How could blockchain tackle PAYING TAXES?

Written by @Doodle15, Edited by @RealScrout (Telegram @s)

Taxes taxes taxes…

Nothing is certain… except death and more taxes. However, taxes are very complicated in today’s world; it seems as if it gets more complex every year. It has not always been like this. For instance, the US was tax-free at the early stages of its establishment. After, the federal government started imposing taxes seemingly for everything [1].

Since the invention of the internet, the world has been marching towards digitalising everything, starting with online food delivery to the lending and borrowing of funds. Today, in almost all developed countries, all tax reports are done online. However, individuals and companies do everything to evade the tax (both legally and illegally). IRS reports that one out of every six dollars owed in federal taxes is not paid [2]. Another fascinating statistic is that every dollar that the government spends on enforcing the tax laws yields 5 dollars into the budget. It is reported that the tax gap (tax not paid) for 2019 is a mind-boggling 461 billion dollars [3]. This money could be spent to improve education and healthcare systems; however, it is missing.

Figure 1: Income Tax Gap and Misreporting by Major Income Type [2]

One of the most notable inventions of the 21st century is considered to be Blockchain [4]. Blockchain might be one of the solutions used to enforce tax laws and simplify audits.

How does blockchain work

Blockchain is a ledger of information stored on multiple computers on a peer to peer network. Every transaction appearing on the network creates a record on the ledger. All the computers on the network can independently access this record, and this transaction record is called a block and is permanent and unchangeable.

Blockchain removes the intermediary members and allows parties to share information directly with each other. It is important to note that information stored on the blockchain is not strictly money; it can be modified to hold information that suits the company using the Blockchain.

Another critical part of Blockchain technology is the way the blocks are created. For a transaction to go through, all the computers connected agree that the information inside the block is valid. This removes the possibility of one of the parties tampering with data.
Summarizing together, blockchain technology brings transparency, security, speed and lower costs of transactions and information transfer [5].

Figure 2. (How Blockchain works) [5]

Blockchain implications for tax

Tax calculations included processes like collation, cleansing, verification, preparation, validation and submission of information. These processes can be paper-heavy and labour intensive, which drives up the costs. It also leaves little time for the taxpayers to agree on the interpretation of tax laws with their tax authorities, leading to legal disputes.

The Blockchain has the power to revolutionize the tax system by automating the payment, transfer and recording of assets. Some countries have already started digitalizing the tax system, like SAF-T in Europe [6] or real-time electronic invoicing in South America [7].

The implications Blockchain can bring to the tax system can be viewed from the government’s and taxpayer’s perspectives. From the government’s perspective, Blockchain integration would bring immediacy, transparency and security. From the taxpayer’s perspective, this would ease the tax-paying process by decreasing repetitive documentation needed to be filled.

One example of how Blockchain can ease the tax payment can be demonstrated in the transfer pricing payments. The intra-firm trade makes up to 30% of all the trade volume worldwide, as reported by the United Nations. When the firms trade across borders, it can become hard to track the price of specific products since the prices differ from country to country[8].

Right now, standard transfer pricing has several drawbacks [8]:

1. Heavy reliance on the intra-firm documents to define the roles of the parties involved.
2. The intra-firm agreements are executed manually
3. High risk of document falsification
4. Over-reliance of on paper documents and data storage on many servers to track the supply chain
5. Tracking of payments is ERP (business management software) based

Blockchain-based transfer pricing could eliminate every problem respectively:

1. Blockchain ledger eases the track of transactions and roles of the parties involved
2. Agreements are written on a self-executing smart contract
3. All the transactions on Blockchain are time-stamped and sealed, removing the possibility of tampering
4. Information is visible to all the parties which have access to Blockchain
5. Smart contracts execute payments if all the conditions are met

All in all, to integrate the Blockchain into the tax system, governments would first have to restructure their databases and network systems. Along with this, the legal system would have to be modified to allow these changes [8].

It looks like taxes will (unfortunately) remain a part of our future, but hopefully, Blockchain will allow for a more seamless and quicker way of doing half of what is certain in our lives. Perhaps, one day, the other certainty may be tackled on Blockchain too.

Website: www.lunarstation.io

Telegram: https://t.me/lunarstation

Twitter: https://twitter.com/lunarstation_

References:

[1] Fontinelle, A. (2020). The History of Taxes in the U.S. [online] Investopedia. Available at: https://www.investopedia.com/articles/tax/10/history-taxes.asp.

[2] Gale, W.G. and Krupkin, A. (2019). How big is the problem of tax evasion? [online] Brookings. Available at: https://www.brookings.edu/blog/up-front/2019/04/09/how-big-is-the-problem-of-tax-evasion/.

[3] Temkin, J. (n.d.). Tax Gap Estimates Show That Compliance Rates Remain Unchanged. [online] Forbes. Available at: https://www.forbes.com/sites/insider/2019/10/18/tax-gap-estimates-show-that-compliance-rates-remain-unchanged/ [Accessed 3 May 2021].

[4] Young, A. and Sauter, M. (2020). 3D printing, E-cigarettes among the most important inventions of the 21st century. USA Today. [online] 9 Jan. Available at: https://www.usatoday.com/story/money/2020/01/09/21-most-important-inventions-of-the-21st-century/40934825/.

[5] G, J. (2018). Introducing Blockchain Technology to the world of Tax. [online] Medium. Available at: https://medium.com/@jurgeng/an-introduction-to-blockchain-technology-tax-567e536767ec [Accessed 3 May 2021].

[6] amavat®. (n.d.). Standard Audit File Tax (SAF-T). [online] Available at: https://amavat.eu/services/vat-filing-compliance/standard-audit-file-tax-saf-t/ [Accessed 3 May 2021].

[7] Sovos. (2020). Latin America: An Update on E-Invoice Requirements. [online] Available at: https://sovos.com/blog/2020/06/03/latin-america-an-update-on-e-invoice-requirements/ [Accessed 3 May 2021].

[8] Blockchain technology and its potential in taxes. (2017). [online] . Available at: https://www2.deloitte.com/content/dam/Deloitte/pl/Documents/Reports/pl_Blockchain-technology-and-its-potential-in-taxes-2017-EN.PDF [Accessed 3 May 2021].