Is Blockchain Technology the solution for current tax compliance challenges?
Traditionally tax compliance has always been a cumbersome process for both the taxpayers as well as tax collectors. In recent years, the international drive to address the issues of tax avoidance and fraud has led to an increase in compliance and reporting requirements which may be quite burdensome for taxpayers, especially in the case of smaller businesses.
Whilst, businesses are rapidly digitising their way of transacting and carrying out processes, tax administrations are lagging behind. Businesses are thus compelled to retain manual tasks in filling in completing the necessary reporting. This results in labour-intensive processes and consequently costly for both taxpayer and tax authorities.
Tax payers are obliged to have documentation and reporting mechanisms in place to which reference may be made in the eventuality that they are required to prove a compliant process execution. Furthermore, due to the complexity and ongoing developments in the tax system, businesses must invest in people to ensure that they are knowledgeable with respect to tax compliance requirements as well as any repercussions which may result from a breach of such.
On the other hand, tax collectors carry out reconciliations in order to ensure that law is being abided to and reduce the tax gap as much as possible. This may also necessitate carrying out audits and investigations which are time consuming for both parties. Notwithstanding, tax authorities are reliant on information as provided by the relevant stakeholders, which may thus be subject to delay, inaccuracies and fraud.
How can blockchain technology facilitate tax compliance processes?
Blockchain technology is a type of Distributed Ledger Technology (DLT). Such technology maintains a list of records or transactions, which is replicated and distributed amongst the computers of the participating parties, in an unchangeable, permanent and trusted manner maintained in a shared digital ledger. The ledger is updated with the participants’ agreement and information can’t be altered or deleted without the knowledge and acceptance of the whole network.
The Blockchain technology’s characteristics, that is, of being immutable, transparent, trusted as well as real-time, are well suited to address the main concerns vis-à-vis current tax systems on a global level.
Such technology may be used as a means of integrating tax compliance into the day to day business processes, thus allowing for reporting to be effected in real-time as soon as the transactions take place. Given that data recorded onto such ledger is immediately available to the whole network it shall also eliminate duplicity, thus making the role of most intermediaries redundant. Real time reporting, which is approved by all stakeholders, shall improve protection of the tax base by guaranteeing tax collection in real time. This shall alleviate the risk of non-compliance including financial penalties for tax payers, as well as considerably diminish the need for reconciliation for tax authorities.
Blockchain technology also allows for the integration of what is commonly known as a smart contract. A smart contract is a computer program which facilitates and verifies a predetermined set of rules essentially by being able to replicate the logic of legal clauses. The enforcement and execution of the required actions based on the legal requirements are ensured as these can be made self-executing, self-enforcing or both. Having said that, one would need to tackle the fact that this allows for anonymous transacting.
As with any other revolutionary change, the introduction of Blockchain Technology for tax compliance shall also bring along certain hurdles. Businesses shall need to invest time in educating their employees in making use of such technology as well as cater for any consequent change in processes and procedures. Furthermore, the initial capital costs required to implement such a system may be too hefty for smaller businesses.
One also questions what shall be the impact of real-time reporting and possibly real-time collection from an accounting point of view, and whether there may be the need to shift the current accrual basis to real time tax settlement.
Nevertheless, it is safe to say that blockchain technology could greatly ease collection of required data from key parties in a transaction, improving speed and accuracy as well as make the process less complex whilst substantially reducing administrative costs. Whilst at this stage we are not aware of all the issues which may be faced upon the implementation of such, asking questions and gaining knowledge on the way such technology functions in order to obtain insight and be able to ensure that the best possible policy introduced by tax authorities is beneficial to all parties concerned.
Antonella, obtained a Master Degree in Accounting from the University of Malta in 2015, and has furthered her studies by obtaining a Professional Certificate in Taxation in 2017. She has been working with E&S Group since 2012 and presently manages the Accounts Department as Director of E&S Back Office Services Ltd. Her main areas of practice are Corporate Tax, VAT, as well as the preparation of Financial Statements for companies from various industries including aviation, gaming, shipping, manufacturing, financial and other services.
Antonella is fluent in Maltese, English and Italian.
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