Digital tax system in the blockchain world

Rage Review : The author is affiliated with the tax service department of Ernst & Young, one of the world's four largest accounting firms. With the joint efforts of Ernst & Young experts, this report was summarized. The core content is the impact of blockchain on tax work. Whether from the perspective of the government or the enterprise, the benefits of blockchain are huge. Although blockchain is not mature at present, it is necessary to prepare as soon as possible to obtain the expected results.

Translation: Annie_Xu

The impact of blockchain technology on corporate taxpayers, tax agencies, and tax consulting agencies is transformative. Both companies and governments need to be prepared to respond.

My tax consulting colleagues and I are closely following the development of blockchain technology. I hope you can also actively participate.

In at least five years, blockchain will demonstrate its disruptive power, so we don’t have much time to prepare and it’s best to stay awake at all times.

1. Blockchain is not Bitcoin

Before we delve into the relationship between blockchain and taxation, we should first understand its connotation and difficulties. Blockchain is a distributed large database shared by multiple parties, with a mechanism for real-time replication of transaction data. Its security and reliability are unparalleled. Moreover, blockchain is transparent, and all participants in the blockchain can see the transaction records.

The main obstacle to the widespread use of blockchain is something we imagined - bitcoin backlash. Blockchain and bitcoin are always equated, leading to unreasonable concerns. But the fact is that bitcoin is just the first application of blockchain. Now there are more than that, including applications that have been developed and are being developed. Then let's clarify the issue of anonymity: blockchain is not anonymous, it is only anonymous in email. Blockchain addresses will match transactions with users. Just like email addresses, the only anonymity may be to prevent the blockchain address from tracing the account owner through some additional operations.

Other obstacles to the popularization of blockchain technology include the problem of how to quickly upgrade transaction processing speed and capacity. These problems are all challenging, and emerging technologies like blockchain have overcome many obstacles in the past. So for the sake of this topic, let's assume that these obstacles can be overcome.

2. Impact on corporate taxpayers

Companies are required to submit their financial information to audits every year for tax purposes. Imagine that companies record transactions on the blockchain, the costs and revenues of these transactions, the company's assets and liabilities. The tax authorities can easily access transaction information from it. Government software projects can calculate the taxes due and automatically deduct the corresponding amount from the company's bank account immediately after the settlement is completed. If blockchain lives up to people's expectations, the government will force the adoption of this technology, of course, for public enterprises.

In this way, companies will be able to pay taxes much faster than now, omitting the tax calculation process. Corporate tax departments will be replaced by blockchain transaction ledgers and software. In theory, errors and fraud will no longer exist.

Of course, employment will also change. Tax administrators are no longer needed, and blockchain technicians with tax knowledge can build, install and maintain the system. The opportunity for complete tax automation is huge.

3. Impact on government tax agencies

Real-time corporate transaction records instead of regular tax returns mean a seamless transition between completing transactions and paying taxes. Governments will also benefit from accurate and timely tax payments, eliminating inefficient processes. Illegal business activities will also have nowhere to hide, and tax evasion will be impossible. Countries such as Russia, Mexico and Brazil have tax fraud, so governments have required audits of corporate transaction ledgers. They have already begun to adopt digital tax management, and blockchain can add reliable real-time transaction analysis capabilities to it.

Regarding indirect taxes, the transparency and real-time transaction verification of blockchain can simplify and automate the tax payment process, especially business taxes such as VAT. This can significantly reduce the costs of enterprises and governments. Earlier this year, the UK government's chief scientific adviser released a report Distributed Ledger Technology: beyond blockchain, which mentioned that the European VAT system based on blockchain can increase transparency, "leave black market transactions nowhere to hide", and "replace quasi-tax compliance economy with smart contracts".

For governments and taxpayers, blockchain can significantly reduce tax disputes, such as tax audits, because most disputes come from uncertainty in transaction records. Transparent and verifiable transactions on blockchain can reduce disputes. Even if disputes continue to exist, the time and financial costs will be lower because we have factual basis and better legal interpretation.

In the field of blockchain, government tax work will also follow the adjustments of enterprises. The government needs blockchain experts to build databases and real-time systems, not auditors.

4. Impact on tax advisors

Then about my own profession, a global tax advisor. We knew we should adjust our understanding of blockchain, even though it continued to disrupt our business, but our clients needed our support.

Tax advisors will no longer fill out tax returns for their clients, because all processes will be different. Blockchain allows governments and businesses to see transaction records in real time. Our Global Compliance and Reporting (GCR) team will have a variety of skills - programmers and blockchain systems with tax knowledge.

Take the GCR team's mutual fund business as an example. This is an extremely complex process worldwide. Each fund may have hundreds or thousands of individual securities and bond investments, each investment has dividends and interest, and needs to pay various taxes, involving multiple jurisdictions. The current compliance and reporting process is very complex, expensive and inefficient. Blockchain can solve this problem. In a public ledger, companies and governments share transaction records and all applicable legal content.

5. Be prepared

While this transformation seems inevitable, it’s important to remember that blockchain is still in its infancy. Think about how we understood the transformation of business and society when the first computer appeared in 1993.

Therefore, it can be said that this change is indeed inevitable. There are many motivations for governments to adopt this technology, and it is not necessarily a bad thing for taxpayers, because blockchain can reduce administrative costs and disputes and ensure the correctness of tax work. Some observers expect significant changes to occur in the next three to four years. We believe that blockchain adoption is slow, especially with the above obstacles, but also because the scale of the change requires careful consideration and detailed planning, government and corporate management needs to adjust, and people's thinking needs to change.

However, the blockchain world will become a reality in mid-2020.