Increasingly, Tax Administrations (TAs) are using Blockchain in their activity; which requires a review, exposed in this article, where its main advantages and some of the use cases are discussed.
Blockchain advantages
Blockchain has advantages such as security, decentralization of the network with smart contracts that can streamline and optimize processes, the possibility of traceability and follow the path of each product from manufacturing to its destination market, cost reduction and transparency of transactions, speed, efficiency and can help achieve interoperability between participants, allowing them to access the same data simultaneously.
The advantages of blockchain, such as transparency, efficiency, data integrity and security, can benefit us in multiple ways, just as the feature of decentralization can improve the efficiency of it and its interaction among multiple stakeholders by providing a more equitable environment for all stakeholders.
Blockchain allows the secure digitization of procedures -from smart contracts, inventory management, traceability of goods, among others- reducing the number of intermediaries in the management of foreign trade, making interactions more secure and transparent and also reducing the transaction cost of operations.
By Resolution dated October 4, 2022, the European Parliament has expressed its opinion regarding the potential of new technologies such as blockchain to improve services to taxpayers, deter corrupt practices, empower tax administrations (TAs) and combat fraud and tax evasion.
TAs can use new technology solutions, such as blockchain, to better serve taxpayer needs, exchange information across jurisdictions, for various types of record keeping, and to deter and/or combat corruption.
The increased visibility of blockchain transactions could facilitate efforts by TAs to combat tax fraud.
The technology can help facilitate cooperation between different government agencies, particularly on tax-related issues.
Adapting the IT capabilities of TAs through new emerging technologies, blockchain or artificial intelligence promises to foster smart, effective and efficient tax and administrative procedures, deter and limit corruption, facilitate tax compliance by citizens and businesses, and increase traceability and identification of taxable transactions and ownership of tangible and intangible assets.
Blockchain through its unique features such as traceability and its ability to store immutable and reliable data, protecting the integrity of that data, could offer a new way to automate tax collection.
This would ensure that individuals pay what they owe, ensure efficient tax compliance and facilitate the collection of tax revenue at source from different stages of the life cycle of a product or service in a timely manner, while protecting citizens’ personal data and ensuring a high level of data protection.
Use cases in tax administrations
Regarding use cases the Federal Tax Administration of Brazil implemented a blockchain-based system, called – “bCPF”, to share data from the Taxpayers / Natural Persons Registry (CPF) between tax and regulatory institutions of the three levels of government (federal, state and municipal).
Regarding Mercosur Customs they are connected by BConnect, a blockchain network developed by Serpro for the Brazilian Federal Tax Service, started to be used in October 2020 to connect customs in Brazil, Argentina, Paraguay and Uruguay.
The platform aims to ensure the authenticity and security of customs data shared between Mercosur countries. It started by allowing the exchange of Authorized Economic Operator (AEO) information and there is already an increase in the network to comply with the exchange of Customs Declaration information.
Argentina implemented the Single Tax Registry – Federal Register (RUT), a tax simplification mechanism that allows taxpayers of the Gross Income Tax to comply through the same channel with the formal requirements of registration in the tax and declaration of all modifications of their data, cessation of jurisdictions, partial and total cessation of activities and/or transfer of goodwill, merger and spin-off.
The RUT the blockchain technology that allows transferring data between the AFIP, the COMARB and the adhering jurisdictions through a very sophisticated encryption system, and in a completely secure way, safeguarding the rights of taxpayers.
In Finland, the TA 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 tax and customs duties.
Estonia has moved a number of government services to blockchain, including banking, health and business records.
The system managed by Chile’s SII to facilitate the verification and exchange of electronic invoices for factoring has excellent results, with a total traded value equivalent to a percentage of national GDP.
This whole process as a whole could benefit from the implementation of blockchain technology that would allow different actors (including sellers, buyers and factoring companies) to leave traces of all their operations: initial document offers, auctions, document granting, contractual details, payments, and resales, among others.
In China, blockchain is being used to combat counterfeit invoices. E-invoices using blockchain make use of smart contracts and encrypted algorithms to ensure the resilience of issuance, storage, transmission, security and anti-counterfeiting of documents. The system offers complete traceability and tamper-resistance, ensuring that data cannot be modified after the fact.
Through a hybrid private or public-private chain, the system acts as an intermediary between the TA, the issuer and the receiver of the invoices, overseeing the circulation, reimbursement and reporting process.
One of the most disruptive proposals is the one formulated in December 2020 in the book “Tax Harmonisation in the EU: Intelligent Tax Administration”. There it is said that private blockchains are intended to improve specific areas of taxation by providing a single system for:
- Real-time exchange of taxpayer data.
- Cryptographically secure and immutable storage of taxpayer data.
- Real-time tax collection and refunds and reduction of intermediaries and administrative burden for tax collection and reporting.
Synthetically, what is encouraged is that, through smart contracts, governments could collect taxes in real time eliminating the need for intermediaries.
To implement such a system, a blockchain would be created in which TAs could access information on all transactions that trigger the payment of VAT.
Governments would be able to collect taxes in real time and, at the same time, eliminate the burden of VAT collection and reporting and declarations by businesses.
In this proposal, existing real-time reporting systems, such as the automatic VAT adopted by Portugal, could be connected to the blockchain and smart contracts, to trigger taxes every time a payment is made and VAT is reported.
A further step would use smart contracts to remit VAT from end consumers directly to TAs by linking payment methods, meaning businesses would no longer need to collect VAT. In addition, automated payments would reduce human error, ensure real-time reporting of quality data and reduce the burden of submitting returns to the TAHTA.
One area of potential development without a doubt is the use of blockchain technology for information exchange both domestically and internationally.
Final thoughts on the advantages of blockchain for tax administrations
It is clear that the potential of blockchain is enormous and will change many aspects of our lives not only in the tax field and in TAs.
Anyway, I would like to warn that not all TAs processes will be able to be performed more efficiently with this technology or others.
The possible application and its benefits and costs will have to be analyzed on a case-by-case basis considering the context of each TA.
Current and emerging technologies can combat fraud by bringing taxes closer to transactions in what is known as continuous transaction controls.
It will be important that the blockchain solutions implemented by TAs are compatible with the accounting and IT systems used by taxpayers.
I believe it is vital on the one hand to promote the technology for its efficiency, but on the other hand to be attentive to its governance, avoiding possible biases with its use while always respecting the rights and guarantees of taxpayers in all areas starting with the protection of their personal data.
In short, I am convinced that blockchain technology presents disruptive scenarios for countries in multiple aspects, and those that make the best use of it will be able to make their processes more efficient and thus improve the quality of life of citizens by providing transparency and accountability, thus improving citizens’ trust.
