Blockchain could create tax certainty in

transactional taxes
In-house blockchain experts and consultants say companies and tax
authorities can use distributed ledger technology to report and administer
transactional taxes as real-time reporting increases.
 By Danish Mehboob
August 05 2019

Those specialising in technology are exploring the wider applications of

blockchain within their businesses. Distributed ledgers, such as blockchain,
could provide a powerful framework for real-time reporting despite some
hesitations of overhead costs associated with companies essentially setting up
another system. As initiatives such as Making Tax Digital (MTD) in the UK
and Immediate Supply of Information (SII) in Spain become more mature,
some advisors anticipate that blockchain will become an applicable real-time
reporting tool for disclosures.

“This technology allows us to trade off instantaneous payments for tax

certainty with respect to transaction taxes,” said David Deputy, director of
strategic development and emerging markets at Vertex.

Blockchain can side-step banks and other payment providers using a

transparent infrastructure to directly execute and record transactions with
customers. The technology can also help generate reports for authorities by
using data from country-by-country reporting and national disclosure
regimes.

Most companies have found the technology to be effective in supply chain

management, which has made ‘transfer pricing the most obvious place to start’
when using blockchain for tax-specific applications by companies such as
Shell, according to Alex Clifford, former head of technology for finance and tax
at Shell, and Ceri Stoner, tax partner at Wiggin who works with blockchain
technologies.
“If companies, as part of their supply chain operations, are starting to use
blockchain, which Shell is and we see a number of other companies doing,
then governments can use the sales orders sitting in the blockchain, which are
immutable and trustable, to check on the payments with various entities,”
explained Clifford.

The overhead costs of using the technology are gradually falling, according to
Clifford. He explained that cloud computing advancements have made
technology solutions affordable and allowed companies to add technology-
specific roles in departments, including for tax reporting. Companies are
exploring the application of cloud-based blockchain solutions for supply chain
management.

The caveat to adopting blockchain for tax is that the effort will have to start
with governments setting up an infrastructure and viable reporting
environment. Asia-Pacific jurisdictions have already started. China, for
example, implemented a blockchain infrastructure for finance and tax
reporting purposes in 2018 to curb tax evasion in Shenzhen using Tencent’s
Intelligent Tax innovation lab. Additionally, Microsoft backed a report with
PwC in 2019 on how blockchain can improve tax compliance, which led
to ITR reporting about how it may be applied to speed up Mexico’s tax
returns.

Stoner explained that if real-time reporting becomes faster and data becomes
more consistent across jurisdictions then there is even greater possibility for
blockchain adoption. She added that blockchain should be developed
alongside initiatives such as MTD in order to stress test the technology in the
UK’s reporting environment and start forming standards.

A matter of time
Taxpayers and advisors said that ‘it’s a matter of when rather than if’ the
technology gets adopted. It is an effective tool for tax authorities to curb VAT
fraud now, but a long-term real-time reporting solution for businesses. Tax
directors are trying to be the first to find a business case in tax to present to
their board of directors about how to make use of blockchain in tax.

However, taxpayers fear interfacing directly with authorities may leave them
vulnerable to too much data mining and fishing trips.

Advisors explain that these risks, coupled with a lack of smart contracts that
embed computer logic to run operations on the distributed ledger for tax
purposes, will impede adoption unless tax departments realise the long-term
benefits of reporting their taxes using the technology.

“I’ve gone to various innovation labs at cryptographic companies to build tax-

based applications that run on blockchain. But the point of building specific
applications on blockchain for tax still does not exist, or at least I have not
come across it yet,” Clifford told ITR.

Michael Minihan, partner with BX3 Capital and a former principle of

international tax at Ryan who also focuses on finding tax-specific applications
for blockchain believes it is unlikely that businesses will adopt the technology
to address the reporting environment as it stands. However, he agrees that as
disclosures become more real-time and the technology’s computer logic
advances, there will be a stronger case to be made for reporting under
blockchain.

Given limited focus on blockchain in the international tax environment due to

uncertainty in the face of more pressing matters such as the digital tax debate,
taxpayers hope governments develop blockchain for tax purposes, including
reporting under the distributed ledger technology. Taxpayers expect the
technology to expand to tax applications if there is a rise in transactional taxes
to address taxing issues under a digital economy.

The long-term tax applications of blockchain are clearer than taxpayers may
think, but the lack of crossover interaction between enthusiasts and tax
specialists is a barrier to adoption. Other barriers such as a lack of
standardised data also hinder wider blockchain applications that can help tax
directors realise the technology’s potential in an increasingly disclosure-driven
international tax environment.

https://www.internationaltaxreview.com/article/b1g4578dn3z04q/blockchain-could-create-tax-
certainty-in-transactional-taxes