Electronic tax

How Global Tax Administrations Are Using Blockchain Technology

This article will analyze some practical applications of blockchain technology in tax administrations around the world, 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 tax and customs duties.

Estonia has launched digital services such as e-Business and e-Register by setting up a keyless signature infrastructure (KSI Blockchain). Using KSI Blockchain allows citizens and the government to verify the integrity of their records on government databases.

The Federal Tax Administration of Brazil has implemented a blockchain-based system, called “bCPF”, to share data from the Taxpayer/Individual Registry (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 register of legal persons, the “bCNPJ”, with the same objectives. This uses an authorized blockchain based on auditable open-source softwarein which only authorized institutions can participate.

The Brazilian Taxpayer Registry is the most reliable registry in Brazil. As such, its data should be shared with other government agencies, in a secure and cost-effective way. The use of blockchain as a data exchange tool has been identified as a way to meet these requirements, and it has already been used as a data exchange tool with customs.

There are proposals for other applications of blockchain in the tax area, such as the development of specific cryptocurrencies to reduce Value Added Tax (VAT) fraud in intra-EU transactions within the EU .

Blockchain could address many of the system’s weaknesses by creating a digital invoice register, which would allow tax authorities across the EU to view and verify taxes paid when a product changes hands.

Customs in the Mercosur bloc (comprising Argentina, Brazil, Paraguay and Uruguay) are linked by BConnect, a blockchain network developed by Serpro for the Federal Tax Service of Brazil, which went live in October 2020. The platform aims to ensure the authenticity and security of customs data shared between countries. It started by enabling the exchange of Authorized Economic Operator (AEO) information, and there is already an extension of the network to comply with the exchange of information on customs declarations.

Argentina has implemented the single system tax register—federal register (RUT), a tax simplification mechanism that allows persons liable for tax on gross income to comply through the same channel with the formal requirements of tax registration and declaration of any changes in data, cessation of jurisdictions, partial cessation and total of activities and/or transfer of goodwill, merger and demerger.

With the RUT, blockchain technology allows the transfer of data between the AFIP (the government agency that applies tax and customs policy), the COMARB (the body in charge of coordinating the collection of income tax gross) and the adhering jurisdictions, through a very sophisticated coding system, and in a completely secure manner, thus preserving 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 the implementation of blockchain technology which would allow the various 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, the blockchain is used to fight against false invoicing. Electronic invoices that use the blockchain use smart contracts and encrypted algorithms to guarantee the defense of the issuance, storage, transmission and security against document tampering. The system offers full traceability and resistance to tampering, ensuring data cannot be changed after the fact.

Through a private or hybrid public-private chain, the system acts as an intermediary between the tax administration, the issuer and the receiver of invoices, overseeing the process of circulation, reimbursement and presentation of reports.

In China, e-invoicing using blockchain has also been implemented in Beijing. Its objective is to provide more transparency to taxpayers, reduce operating costs, save social resources, increase consumer comfort and create a healthy and fair tax environment.

Thailand Revenue Agency implements blockchain in VAT refunds.

Still on this subject, but in the private sphere, the Abu Dhabi-based telecommunications company Etisalat has launched a blockchain Platform aimed at preventing fraud on commercial invoices.

Potential developments

As we have seen, one area of ​​potential development is undoubtedly the use of blockchain technology for the exchange of information, both internally and internationally.

Another potential area for development is to have tax administrations provide taxpayers with pre-populated tax returns using blockchain databases, making the process more efficient.

Tax administrations with access to the blockchains of multinational companies could also carry out tax audits in real time, 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 middlemen. To implement such a system, a blockchain would be created in which a tax administration could access information on all transactions that trigger the payment of VAT.

Using an authorized private blockchain would mean that only the competent tax authority could access or modify the information. Smart contracts could be used to automate the system, based on trigger events. Taxes would be transferred directly to the tax administration whenever a taxable event occurs, such as payment for a good by an end consumer, through the linking of bank accounts. Governments could collect taxes in real time, while eliminating the burden of VAT collection, reporting and filing by businesses.

Applying blockchain to transfer pricing also looks promising. Systematizing and automating processes could bring benefits for transfer pricing enforcement, documentation and defense, especially given both the increased complexity of business-to-business transactions and increased transparency requirements. This has the potential to significantly reduce the effort and time tax authorities invest in tax audits.

Final Thoughts

Some examples of the application of blockchain in tax administrations are presented above. They will surely continue to increase, because the potential of the technology is enormous; it will change many aspects of our lives, and not just in the area of ​​taxation.

Blockchain is one of the technologies that can disrupt the functioning of tax systems. It is already being implemented as a means 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 players, providing a fairer environment for all stakeholders. .

However, it must be recognized that not all tax administration processes can be performed more efficiently with this technology. It is essential to analyze each particular case, taking into account the context, to understand the possible application, its advantages and its costs. We need to see what problem needs to be solved and whether the technology is appropriate.

It would seem that the potential uses of blockchain in tax administrations are mainly concentrated in processes requiring the participation of more than two actors. There will be different parties with different objectives, of which the tax administration will be one more. The implementation of smart contracts, with operations and access restricted to specific actors, as well as the possibility of limiting access to data through cryptography, will provide great opportunities to establish different ecosystems of cooperation between actors.

It would seem in principle that the use of blockchain would be appropriate where everyone involved is required to keep some type of record of information, access it and validate it in real time, and so it will maintain a verifiable, traceable and reliable history of all operations.

Integrating blockchain into tax administrations involves, among other things, building the operating ecosystem, onboarding users, initializing processes and integration with existing systems, and resolving lingering issues from the past by terms of data quality or to create a legal basis that supports the new operations. While blockchain can ensure that third-party information is collected and disseminated accurately, the technology as conventionally designed cannot control input errors.

For this reason, it is vital to work on the quality of the “input” data, because it is commonly said in computer science that if what comes in is “junk”, then what comes out is “junk”. It will therefore be important to determine who is responsible for the correct data entry and approval of the accuracy of this data. It will also be important that the blockchain solutions put in place by tax administrations are compatible with the accounting and IT systems used by taxpayers.

Current and emerging technologies can also combat fraud by bringing taxes closer to transactions in what are known as continuous transaction checks.

Finally, I believe that it is vital, on the one hand, to promote technology for its effectiveness, but on the other hand, to be attentive to its governance. I refer specifically to avoiding possible prejudices when using it 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.

Author Information

Alfredo Collosa is 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 can be contacted at: [email protected]