Blockchain and Tax Administration

Blockchain and Tax Administration

Blockchain and tax administration is a concept that will ensure the efficiency of revenue generation with a huge sense of transparency ensured in the contemporary 21st century.

With the popularity of Bitcoins, blockchain technology is often connected with only cryptocurrency, little is it known that this technology can do more, spanning across the health, financial, gaming, and even taxation sectors not leaving out other critical sectors of human development.

It is on this note that we bring to the fore the potential of Blockchain Technology as a proven solution to these downsides experienced by the tax administration.

Just before we commence, in this post, you are expected to:

  • Understand the Blockchain Technology Ecosystem
  • What countries are doing with blockchain technology
  • Blockchain technology and tax administration

Understanding Blockchain Ecosystem

The ability to exchange information directly in real-time between two or more participants in a pair-to-pair network represents the kernel of blockchain technology. It eradicates the involvement of a third party or intermediary.

Technically speaking, a blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. It is made up of blocks where a block in the chain contains several transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

Blockchains are used across different sectors and come in three major types. These types are the Public Model which allows for open and anonymous participation, an example is Bitcoin; the Private Model which is obtainable when a party defines the rule and supervises compliance; Closed Ecosystem where each participant is identified, allowing the creation of organizations or groups for a particular purpose.

Blockchain and Tax Administration: What Countries Are Doing

Tax administrations globally continue to explore ways to shore up tax collection, hence the use of blockchain. Check out interesting highlights across countries below:

  • The Federal Tax Service of Brazil in October 2020 has implemented a blockchain network that connects customs in Brazil, Argentina, Paraguay, and Uruguay to ensure the authenticity and security of customs data shared between the Mercosur countries. This innovation will ensure real-time deduction in customs duty and adequate tracking of taxable goods. This also aims at reducing the VAT fraud prevalent in intra-community transactions.
  • China uses technology to combat fake invoices, especially in Beijing with a goal according to the Chinese  Government 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.
  • The Tax Agency of Thailand is implementing blockchain in VAT refunds.

Other countries are also joining the fray.

  • In Finland, the Tax Administration works in close ties with banks on a blockchain system to track taxes on real estate transactions.
  • In Sweden, blockchain is being tested to digitalize receipts, non-resident income tax, and customs duties.
  • Estonia has moved several government services to a blockchain system, including banking, health, and business records.

Blockchain and Tax Administration
The electronic invoices that use blockchain technology make use of smart contracts and encrypted algorithms to guarantee the resistance of the issuance, storage, transmission, security, and the fight against the falsification of documents. The system offers complete traceability and tamper resistance, ensuring that data cannot be changed after the fact.
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How Blockchain Can Improve Tax Administration

  • Since blockchain can be used to capture information both locally and internationally in real-time, the tax administration in Nigeria can leverage this to capture potential taxpayers across sectors into the tax net.
  • Tax administrations with access to the blockchains of multinational companies could carry out real-time tax audits.
  • A key potential to be harnessed by the administration based on blockchain is in the area of transfer pricing. This potential can be realized due to the capacity of blockchain to systemize and automate, adding significant transparency to tax audits.
  • Another potential way to leverage the technology is hinging on pre-filled tax returns, where the tax administration could use a database with blockchain to supply them with taxpayer’s details, thus making the process more efficient.

Summarily, blockchain is capable of injecting transparency, efficiency, data integrity, and security into the tax administration.

The potential of blockchain technology is enormous, hence the tax administration has to:

  • Increase digital literacy amongst its officer not neglecting the end-users which represents the taxpayers.
  • The need to ensure a clear operation framework is also necessary as this will incorporate users, initialize processes, and integrate with existing systems.
  • The above is because, while blockchain can ensure that third-party information is accurately collected and disseminated, the technology, as conventionally described, cannot control input errors. This is also based on the garbage in; garbage out principle.

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DISCLAIMER

The information contained herein is general and is not intended, and should not be taken, as legal, accounting or tax advice provided by Taxmobile.Online Inc to the reader. This information remains strictly the opinion of Taxmobile.Online Inc.

The reader also is cautioned that this material may not apply to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of other tax factors if any action is to be contemplated. The reader should contact his or her Tax Advisers before taking any action based on this information.

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