This article will analyze some concrete blockchain technology applications in tax administrations globally, and then go on to 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 digitalize receipts, nonresident income tax, and customs duties.
Estonia launched digital services such as e-Business and e-Register by implementing keyless signature infrastructure (KSI Blockchain). The use of KSI Blockchain allows citizens and the government to verify the integrity of their records on government databases.
Brazil’s federal tax administration implemented a system based on blockchain, called “bCPF,” to share data from the registry of taxpayers/individuals (CPF) between tax and regulatory institutions of the three levels of government (federal, state, and municipal). The next step is the implementation of the blockchain-based registry of legal entities, the “bCNPJ”, with the same objectives. This uses an authorized blockchain based on auditable open-source software, in which only authorized institutions can participate.
The Brazilian taxpayer registry is the most reliable registry in Brazil. As such, its data is required to be shared with other government agencies, in a secure and cost-effective way. The use of blockchain as a data exchange tool was identified as a way to fulfill these requirements, and it has already been used as a tool for data exchange with customs.
There are proposals for other applications of blockchain in the tax field, 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, which would allow tax authorities across the EU to view and verify the taxes paid when a product changes hands.
The Mercosur bloc customs (comprising Argentina, Brazil, Paraguay, and Uruguay) are connected by BConnect, a blockchain network developed by Serpro for the Federal Tax Service of Brazil, and which came into use in October 2020. The platform aims to guarantee the authenticity and security of customs data shared between the countries. It started by allowing the exchange of information from authorized economic operators (AEO), and there is already an expansion of the network to comply with the exchange of information on customs declarations.
Argentina has implemented the single tax registry—federal register (RUT), a tax simplification mechanism that allows payers of gross income tax to comply through the same channel with the formal requirements of tax registration and declaration of all modifications of data, cessation of jurisdictions, partial and total cessation of activities and/or transfer of goodwill, merger, and spin-off.
With the RUT, the blockchain technology allows data to be transferred between the AFIP (the government agency which enforces tax and customs policy), the COMARB (the body in charge of coordinating the collection of gross income tax), and the adhering jurisdictions, through a very sophisticated coding system, and in a completely secure manner, thereby safeguarding the rights of taxpayers.
The system managed by the Chilean SII (tax administration) to facilitate the verification and exchange of electronic invoices for factoring has had excellent results. The process 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 offers of documents, auctions, granting of documents, contractual details, payments, and resales, among others.
In China, blockchain is being used to combat false invoicing. The electronic invoices that use the blockchain employ smart contracts and encrypted algorithms to guarantee the defense of the issuance, storage, transmission, and security against falsification of documents. The system offers complete traceability and tamper resistance, ensuring that data cannot be changed after the fact.
Through a private or public-private hybrid chain, the system acts as an intermediary between the tax administration, the issuer and the receiver of the invoices, supervising the process of circulation, reimbursement, and presentation of reports.
In China, electronic invoicing using blockchain has also been implemented in Beijing. Its goal is to provide more transparency to taxpayers, reduce operating costs, save on social resources, increase consumer convenience, and create a healthy and fair tax environment.
The Tax Agency of Thailand is implementing blockchain in VAT refunds.
Also on this issue, but in the private sphere, the Abu Dhabi-based telecommunications company Etisalat has launched a blockchain-based platform designed to prevent fraud in relation to commercial invoices.
As we have seen, one field of potential development is undoubtedly the use of blockchain technology for the exchange of information, both internally and internationally.
Another potential field for development is that of having tax administrations supply taxpayers with pre-filled tax returns using blockchain databases, thus making the process more efficient.
Tax administrations with access to the blockchains of multinational companies could also carry out real-time tax audits—in the not-too-distant future.
Another use is to improve VAT collection; 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 a tax administration could access information on all transactions that trigger VAT payments.
The use of 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. Taxes would be transferred directly to the tax administration whenever a taxable event occurred, such as the payment for a good by a final consumer, through the linking of bank accounts. Governments could collect taxes in real-time, while eliminating the burden of VAT collection and reporting and filing by businesses.
The application of blockchain to transfer pricing also looks promising. The systematization and automation of processes could provide benefits for the application, documentation, and defense of transfer pricing, especially considering both the increased complexity of transactions between companies and the greater transparency requirements. This has the potential to significantly reduce the effort and time that tax authorities invest in tax audits.
Presented above are some examples of blockchain application in tax administrations. They will surely continue to increase, because the potential of the technology is enormous; it will change many aspects of our lives, and not only in the area of tax.
Blockchain is one of the technologies with the potential to disrupt the way tax systems operate. It is already being implemented as a way of modernizing existing tax systems and tax administrations.
The advantages of blockchain, such as transparency, efficiency, data integrity, and security, can benefit the tax administration in multiple ways, just as its characteristic decentralization can improve efficiency and the interaction between multiple actors, by offering a more equitable environment for all stakeholders.
However, it should be recognized that not all the processes of the tax administration can be performed more efficiently with this technology. It is essential to analyze each particular case, considering the context, to understand the possible application, its benefits and costs. We must see what problem needs be solved and whether the technology is appropriate.
It would seem that the potential uses of blockchain in tax administrations are mostly concentrated in processes that require the participation of more than two actors. There will be different parties with different purposes, of which the tax administration will be one more. The implementation of smart contracts, with operations and access restricted to specific actors, together with the ability to limit access to data through cryptography, will offer great opportunities to establish different cooperation ecosystems between the actors.
It would seem in principle that blockchain use would be appropriate when all those involved are required to keep some type of information record, access it, and validate it in real time, and it will thus allow maintaining an auditable, traceable and reliable historical record of all operations.
To incorporate blockchain into tax administrations involves, among other things, building the operating ecosystem, incorporating the users, initializing processes and integration with existing systems, and solving the persistent problems of the past in terms of data quality or creating a legal base that supports the new transactions. While blockchain can ensure that third-party information is accurately collected and disseminated, the technology, as conventionally designed, cannot control input errors.
For this reason, it is vital to work on the quality of the “input” data, as it is commonly said in computing that if what enters is “garbage,” then what comes out is “garbage.” It will therefore be important to determine who is responsible for providing adequate data entry and approving the accuracy of these data. It will be also 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 moving taxes closer to transactions in what are known as ongoing transaction controls.
Finally, I believe it is vital, on the one hand, to promote technology for its efficiency, but on the other hand, to be attentive to its governance. I am specifically referring to avoiding possible biases with 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 reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Alfredo Collosa is a consultant and tutor in tax administration at the Inter-American Center of Tax Administrations (CIAT), professor, investigator, author of books and publications, and lecturer. He holds an Official Masters in Public Finance and Tax Administration (UNED-IEF).
The author may be contacted at: [email protected]