Can blockchain improve VAT Collection? – Part 1

We are witnessing a time of historical crisis where States need, more than ever, resources to finance the policies needed to face it.

In many countries, tax reforms are being studied, proposing either an increase in current taxes or the establishment of other new taxes.

In view of this, it seems relevant to me to analyze alternatives to make current tax systems more efficient, taking advantage of modern technology.

In a survey conducted by the World Economic Forum (WEF) in 2015, 73% of respondents expected governments to collect taxes for the first time via blockchain by 2025.[1]

Through this comment, I will analyze some proposals that have been developed to use blockchain to improve efficiency in the management and collection of VAT and conclude by expressing some ideas in this regard.

 

  1. USE OF BLOCKCHAIN FOR THE MANAGEMENT AND COLLECTION OF VAT.

Blockchain is a distributed ledger technology that allows information to be stored automatically, immutable and secure. It uses consensus mechanisms to approve specific data or transactions. Participants (nodes) verify the authenticity of the transaction by solving complex cryptographic puzzles and store new data (blocks) on the chain.

Each participant has part of the data, which means that the data is not stored in a centralized database (more prone to data manipulation) but is distributed.

Therefore, the data is available in real time to all participants of the blockchain, which facilitates access. In addition to data storage capabilities, smart contracts embedded in the blockchain databases allow for the self-execution of agreements.

Smart contracts are computer programs, which can be programmed to replicate regular contract clauses and to self-execute based on a specific triggering event[2].

To make a bit of history on the subject, already in 2019 it was said that blockchain could solve many of the weaknesses of the VAT collection system in the EU, by creating a registry of electronic invoices that would allow the Tax Administrations (TAs) from all over Europe see and verify the taxes paid when a product is marketed.[3]

With blockchain, a taxpayer could upload electronic invoices to a country’s reporting system. The invoices would be verified and placed on a blockchain-based network accessible to the TAs and participating auditors. Such a system could allow the automation of VAT payments and would also create a history of transactions that the EU Tax Administrations could easily access if they suspect fraud or errors.[4]

Some European countries have already started experimenting with blockchain for tax collection and other government services.

In Finland, the TA works with banks on a blockchain system to track taxes on real estate transactions and has also conducted a pilot project evaluating the effectiveness of a blockchain-based VAT system.

In Sweden, blockchain is being tested to digitalize invoices, non-resident income tax, and customs duties.

Estonia has moved a number of government services to blockchain, including banking, health and business records.

In China, blockchain is being used to combat fake invoices.  E-invoices using the 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 resistance to tampering, 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 TA, the issuer, and the receiver of the invoices, supervising the process of circulation, reimbursement, and presentation of reports. [5]

In China, electronic invoicing using blockchain was also implemented within Beijing. Its goal is to provide more transparency to taxpayers, reduce operating costs, save social resources, increase consumer convenience to save invoices, and create a healthy and fair tax environment[6].

Importantly, real-time reporting of sales and service operations is becoming the new standard. Through these, companies are obliged to send invoicing data to the Tax Administrations in real-time so that they can obtain information on real commercial activities, carry out (automated) checks and detect fraud more quickly.

Italy, Spain, and Hungary already have a real-time reporting system for this, and France and Poland are currently developing it with the expected entry into force from 2023.

The European Commission will present a bill for real-time reporting for intra-community transactions in 2022.[7]

Part 2

[1] (2015, Sep.) Deep Shift: Technology Tipping points and Societal Impact. World Economic Forum. Retrieved from: http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf
[2] Conway, Luke. (2020, November 17) Explanation of Blockchain. Investopedia. Retrieved from: https://www.investopedia.com/terms/b/blockchain.asp
[3] https://news.bloombergtax.com/daily-tax-report-international/eu-inches-toward-blockchain-in-fight-against-vat-fraud-1
[4] https://news.bloombergtax.com/daily-tax-report-international/eu-inches-toward-blockchain-in-fight-against-vat-fraud-1
[5] https://www.antilavadodedinero.com/pekin-probara-una-blockchain-platform-to-fight-the-fraudulent-bills/
[6] https://www.cripto247.com/comunidad-cripto/beijing-implementara-facturacion-blockchain-188669
[7] https://blog.summitto.com/posts/german_business_association_dmb_benefits_of_real_time_reporting_smes/

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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