This article will analyze some concrete applications of blockchain technology in tax administrations worldwide and then formulate some ideas for its potential expansion in the future.
Examples of blockchain in tax administrations
In Finland, the tax administration has started working with banks on a blockchain system to track taxes on real estate transactions.
In Sweden, blockchain is being tested to digitize receipts, non-resident income taxes and customs duties.
Estonia introduced digital services such as e-business and e-register by implementing keyless signature infrastructure (KSI Blockchain). Using KSI Blockchain allows citizens and government to verify the integrity of their records in government databases.
The Brazilian Federal Tax Administration implemented a blockchain-based system called “bCPF” to share data from the taxpayer/individual register (CPF) between tax and regulatory agencies at the three tiers of government (state, federal, and municipal). The next step is to implement the blockchain-based registry of legal entities, the “bCNPJ”, with the same goals. This uses an authorized blockchain based on auditable open source software, in which only authorized institutions can participate.
The Brazilian Taxpayers Registry is the most reliable registry in Brazil. Therefore, their data must be shared with other government agencies in a secure and cost-effective manner. The use of blockchain as a data exchange tool has been identified as a way to meet these requirements and has already been used as a tool for data exchange with customs.
There are suggestions for other uses of blockchain in taxation, such as the development of specific cryptocurrencies to reduce Value Added Tax (VAT) fraud in intra-community transactions within the EU.
Blockchain could solve many of the system’s weaknesses by creating a digital invoice register that would allow tax authorities across the EU to view and verify taxes paid when a product changes hands.
Customs of the Mercosur block (consisting of Argentina, Brazil, Paraguay and Uruguay) is connected through BConnect, a blockchain network developed by Serpro for the Federal Tax Service of Brazil, which went live in October 2020. The platform aims to guarantee the authenticity and security of customs data exchanged between countries. It started with allowing the information exchange of Authorized Economic Operators (AEO) and there is already an extension of the network to fulfill the information exchange on customs declarations.
Argentina has introduced the Unified Tax Register – Federal Register (RUT) – a tax simplification mechanism that allows gross income tax payers to complete through the same channel the formal requirements of tax registration and declaration of all changes of dates, termination of jurisdictions, partial and complete cessation of activities and/or goodwill transfer, merger and spin-off.
With the RUT, blockchain technology enables the transfer of data between the AFIP (the government agency that enforces tax and customs policies), COMARB (the body responsible for coordinating the collection of gross income tax) and associated jurisdictions using a very sophisticated coding system, and in a completely secure manner, which protects taxpayers’ rights.
The system managed by the Chilean SII (Tax Administration) to facilitate the verification and exchange of electronic invoices for factoring has achieved excellent results. The process could benefit from the implementation of blockchain technology, which would allow various actors (including sellers, buyers and factoring companies) to leave traces of all their activities: initial document offerings, auctions, document granting, contract details, payments and resale etc
In China, blockchain is used to combat false invoices. The e-invoices using the blockchain use smart contracts and encrypted algorithms to provide defense of issuance, storage, transmission and security against document forgery. The system offers full traceability and security against tampering, ensuring that data cannot be subsequently changed.
Through a hybrid private or public-private chain, the system acts as an intermediary between the tax administration, the issuer and the recipient of the invoices, monitoring the circulation, reimbursement and submission of reports.
In China, blockchain e-invoicing has also been implemented in Beijing. The aim is to provide taxpayers with more transparency, reduce operating costs, save social resources, increase consumer convenience and create a healthy and fair tax environment.
The Tax Authority of Thailand implements blockchain in VAT refunds.
Also on the same subject, but in the private sphere, Abu Dhabi-based telecoms company Etisalat has launched a blockchain-based platform aimed at preventing commercial invoice fraud.
As we have seen, one possible area of development is undoubtedly the use of blockchain technology for the exchange of information, both internally and internationally.
Another potential area of development is for tax administrations to provide taxpayers with pre-filled tax returns using blockchain databases, making the process more efficient.
Tax administrations with access to the blockchains of multinational companies could also conduct real-time tax audits in the not too distant future.
Another use is to improve VAT collection; Smart contracts could allow governments to collect taxes in real time, eliminating the need for intermediaries. To implement such a system, a blockchain would be created where a tax administration could access information on all transactions that trigger VAT payments.
Using an authorized private blockchain would mean that only the relevant tax administration could access or change the information. Smart contracts could be used to automate the system based on triggering events. Via linking bank accounts, taxes would be remitted directly to the tax authority when a taxable event occurred, such as a B. the payment for a product by an end consumer. Governments could collect taxes in real time while removing the burden of VAT collection, reporting and filing by businesses.
The application of blockchain to transfer pricing also looks promising. The systematization and automation of processes could offer advantages for the application, documentation and defense of transfer pricing, especially in the context of both the increased complexity of transactions between companies and increased transparency requirements. This has the potential to significantly reduce the effort and time tax authorities invest in tax audits.
Above are some examples of blockchain applications in tax administrations. They will certainly continue to increase because the potential of the technology is enormous; it will change many aspects of our lives, not just in the tax area.
Blockchain is one of the technologies with the potential to disrupt how control systems work. It is already being implemented to modernize existing tax systems and tax administrations.
The advantages of blockchain such as transparency, efficiency, data integrity and security can benefit tax administration in many ways, just as its characteristic decentralization can improve efficiency and interaction between multiple actors by providing a fairer environment for all stakeholders.
However, it should be recognized that not all tax administration processes can be performed more efficiently using this technology. It is important to analyze each individual case, taking into account the context, to understand the possible application, its benefits and costs. We need to see what problem needs to be solved and if the technology is suitable.
It seems that the potential applications of blockchain in tax administrations are mostly focused on processes that require the involvement of more than two actors. There will be different parties with different purposes, another of which will be the tax administration. The implementation of smart contracts, where operations and access are restricted to certain actors, together with the possibility to restrict access to data through cryptography, will offer great opportunities to establish different collaborative ecosystems between actors.
Basically, blockchain usage seems appropriate when all parties involved need to keep some kind of records of information, access them and validate them in real-time, thus making it possible to keep an auditable, traceable and reliable historical record of all operations.
Integrating blockchain into tax administrations involves, among other things, building the operational ecosystem, engaging users, initializing processes and integrating with existing systems, as well as solving the stubborn problems of the past related to data quality or creating a legal basis that this supports new transactions. While blockchain can ensure that third-party information is collected and disseminated correctly, the technology as traditionally designed cannot control input errors.
This is why it is important to work on the quality of the “input” data, since in computer science it is commonly said that if what comes in is “garbage” comes out “garbage”. Therefore, it is important to determine who is responsible for providing appropriate data entry and confirming the accuracy of that data. It will also be important that the blockchain solutions implemented by tax administrations are compatible with the accounting and computer systems used by taxpayers.
Current and emerging technologies can also combat fraud by bringing taxes closer to transactions, known as ongoing transaction control.
Finally, I think it is crucial to promote technology because of its efficiency on the one hand, but also to pay attention to its control on the other. I refer in particular to avoiding possible prejudices in its use and always respecting the rights and guarantees of taxpayers in all areas, starting with the protection of their personal data.
This column does not necessarily represent the opinion of the Bureau of National Affairs Inc. or its owners.
Information about the author
Alfredo Collosa is a tax administration consultant and tutor at the Inter-American Center for Tax Administrations (CIAT), a professor, investigator, author of books and publications, and lecturer. He holds an official Masters in Public Finance and Tax Administration (UNED-IEF).
The author can be contacted at: firstname.lastname@example.org