In search of an attractive problem and a ready-to-use application

In recent months, in very diverse circumstances, including in the talks that often precede the start of a work meeting to create space for all participants to arrive, and that also cover the weather, the daily political gossip  or entertainment that occupy more headlines than they should, or advances and achievements in areas of common interest; even in the short space shared in a queue of migration in an airport fruit of one of those coincidences that remind us that the world is small, the blockchain topic has been raised.

Maybe because I talked about blockchain and the opportunities and difficulties that the tax administration could derive from its application in a couple of presentations including the one I did at the CIAT General Assembly in Asunción in 2016, some colleague asked me to explain what that technology represents, its relation with the encrypted currencies and above all about the possible uses of this technology within the tax administration. When asking the question, the colleague commented on articles and comments that attributed to that technology application a disruptive power comparable to what the popularization of Internet had already caused in our lifestyle.

I will not use this space to describe how block chain operates, nor the possibilities of its public implementation (in the sense that anyone can participate) or private (shared only by those that participate in a process), or with a relatively anonymous participation or, by contrast, a completely identified one. An excellent series of articles[1] written by Antonio Seco, published in this blog, do that work clearly and completely.

The topic that I wanted to briefly refer to here has to do with one of those recurring questions. How can blockchain be used in the tax administration? This is the reason of the curious title that I have given to this post and that plagiarizes a bit the title of a Venezuelan film of the 70s “Seeks lady of good presence and motorized[2] with own motorcycle”. The long title statement replicates the content of a classified ad in a newspaper looking to hire a couple of collaborators that are extremely convenient for the employer or simply fantastic.

I get the impression that the approach that we sometimes want to give to blockchain within the administration can mimic some of the two parts of this headline. On the one hand, we are those who want to use technology and who, it seems, have a solution in search of a problem in which it can be used. Of course there are an infinity of processes within the administration that could be implemented using blockchain , without a doubt, but, not necessarily that application is better, or more efficient, or easier to implement than one supported by more, let’s say “conventional technology”. And I’ve always believed that things do not necessarily have to be done for the sole reason that they can be done. Surely you can assemble in a chain of blocks the process of administrative resources, replicating in many nodes each of the actions, each of the drafts, each of the approvals inherent to that process, ensuring that they will never be altered in the future, identifying precisely each of the actors and each of their actions. But where would be the other nodes that are not of the administration and where would those data be replicated, and who would pay for them and for their operation, and for their connectivity to the Internet? And, above all, what would be gained?

In my opinion, there are some characteristics that could help us identify if a problem is attractive for blockchain, I mean appropriate, and that I will try to briefly list them here:

  • There is no naturally centralized point in which all transactions or actions occur or end.
  • During the life cycle, a significant number of actors intervene.
  • The actors do not necessarily trust each other, without this meaning that they naturally distrust each other. And they do not necessarily trust, or want to trust, a centralized regulatory body.

And these circumstances imply that they are not problems of the tax administration (and by extension, of taxpayers) but of things in which the tax administration is one of the participants, although in some cases it may be a leading actor, or in other cases, the other actors may be other tax administrations.

And here comes the other part of the title. It is unlikely that a blockchain application will come with everything ready, as the motorized would come, with its own motorcycle. It will be necessary to build many things, the operation ecosystem, the incorporation of users, the initialization, the solution of existing problems of the past, the creation of a legal base that supports new transactions.

Some of the possible blockchain applications for the tax administration are described in Antonio’s articles, already mentioned above. Including, the VATcoin, the management of specific taxes on tobacco products, or for example, an application for a customs office in Singapore that with a bit of luck Antonio may comment here. These applications and proposals work directly with tax issues and I promise to comment on them in the future.

I am going to refer to two applications in a more general scope, in which the tax administration would be one of the participants and that could illustrate the possibilities of having a private block chain, which does not have to be small because they are private.

The first has to do with the implementation of the use of invoices as a valuable or factoring or factoring title. I would not propose that all the electronic invoices of a country be part of a chain of blocks, it would be too expensive to operate and we already have a natural information centralizer that is the tax administration, under the models of electronic invoice’s national systems developed in Latin America. What would make part of the blockchain would be the electronic invoices that are going to be negotiated in the market. In this scenario the participants of the block chain would be the sellers that issue invoices that will be charged at some time in the future, the buyers, the buyers of those invoices, the financial entities that will pay in due course the corresponding values ​​and the tax administration, where the original of the invoice digitally signed by the issuer resides. This application would eliminate the need to have a centralized entity that manages the market. Probably the sale of goods or services that will be charged in ninety days, for example, would be done with an intelligent contract that identifies the moment and means of payment and would be record every movement of the process in the chain, including the availability of a new invoice to to be  traded, its acceptance by the administration, the sale of the invoice, any subsequent sale, the buyer’s payment (directly or through a financial institution, which has at the time the rights on that invoice, a possible return of the merchandise, etc.)

The second has to do with the registration of companies. I do not refer to the registration of those taxpayers in the administration, or should I say only to the registry of those taxpayers at the administration, but to all the movement and registration of public transactions related to those companies, such as their constitution, the change of their directors or legal representatives (things that occur in public registers, in mercantile registers); but also to the concession and municipal permits that make viable a certain operation in a certain sector; to the verification of the fire brigades on the suitability of the facilities and services and their periodic reviews; to health permits granted by a health authority if applicable, or education or transportation if applicable; and, of course, of the tax administration and the administration of social security and customs if appropriate. It is an interesting alternative, not easy to implement, which however could be extremely convenient compared to the alternative of developing innumerable instances of interoperability among dozens of systems administered by public administrations, associations, chambers, non-governmental organizations, and those taxpayers involved.

Of course, it’s just my opinion and I can be wrong.

Greetings and luck.

[1] BLOCKCHAIN: Potential concepts and applications in the tax area (1/3 ); BLOCKCHAIN: Potential concepts and applications in the Tax Area (2/3) and BLOCKCHAIN: Potential concepts and applications in the tax area (1/3)

[2] A term popularly used in Venezuela to refer to a messenger who delivers external correspondence.

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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.

1 comment

  1. Byron Vasconez Reply

    Muy buen post Raul. De mi experiencia con nuevas tecnologias Blockchain mas que una tecnologia de seguridad debe ser parte de un ecosistema de info. Seria interesante que se pueda tener claro como seria un roadmap de aplicacion como existe en otras industrias.


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