Blockchain and Tax Function- The Real Time Solution?
Bitcon currency is based on the blockchain technology. The currency is gradually accepted universally. The Blockchain technology has a bigger role to play. Bitcoin to blockchain is like gmail to internet, blockchain technology can be implemented across all the industries – health, education, travel, finance, manufacturing, engineering, pharma etc. The technology is at nascent stage but rapidly being implemented across the industries.
Every industry is attempting to evaluate the implication of blockchain technology not only from business revenue perspective but also from overall internal functioning and change in roles perspective. In this article, I am going to evaluate how Blockchain Technology will affect tax functions and the role of tax professionals. Beofe that lets discuss what blockchain is and how it functions:
The simplest way to define blockchain is as a shared or distributed ledger (peer to peer system) which is shared between various participants. All participants in the system can see the same version of the ledger and can make entries in the ledger that are distributed to other participants. The participants are part of a blockchain and when any transaction happens, the same is validated by a public key and a private key by using hash function. The ledger tracks ownership – and this can be ownership of monetary value or any other thing. By taking account totals of the ledger, participants can see the current state of ownership at any time. In simple words, after implementation of blockchain technologies the role of intermediaries would be reduced on account of peer to peer system which will deal only between participants of the transaction.
The excitement about blockchain is based on its ability to serve as a tool for achieving and maintaining integrity in purely distributed peer to peer system that have the potential to change the whole industries due to disintermediation. Below is the example of a blockchain transaction:
As mentioned, blockchain technology is still at a nascent state. However, with the advent of new sources and continues research, this technology will be implemented soon in most of the industries. It will definitely change the way we work:
How Blockchain Could impact Tax function
There are various tax automation software already in place for streamlining the tax functions. Still, the availability of relevant data is a big issue for taxpayer, tax consultant and tax authorities. Blockchain technology can make this data available on a real time basis wherein a block can be created between taxpayer, tax consultant and tax authorities. This would reduce significant time of compliance burden.
Another issue for taxpayers is maintaining transparency of the data. One of the biggest advantages of blockchain technology is achieving accuracy and transparency. Using this technology in tax functions could be a boon for taxpayers as they will be free from the headache of maintaining transparency of data. Whatever tax related data is to shared, it will shared within a block of trusted network/parties.
Wherever there will be role of tax consultant as a compliance intermediary i.e. between taxpayer and tax authorities, the role may be replaced with blockchain technology and there may not be any intermediaries for compliance support. If there is blockchain created between taxpayer and tax authorities for accessing the real time data, this will be a massive change in overall system and functioning of tax. This change will enable the tax authorities to access the data on a real time basis and there will no possibility of any manipulation of fraud.
In case of indirect taxes, if taxes paid through a smart contract that calculated the correct taxes, the tax due could be split from the payment as it is made by the customer and be sent directly to government, resulting in significant reduction of transaction costs and reducing the risk for fraud.
In case of country by country reporting ( as guided by OECD) and implemented by various countries, peer to peer system could be used to feed the CbC related data on a real time basis by using blockchain distributed ledger. This would reduce the compliance burden and increase efficiency of tax functions. Potentially, this could be achieved at lower cost than is involved in producing CbC reports in their current format.
In nutshell, use of blockchain technology in tax is all about making the data available on a real-time basis to trusted parties of distributed ledger. Whether it is direct tax, transfer pricing or indirect tax, availability of relevant data is a big issue, this issue can be resolved with implementation of this technology and it will reduce significant amount of time during return filing and also during assessment proceedings. There wont be need of collation of data from different places or people once the data is available on a chain on a real time basis.
Blockchain technology is likely to become a new system for many processes that rely on collated data, by producing verified, real-time data. The tax authorities across the globe are positively responding to these technological developments, transferring some of the physically kept ledgers to distributed ledger platforms.
In the tax world the need of hour is maintaining transparency, accuracy and effectiveness. Blockchain technology has the power to fulfill all the needs and change the entire system to bring effectiveness. However, the taxpayer is required to evaluate their overall internal system for becoming ready to adopt such technology.
One of key challenges would be to evaluate the tax treatment of the the transactions happening through blockchain ledgers. While, treatment of digial transaction is still a complex area of taxation, the blockchain transaction would be a new area to evaluate from a tax implications perspective.
For tax professionals, it is utmost important to be updated for staying relevant in a disruptive world of technologies. There might be cases wherein the role of tax professional is only to provide advice which require human intellectual and which cannot be replaced with blockchain and artificial intelligence. Tax professional need to consider the tax role as beyond compliance.
Disruptive Times Ahead…
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