementing reporting requirements on crypto intermediaries in respect of their customers.

We expect crypto intermediaries will likely be required to file returns containing details of their customers’ acquisitions, disposals, and income earned during a period. The exact form and regularity of the reporting requirements under DAC 8 are to be confirmed, as are the intermediaries subject to DAC 8 reporting.


On 22 March 2022, the OECD launched a public consultation on the establishment of CARF to facilitate the emergence of a new global tax transparency framework and the exchange automatic information relating to crypto assets. The consultation also proposed changes to the existing CRS.

The CARF has been developed with a view to minimising the possibilities offered via crypto assets to undermine the existing international tax transparency framework, including the CRS. It would require those intermediaries that enable movement between crypto assets and fiat currency, as well as the transfer of crypto assets, to report information on their account holders and information about the assets themselves based on transaction data, which is likely to be more detailed than existing CRS reporting.

The CARF would require that most players in the digital market, such as crypto asset brokers, dealers and exchange service providers to adopt due diligence procedures to identify their customers and declare crypto related transactions annually to their tax authorities. Note that one of the proposals under the CARF is that self-certifications would expire after three years, unlike the existing CRS provisions. In addition, where self-certifications are not obtained, the intermediary may be required to restrict customer access to future transactions. Our understanding it that the approach to DAC 8 and the CARF should be broadly aligned.

CRS update

Since the adoption of the CRS in 2014, the OECD has undertaken its first comprehensive review of the CRS with the aim of improving the functioning of the CRS in participating jurisdictions. The proposed changes to the CRS focus on the definitions of financial institution and financial account to cover electronic money providers and integrate new assets into the scope of the CRS as far as they henceforth constitute a credible alternative to the holding of financial assets currently subject to the CRS reporting. In this regard, the proposal extends the scope of CRS by introducing new terms and updating definitions, such as those related to depository institution and financial asset.

It also attempts to ensure an efficient interaction between the CRS and the CARF, to limit instances of duplicative reporting to the extent certain assets could be subject to reporting under both regimes. An expansion of the CRS to apply to e-money and digital assets is intended to create a level playing field with the CARF that would apply to crypto transactions.

The OECD will release a draft agreement covering the CARF, as well as an amended CRS agreement both of which will then need to be implemented into national legislation. We expect further consultations to be undertaken by HMRC prior to the release of draft UK legislation covering both areas.

What to do now?

Once the draft regulations are available, you can focus on implementing effective processes to ensure risks are identified and managed accordingly as follows:

  • Conduct an impact assessment of the proposed rules for your business
  • Develop training and awareness for colleagues
  • Establish appropriate governance and procedures, including compliance health checks and internal audits
  • Determine how to meet the broader reporting and filing obligations

Changes to QI Agreement – US partnership interests

Where a QI holds an interest in a US publicly traded partnership (PTPs), the disposal of such interests is potentially subject to US withholding tax, as well as the payment of distributions by such partnerships.

The IRS published Notice 2022-23 in May 2022 that included proposed changes to the QI agreement in relation to a QI effecting a transfer of an interest in a PTP or receiving a distribution made by a PTP on behalf of an account holder of the QI. The final changes to the QI agreement effective 1 January 2023 may not be announced until late 2022 in an IRS revenue procedure.

The most challenging aspect for QIs impacted by these changes will be the monitoring of disposals in US partnership interests that attract a 10% withholding tax charge and being able to inform the upstream custodian on a timely basis, who in turn passes on information to the ultimate US broker that's purchasing the PTP interest. The documentation requirements are envisaged to be more onerous as compared to existing QI requirements. In addition, QIs will need to determine how they withhold (or pass withholding responsibility upstream) on the sale of such securities and face increased scope of Form 1042-S reporting going forwards. These changes correspond with both the applicability date of final US regulations relating to withholding: sections 1446(a) and (f), and the start of the new QI agreement. 

What you can do now

You can manage the impact of these changes by taking these key steps: 

  • Identify where the partnership interests exist and how buy/sells are tracked
  • Determine whether to continue to hold US PTP interests following the changes to the QI agreement and the practical steps to manage the compliance process
  •  On the associated compliance actions, eg, enhanced due diligence, Responsible Officer certifications, scope of periodic reviews going forwards that are impacted by the increased QI obligations

IRS extends the phasing-in of Section 871(m)

The IRS published Notice 2022-37 on 23 August 2022 to confirm a further delay to the effective date of certain aspects of the regulations resulting from section 871(m) and to extend for a period of two years the transition period provided for in Notice 2020-2 for certain provisions. Under the Notice 2022-37, the IRS has granted a two-year extension through to 1 January 2025 with respect to the phasing in of non-delta one transactions, the application of the combined transaction rule, the taxation of relevant payments made to Qualified Derivatives Dealers (QDD) and the use of Qualified Securities Lender (QSL) status. The two-year extension has been granted to allow more time to prepare for implementation. 

Actions to prioritise

You can take advantage of the extension by doing these two things: 

  • Consider final implementation of the 871(m) regulations, in particular the changes that are expected to come into force in 2025
  • Review how to deal with the compliance requirements for those QDDs that will be impacted by the new QI agreement

To find out more about operational tax risks and opportunities, contact Martin Killer 

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