Introduce CARF in 2026 and achieve automatic exchange of global tax data by 2028

As an international financial center, Hong Kong has long responded to the OECD Global Tax Transparency Initiative by incorporating the Common Reporting Standard (CRS) into its tax regulations and conducting data exchange with 129 jurisdictions. However, the decentralized and anonymous nature of encrypted assets makes it difficult for traditional CRS to cover, making it a gray channel for tax evasion, and there is an urgent need for a specialized regulatory framework to fill the gap.

The CARF framework introduced this time is a global encrypted tax transparency standard developed by the OECD in 2022 and improved in 2023. It has received support from encryption centers such as G7 and Singapore, and aims to curb international tax evasion of encrypted assets through standardized information collection and exchange. According to the roadmap released by Hong Kong, the promotion process is divided into three key stages.

The first stage is the legislative preparation period in 2026, during which the Financial Services and Treasury Bureau and the Taxation Bureau will jointly revise the "Tax Regulations" to clarify the definition of encrypted assets, the scope of declaration, and the compliance obligations of service providers (RCASPs). Exchanges and other entities will be included in the declaration process, balancing regulation and industry innovation, and laying a legal foundation.

The second stage is the information collection period in 2027. Qualified encryption service providers need to upgrade their KYC process, verify users' tax identities, collect and retain information on transaction parties, amounts, types, etc., covering three core transaction scenarios. Transaction records should be retained for no less than 6 years to ensure tax traceability and verification.

The third phase is the global data exchange period in 2028, during which Hong Kong will connect to the CARF global exchange network and automatically exchange transaction data with participating jurisdictions every year, achieving transparent supervision of cross-border encrypted transactions, breaking the "tax blind spot", and eliminating encrypted tax evasion.

The Hong Kong government stated that introducing CARF is not only fulfilling international obligations, but also a key measure to regulate the local market. The current tax risks associated with encrypted assets are prominent, with some investors hiding their profits to evade taxes, which damages tax fairness and market order. The implementation of CARF can fill regulatory gaps and build a fair and compliant market environment.

From a global perspective, Hong Kong's move aligns with the trend of OECD cryptocurrency tax regulation. After the completion of the CRS review by OECD in 2023, CARF and the revised CRS will be listed as core standards, with Hong Kong as the hub. Their implementation will enhance the compliance image and provide practical experience for the world.

CARF will have a profound impact on market entities: service providers need to upgrade their compliance systems and fulfill their information reporting obligations, otherwise they will face heavy penalties; Investors need to enhance their compliance awareness and proactively fulfill their tax obligations; Reduce the risk of compliant capital investment and promote the industry's transformation towards institutionalization and standardization.