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How blockchain could shape tax automation

  • Oct 10, 2016 | Richard Asquith

How blockchain could shape tax automation

Blockchain, the online public ledger technology that underpinned Bitcoin, has been the hot topic in business technology lately, because it has the potential to transform the way businesses manage and account for transactions – including VAT in the EU.

A blockchain system records each and every transaction cryptographically; each change to the transaction creates another block in a connected and traceable chain, making the transaction nearly impossible to falsify or destroy. What blockchain does really well is track ownership of anything, by electronically initiating and enforcing contracts.

The technology has massive implications for all sorts of industries, from property and financial securities, to funds transfers and accounting. What further impact could this technology have on our industry specifically? Let’s look at some other potential areas.

Addressing VAT Fraud

The “VAT Gap” remains a looming issue within our industry. The European Commission reported a €160 billion VAT gap in 2014. This gap between VAT revenues expected vs. those actually collected can be attributed to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies and errors. In terms of cross-border VAT fraud alone, there is an estimated €50 billion reported within the EU.

Blockchain could have significant implications for helping reduce VAT fraud. It provides numerous solutions for VAT reporting through:

  • Synchronization. Each party has its own full copy of all of the data (of all the entries in the ledger).
  • Deterministic. Blockchain can confirm if a transaction happened or if it didn’t.
  • Single Use. If the system records product as owned by A, and A wants to sell it, it ensures A can only transfer ownership of the product exactly once. Similarly if A owns €10, then A can only transfer out €10.
  • Non-Repudiation. All transactions are digitally signed. So if there is a record of A selling the product, we can cryptographically prove that someone with A's credentials approved that sale. There is still vulnerability if electronic credentials are stolen, but it’s a much smaller problem than the paper signature system we currently use.
  • Speed. Blockchain transactions can be confirmed in about 10 minutes. Compare that to day-long processes we have today around settling stocks, property, or even ACH transfers.

Faster Digital Reporting

To address global VAT changes and mitigate fraud, many countries are administering digital VAT filing to streamline the tax process. Since blockchain gives multiple authorised parties the ability to independently view the same piece of transaction information electronically, this could potentially make the process of VAT filing even more seamless and efficient in the future.

In the UK, HMRC has proposed its “Making Tax Digital” initiative, a project aimed at eliminating the paper-based, long-after-the-fact tax return by 2020. HMRC will collect and process information affecting tax in as close to real-time as possible, to stop tax due or repayments owed from building up. Businesses should not have to wait until the end of the tax year, or even longer, before knowing how much tax they should pay; the government is, of course, eager to get its due as soon as possible.

Italy offers another example. In an effort to reduce VAT fraud and simplify reporting, Italian tax authorities are introducing a voluntary e-invoice tax reporting regime effective 1 January 2017. Businesses will be able to electronically submit their VAT purchase and sales invoice details, and have the authorities automatically calculate their monthly VAT liabilities.

As countries make steps towards digital tax reporting, this paves the way for blockchain technology to offer a more sophisticated level of transparency, security, and immediacy.

More Control for Businesses and Tax Authorities

Internationally, we are seeing a major shift in focus to indirect taxes. Numerous countries, including Malaysia (2015), India (2017), and the United Arab Emirates (2018), are implementing new GST and VAT regimes. These new policies are aimed at avoiding double taxation, simplifying compliance, and, as is the case with the UAE, offsetting current economic losses.

Cross-border trade also continues to increase in the EU. To eliminate VAT obstacles and streamline VAT arrangements, countries like the UK have established policies such as the VAT Mini One Stop Shop (VAT MOSS). Initiated in January 2015 by the all EU member states, VAT MOSS saves businesses the time and money from having to register for VAT in every EU member state where they supply to customers.

While blockchain is still in its nascent stages, over the long term it may also enable stronger oversight for business owners and tax authorities, particularly as cross-border e-commerce continues to grow and various countries establish new VAT guidelines.

Blockchain = A New Permanent Record

Ultimately, blockchain technology could offer better real-time tracking for our industry. As a digital permanent record, will this signal the end of traditional business documents, or the need for filing tax returns in the future? One can only predict now, but the possibilities blockchain can offer for businesses and our industry are profound.


Author: Kid Misso, Senior Director of Solutions

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara