Two Applications of Blockchain for Tax Compliance

The technology’s use cases are legion, but detailed descriptions are rare. A recent white paper explores how blockchain can prevent value added tax (VAT) fraud and support sustainable eco-tourism.

Published jointly by Vertex, Microsoft and PwC, this is the second publication in a two-part series; you can download Blockchain for Tax Compliance Part 1 and Part 2 here. David Deputy, director of strategic development and emerging markets at Vertex, co-authored the papers with Microsoft and PwC experts, and you can see his take on the first paper here.

We at Vertex believe the emergence of blockchain represents a unique opportunity to create standardized tax processes based on the principals of designed compliance, which could drastically reduce cost and fraud, raise collections and enhance business certainty. VAT compliance is a highly visible area in which these principles could be applied; as the white paper points out, the countries of the European Union collectively lose between 50 and 150 billion euros annually due to VAT fraud.

Unlike traditional business technology initiatives, which are typically conducted within the boundaries of a single enterprise, blockchain-based systems may span multiple entities. The white paper describes a VAT fraud prevention prototype, developed by Microsoft and PwC, which encompasses multiple stakeholders – such as tax administrations, corporate taxpayers and financial institutions – and could also be applied across national borders. The report also charts the potential evolution of a blockchain-based VAT compliance system from information exchange, through real-time VAT, to the use of specialized digital tax currencies for transaction compliance.

The second blockchain use case – building an infrastructure to support payment compliance with an eco-tourism tax – may seem a less intuitive fit than VAT. However, expanding tourist visits are both a blessing and a curse for many nations as the tourists help the economy but can also overburden local infrastructure and damage the environment. Tourism fees are an increasingly important source of income for many countries but lack the transparency needed for full industry and tourist support. When blockchain is integrated, a tax authority might decide to impose an arrival and/or departure levy on tourists, or request a voluntary contribution from them, to help preserve the country’s natural resources and support local businesses engaged in eco-tourism. Blockchain-enabled smart contracts can ensure the payments are allocated directly to a government fund, or even individual projects, dedicated to those goals, which “may help mitigate against the risk of the tax money being used for other purposes.”

The white paper describes blockchain’s potential role in creating a sustainable eco-tourism tax infrastructure, as well as the benefits that authorities could expect to realize, such as greater integrity and transparency, reduced cost of compliance, and improved collections.

Explore our VAT solutions and long-standing partnerships with PwC and Microsoft.