Blockchain and Government: International Taxation

Share this post:

It’s the same old story.  International companies and cross-country commuters file their huge bulk of tax declarations once a year. Nancy’s department is responsible for checking these declarations against international tax treaties and local taxation rules, interacting with the companies, employees and other tax authorities to clarify issues and to correct the values where necessary. There is rarely a declaration without adjustments, and it takes an immense amount of time and resources to do the revisions. Changing international agreements and tax regulations don’t make her life easier; the same holds true for the companies and their employees.

A jungle of international tax treaties makes it almost impossible for tax authorities, international corporations and cross-border commuters to file tax declarations in a transparent and efficient way.

Nancy is not alone in her pain.  As of 21st December 2017, over 2,600 bilateral exchange relationships are in effect across 78 jurisdictions committed to the Common Reporting Standard. The Organization for Economic Cooperation and Development (OECD) proposed the standard of Automatic Exchange of Information (AEOI)

How nice would it be to have global adoption of an exchange standard for the different taxes? How nice would it be if corporations uploaded their financial data across all countries and gave access to individual tax authorities – like Nancy’s – whenever transactions involve her country and the national tax regulations? How nice would it be for the corporations, local subsidiaries, their cross-country commuters and, in fact, all employees if there was a way to automatically calculate necessary deductions including retaining taxes and VAT by the different tax authorities?

Sharing a common truth of tax regulations in each jurisdiction and inter-juridical, e.g. different countries or different states, holds tremendous potential for tax authorities, companies and employees alike.

Between the tax authorities, one could imagine establishing an automatic exchange of key indicators (such as corporate profits, taxes paid, employees and assets of each entity) of multinational enterprise groups. The exchange allows tax authorities to make assessments and automatic calculations of transfer pricing arrangements and profit-shifting risks, which can serve as a basis for starting a completely new way of interacting with tax authorities.  They are already giving expert advice to corporations and their cross-country commuters on how to improve their tax payment within the given regulations. This is in stark contrast to current practice and public image of many tax authorities to suspect corporations and people of avoiding taxes and applying semi-legal practices until the tax authority “fails to find” these irregularities.

Why Blockchain?

A permissioned blockchain technology allows all players – state and national tax authorities, corporations, financial institutes and employees – to exchange information and give dedicated, role-based access permissions. Blockchain allows full auditability, transparency and improved efficiency. Smart contracts can be used to automate the exchange of information and the application of tax regulations and tax treaties in order to calculate the adequate tax payments for an entity across all borders.

The world of global trade has similar complexities on import and export regulations for individual goods and their individual trade lane. In this context, the global consortium TradeLens united around more than a hundred private and public organizations to drastically streamline the effort and increase the transparency of global trade.

Why IBM

IBM offers a unique combination services, technology and skills.  We can:

• Advise tax authorities and corporations on the tax process and an integration to a cross-organizational permissioned tax blockchain eco-system.
• Provide the consortium of tax authorities and corporations the expertise regarding business, governance and technology necessary to establish a feasible and agile partner-network.
• Provide the permissioned blockchain backbone including the necessary implementation of the different taxation rules and treaties, the required end-to-end security and necessary privacy and sharing logic.
• Build and support the integration between the different partners and the blockchain backbone.
• Offer global reach to scale across a growing number of participating countries.

Ask yourself

How much time do you spend on clarifying numbers, regulations and context information across different organizations and even countries to review tax declarations or requests? How often are you entering or sharing the exact same information with different partners? How often are you unable to trust the information or don’t have the necessary transparency to make a decision? Where do you face regulations and treaties so complex and dynamic that it is hard to keep up? How much more time and effort could you devote to critical issues if the administrative overhead of collecting and sharing necessary information disappeared?

This is the fourth in a series of blog posts on the ways in which Blockchain can help Governments deliver better services for citizens.  The previous post can be found here.