Blockchain Aims To Fix Tax System          

In collaboration with government and industry representatives, EY has created a far-reaching blockchain solution to address challenges in the cross-border withholding tax process.

The goal for TaxGrid is to address inefficiencies and complexities with the international withholding tax process in relation to dividend distributions and improve tax compliance to nearly real-time, benefiting investors, financial institutions and tax authorities alike.

TaxGrid is also designed to help financial intermediaries coordinate the timely exchange of investor information across a network to meet contractual obligations and, potentially, regulatory requirements, while protecting confidential investor information.

The solution uses blockchain technology to automate, decentralize and share tax and financial information more securely between financial intermediaries and tax authorities by creating a kind of shared record book of all dividend transactions, to help with taxation of dividend income at the source. TaxGrid is built to simplify the process for obtaining the correct tax treatment while reducing governments’ exposure to fraud.

To safeguard data privacy and confidentiality, the TaxGrid uses privacy technology to help protect investors’ sensitive information and commercial confidentiality. Zero-knowledge proof is a key feature of blockchain technology, allowing one party to prove it knows a certain piece of information or value, without revealing the actual information.

“Distributed ledger technology as a solution to the WHT challenge is no longer merely a concept,” EY’s WHT distributed ledger report notes, adding that the project has provided a basis for enabling a global solution to address various demands of taxpayers and tax authorities. “This could support the European Commission’s proposal to begin building a common and standardized EU-wide system for withholding tax relief at source,” starting in 2022, EY stated.

Benefits Of Blockchain Technology 

As with all new and mostly untried technologies, blockchain has attracted a lot of hype and scepticism. Although it could potentially revolutionise almost every aspect of record keeping, exchange and settlement, blockchain is still a technology looking for an application. There are hurdles to overcome before it can be deployed effectively — its application within taxation exemplifies this. Yet, in the right circumstances it can provides for a wide range of benefits, which can be categorized as follows:

• Cost — a distributed ledger potentially reduces costs of transaction processing and data storage.
• Speed — a decentralised network can be faster and more versatile than a centralised server.
• Protection — it is near impossible to alter or overwrite without other parties knowing/agreeing, which provides protection against fraud and disputes.
• Security — tamper-proof data structure with strong encryption, multiple confirmations of each transaction and transparency enhance security.

What Is In It For Tax Authorities? 

Governments and tax authorities have blockchain firmly in their sights as part of a wider move towards digitising the tax system and assessing tax in real-time. Blockchain can pave the way for more advanced levels of transparency, immediacy and security with reporting, as more countries make progress towards digital tax reporting. Accurate and shareable information allows for earlier collection and oversight of transaction related taxes.

What Is In It For Tax Payers?

The opportunities to rationalise complex processes and reduce the need for repetitive documentation between parties are good starting points. There are also opportunities to bring greater certainty to tax management and reduce the risk of audits and disputes. In particular, your tax records and approach would be agreed up front between the different parties in the network. This includes agreements with the tax authorities as part of the blockchain protocols, much as would be in an advanced pricing agreement. When combined with the move to more focused smart contract review, greater upfront certainty would limit the amount of audit defence time and need to hold reserves to pay disputed tax. Moreover, all transactions would be available for review and any steps to secure a competitive advantage through special or questionable treatment of comparable transactions would be extremely difficult. Blockchain could thus create a more level playing field between competitors.

In the long run, blockchain can be a driving factor in implementing real-time, automated tax processes for both small and large enterprises. The initial focus is likely to be on indirect tax, though other areas of tax management such as transfer pricing and payroll tax could be brought into play as the blockchain networks develop.

The Future

Blockchain development is still at an early stage and many issues are yet to be resolved. Transferring blockchain technology from cryptocurrencies into a more complex system like tax, is work in progress.

Tax is not the main priority when businesses think about blockchain. Although the focus is blockchain’s potential to reduce transactional costs, a more streamlined, efficient and effective tax function would be a significant bonus.

We are in the early stages of understanding what blockchain can do for businesses, for consumers and for the world of tax, but here at Accountancy Slice we believe that exciting possibilities lie ahead.

Richard Aston, Industry Slice