Blockchain meets taxation
Hints on the possibility of having records secured through cryptography and stored as blocks came around in the 1990s. However, the practical application of this theory did not happen until 2008 when an anonymous person only known by the name of Satoshi Nakamoto created a digital currency known as Bitcoin. Since then the popularity of this currency and the underlying technology known as the blockchain. Notably, while quite a large number of people have gained relatively significant information on Bitcoin, blockchain remains elusive to most of them. However, efforts to gain a better understanding of blockchain are gaining steam by the way as different individuals, private institutions and governments seek to harness the technology.
The blockchain is a decentralized ledger that is distributed among multiple computers and allows for passive access to the information and records stored therein. In other words, anyone connected to the blockchain network can view the information stored in it but they cannot make any changes to it. This feature is meant to enhance security while at the same time enabling transparency and accountability. So far, blockchain has been applied in many different areas including supply chains, finance and in retail. Despite the looming uncertainty of blockchain among the vast majority, some governments are in the process of studying the technology in an attempt to harness it for finance activities and more so taxation.
Improving tax collection using blockchain
Essentially, the main sources of revenue for the governments are taxes and fees. The tech-enabled revolution is hitting these revenue streams which is consequently making the collection of taxes and fees more difficult. Thus, governments have been left with only one option and that is to deliberate on how they can use these technologies in their favor. Notably, as the popularity of Bitcoin and other cryptocurrencies grows, so will the number of users. This means that the amount taxes government will manage to collect at that one point will be very minimal.
Blockchain technology has transparency and accountability as one of its key features. With this feature, blockchain can help prevent tax avoidance schemes such as the infamous double Irish with a Dutch sandwich. With this scheme, companies would transfer profits between Ireland and Netherlands and use the tax code of each country to lower the taxes due. Considering that blockchain is decentralized and distributed, it would allow the governments to track transactions on every stage. This includes international transactions.
At this point, indulgence in international trade and geographically distributed business operations is no new concept. According to the CFO of Ventana Research, Rob Kugel, “Tax authorities have been concerned for many years that multinationals have been using artificial means to avoid paying taxes”. Despite the fact that many corporations have successfully evaded taxes over the years, strategic use of blockchain could make this tendency a thing of the past. Currently, there are about 100 countries working together to develop regulations and standards for using blockchain to bring about more transparency in business operations. Conventionally, businesses are expected to present their operating and financial data to tax authorities for tax purposes. By mandating the blockchain technology, governments would be in a position to increase tax payments and restrict abusive tax tendencies. The concern of the businesses, however, is that they would not feel comfortable giving tax organizations an unregulated visibility to their financial records.
Much as they may try, businesses cannot avoid tax entirely given that corporate tax remains to be one of the key sources of revenue for the governments. As a show of unity of purpose, businesses and some governments are currently going through the precepts underlying blockchain technology. However, majority of countries are working independently in developing blockchain regulation and this might bring about the problem of working in silos and fail to solve efficiencies of current systems. From the look of things, the two parties are focused on adopting blockchain to minimize costs, enhance security and improve revenues. On the other hand, small businesses are likely to adopt the technology to boost their competitiveness.
According to Camilla Dahlen, SAP North America’s vice president of ISV, cloud and platform partnerships, “Blockchain opens the door for small and medium-sized businesses to compete and to trade globally.” In fact, it is being predictive that blockchain technology could help reduce settlement and clearing costs by about $80 billion by the year 2022. If this does happen, both large and small enterprises will have much to celebrate.
Technically, whatever is posted on the blockchain cannot be altered in any way which means that businesses and governments can trust the information therein. Moreover, when it comes to negotiations on taxes and tax compliance, the information on the blockchain can be used as a system of records on which to base the arguments. Tax on blockchain is however, a controversial issue because one of the underlying principles of blockchain is to give power o the people. This means having full control of their financial lifestyle without facing threats of closure, tracking and restrictions by government. How governments and other entities maneuver through this will either bring about more adoption of blockchain or increase skepticism on usability of blockchain.
BCC Asesores – Tax department
December 6, 2017.