Blockchain will significantly help businesses, tax authorities, and regulators by providing trust, transparency, and more accurate information that can be shared to collect and oversee transactions.
A number of proposed blockchain tax use cases have the potential to spark a revolution in the way governments collect and spend their money.
Even though people hate paying them, taxes are necessary to keep nations and economies running smoothly. While governments do not operate for profit like businesses, they do need funding to cover the costs of the services they provide to the public. However, most governments fail to recover a significant portion of the taxes owed to them and operate with financial debt and deficit, which in the long run can lead to economic stagnation and lower quality of services. public. Thus, tax collection is a major financial priority for governments. In order to recover these taxes, government agencies sometimes find themselves having to go to great lengths, resulting in additional costs, making the whole process riddled with inefficiencies. Using blockchain in tax matters can make the process more effective and efficient and ensure that government agencies are paid what they owe.
WHY DOES THE TAX SYSTEM NEED A NEW REFORM?
Tax policies and Although the problems vary by country, there are some general factors that inhibit tax collection. These are inherent flaws in traditional methods of collecting revenue that are found in almost all existing tax systems. Tax systems often involve complex filing processes which are subject to change each time new regulations are adopted. Sometimes it’s not just the tax filing process, but the whole tax system gets quite complex and esoteric for those who are unfamiliar with tax laws. This leads to the inability of individuals to follow tax remission procedures, which often results in them either not declaring their full tax liability or not being able to avail themselves of all the evasion provisions. planned by regulators. Thus, the process of collecting taxes ends up being unfairly executed, although everyone is expected to be fairly collected, depending on what they have.
Taxes are not only collected from individuals and businesses based on their income and profits, but also on specific business activities such as value added tax (VAT) and sales taxes. These taxes are an important source of revenue for local regulatory agencies and vary depending on the product or service on which they are levied as well as the area of jurisdiction in which they are applied. These taxes are difficult to follow both by regulatory agencies and by the people who want to remit these taxes. Sometimes a significant portion of these taxes go unpaid, depriving public agencies of some much-needed funding. In the European Union, VAT fraud regulators are estimated to cost between 40 and 100 billion euros each year.
While tax evasion, i.e. using legal provisions to minimize the amount paid in tax, is fair and even encouraged by governments, some businesses and individuals engage in tax evasion, it that is to say not respecting the law to completely or partially evade the payment of taxes due. Due to the complexity and indeterminacy of tax and legal systems, combined with the inability of public agencies to prove and track these wrongdoings, many high-income entities often get away with paying unreasonably low taxes, while many pay their fair share. It is estimated that the The United States alone loses nearly $ 200 billion each year due to tax evasion. This amount is easily higher than the annual budgets allocated to different federal departments (to put it in perspective, NASA, the Department of Education, and the Department of Agriculture had a combined proposed budget of around $ 110 billion. for 2018). The situation is not much better in the rest of the capitalist world, because tax evasion burns the biggest holes in most of the national coffers.
The introduction of technologies such as AI and blockchain into taxation promises to change these trends for the better, as the various emerging use cases of the technology show.
HOW CAN THE USE OF BLOCKCHAIN IN TAXATION BE REVOLUTIONARY?
1. Make the tax calculation simpler and more indisputable
The blockchain offers a few features that the tax industry, regardless of country, can benefit from. Blockchain-based transaction systems, such as the platform that underpins the Bitcoin network, offer decentralized data logging that is completely transparent to all participants but highly secure, making it ideal for supporting financial transactions. A blockchain also provides an immutable record of data and a trustless architecture for performing transactions, ensuring fairness and a negligible likelihood of crime. Finally, the blockchain allows the use of smart contracts. Smart contracts can automate execution transactions based on the satisfaction of predetermined and mutually agreed terms. All of these properties of blockchain can be used in the tax sector where the worlds of finance and law – two of the biggest benefactors of blockchain technology – converge.
2. Increase trust and transparency between governments, businesses and regulators
Setting up a blockchain-based digital financial ecosystem can enable all monetary transactions to be carried out in a transparent and decentralized manner. It would also mean that the record of every transaction made on the entire network would be stored on that network, accessible to everyone, mainly regulators. Transactional records would also undoubtedly be immutable. The source of each unit of currency would be easily determined. When the numbers and details relating to each transaction become traceable, the ownership of assets and money can be easily determined and, therefore, all applicable taxes can be easily calculated without offering owners the option of obscuring proof of. fiscal responsibility. Thus, revenues can be collected directly from the entities concerned due to the presence of undeniable evidence.
A blockchain-based public transaction ledger that records all cross-border commercial and retail transactions can provide evidence to support the collection of VAT due or sales taxes down to the last penny. Even corporate fraud can be avoided by using blockchain-based transaction systems, as these systems can account for every transaction, making it easy for authorities to calculate taxable income and invoice them accordingly. The blockchain network will also provide evidence in the event of non-compliance to support legal action. And in the face of strong, immutable evidence such as that offered by blockchain records, fairness will prevail in the tax sector.
3. Automation and monitoring of transactions with smart contracts
All of the above benefits can be stacked even without the use of smart contracts. Smart contracts can potentially lead to a much bigger change in the way taxes are collected by completely automating the tax process. Governments and other regulatory agencies can program smart contracts to act in accordance with state tax laws. These automated contracts can be programmed with multiple clauses to provide all possible benefits to entities in the form of tax evasion and collect income as dictated by tax laws in effect during this period. This means that neither the government nor the taxpayers will need to keep track of their finances and tax obligations, as the smart contract, informed by the blockchain, will automatically deduct the amount owed from the taxpayers’ accounts. Even refunds and returns, if any, can be processed automatically in accordance with government policies without taxpayers having to go through complicated procedures.
Smart contracts can be used to automatically process all types of tax payments, from VAT and sales tax to corporate tax, whenever they are due. This means less hassle for taxpayers, efficient collection processes for government agencies, and an overall fair income system that everyone can (finally) be happy with.
While blockchain is touted as a revolutionary technology in almost every area of application it is associated with, the use of blockchain in taxation in the aforementioned manner, if ever achieved, will be revolutionary in its true sense. However, before bringing about transformation on a global scale, blockchain – or a highly evolved form of it – will need to be used to form financial ecosystems on a national, if not global, scale. The formation of a unified financial platform will have to precede any large-scale and radically new tax system, which appears to be far in the future. However, continued investments to improve the blockchain and explore other possibilities with the technology can accelerate the acceptance and adoption of the technology by the general public.