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Blockchain’s impact on taxes and global trade

How can blockchain transform tax? Could distributed ledgers remove the need for invoices? Could governments impose cryptocurrencies to collect and refund value-added tax? Could the role of trusted advisors and tax officers be eliminated? See how blockchain could determine the future of tax, and find out what tax authorities are doing to embrace this transformation.

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Blockchain’s impact on taxes and global trade

  1. 1. EY Global Blockchain Summit San Francisco, CA April 26, 2017
  2. 2. Page 1 EY Global Blockchain Summit Blockchain impact on taxes and global trade
  3. 3. Page 2 EY Global Blockchain Summit Transforming tax through blockchain ► Could tax returns be a thing of the past? ► Could distributed ledgers remove the need for invoices? ► Could governments impose cryptocurrencies to collect and refund tax? ► Could the role of trusted advisors and tax officers be eliminated?
  4. 4. Page 3 EY Global Blockchain Summit What could a tax blockchain look like? ► Decentralized distributed ledger ► Complete, transparent and real-time validation of transactions ► Transactions executed with efficiency and security ► Linked to smart contracts ► Triggering performance, payment and place of contract ► Giving certainty as to where assets are and who owns them ► Automatic and simplified taxation of transactions ► Periodic self-reporting could be replaced by real-time recording ► Real-time tax compliance ► More timely and accurate tax payments ► Support for refunds and relief ► Immediately verifiable information ► But, could there be a disconnect between transparent openness and desire to keep sensitive commercial information private?
  5. 5. Page 4 EY Global Blockchain Summit Could the biggest impact be on indirect tax? ► Value-added tax (VAT) is triggered by events that needed to be documented and recorded securely, such as: ► Performance of a service ► Delivery of goods ► Conclusion of a contract ► Manufacture of a product ► Imports and exports ► Can blockchain be used to verify: ► Place of supply? ► Parties to supply? ► Tax points? ► VAT rates? ► VAT amounts? ► When VAT is payable, how and by whom?
  6. 6. Page 5 EY Global Blockchain Summit How VAT works (VAT rate: 20%) Buys: 300 + 60 Total tax collected: 60 Stage 4 Consumer buys furniture Buys: (100 + 20) Sells: 200 + 40 To government: 20 Stage 2 Manufacturer makes into furniture Buys: (200 + 40) Sells: 300 + 60 To government: 20 Stage 3 Retailer sells in furniture shop Buys: nil Sells: 100 + 20 To government: 20 Stage 1 Farmer sells trees Suppliers act as tax collectors
  7. 7. Page 6 EY Global Blockchain Summit The future of VAT invoices ► “Digital fingerprints” ► Every valid VAT invoice could be required to display a digital fingerprint derived through a VAT blockchain consensus process. ► Identifying that a block is linked to previous and subsequent blocks ► Allowing entire history of commercial chain to be followed ► Scrutiny of the whole chain would be possible from a single valid VAT invoice. ► For example, via a tax auditing program, tax and customs authority, or robot ► All transactions in a chain would need to be validated for a valid VAT invoice to be issued ► Needed for a seller to collect VAT and for a buyer to deduct VAT ► VAT registration would be automated with a validated registration number
  8. 8. Page 7 EY Global Blockchain Summit Could there be a “VATcoin”? ► Blockchain trustless ► Doesn’t require third-party validation ► Consensus mechanisms verify authenticity of transactions ► Cryptocurrencies ► VAT could be paid and credits received in government-backed cryptocurrency underpinned by blockchain ► VATcoin? ► Payments could be made by smart contracts embedded in invoices ► Taxpayers (suppliers) no longer VAT collectors for governments ► VAT accounting regulated by blockchain ► Decrease missing trader intra-community (MTIC) fraud ► VATcoin could be balanced daily so no need for VAT returns ► Could be immune to cyber attack if cryptocurrency has no material cash value ► Only convertible into cash by governments (i.e., refunds)
  9. 9. Page 8 EY Global Blockchain Summit Could blockchain reduce VAT fraud? ► VAT blockchain reporting systems could cut fraud drastically ► Synchronization: all parties have all data ► Deterministic: confirm whether transaction happened ► Singular: each transaction can only occur once ► Non-repudiation: all transactions digitally signed ► Efficiency: instant confirmation of transactions ► Trustless: no need for centralized data repository ► Parties with no confidence in each other can collaborate using neutral central authority: blockchain creates trust
  10. 10. Page 9 EY Global Blockchain Summit MTIC fraud example Co. A Co. B Co. C France Germany ► A zero rates its sale of goods to B as an intra-community sale ► A reports the sale on its VAT return, EU Sales List and Intrastat at the end of the reporting period (monthly and quarterly) ► A recovers its French input VAT ► B does not self-assess German acquisition VAT on its purchase from A ► B charges German VAT on its sale of goods to C ► B does not report or pay the VAT on its sale of goods to C to the German tax authorities ► C pays VAT on its purchase from B ► C reports and recovers the VAT on its purchase on its VAT return at the end of the reporting period (monthly and quarterly) ► German tax authorities can hold C jointly and severally liable for “missing” VAT EUR100 EUR100 + 19% VAT Value of fraud
  11. 11. Page 10 EY Global Blockchain Summit MTIC fraud example ► Zero-rated intra-European Union (EU) supply (A to B), followed by standard-rated domestic supply (B to C) ► B does not self-assess acquisition VAT on purchase from A ► B disappears without passing VAT paid by C over to tax authorities (or, was never VAT registered) ► Becomes a “missing trader” ► Under current EU VAT Information Exchange System, fraud isn’t identified until A and C file VAT returns, ESLs, Intrastats ► Can be months later ► Problem = each tax authority and taxpayer maintains its own database of transactions ► Transactions are reported historically ► Fraud can be stopped if tax authorities convincingly communicate they know details of every transaction and anticipate fraud in real time ► Security and identification of transactions crucial to stopping MTIC fraud
  12. 12. Page 11 EY Global Blockchain Summit Co. A Co. B Co. C France Germany ► A issues valid VAT invoice with digital fingerprint ► Invoice contains all contractual terms to validate supply to B ► Automatically triggers: ► A to zero rate and report its sale of goods to B as an intra-community sale ► B to self-assess acquisition VAT ► Recovery of A’s input VAT ► B issues valid VAT invoice with digital fingerprint ► Invoice contains all contractual terms to validate supply to C ► Automatically triggers: ► B to charge, collect and report VAT on sale of goods to C ► Recovery of B’s acquisition VAT ► C needs invoice with digital fingerprint to pay and recover VAT on purchase from B ► C knows transactions are validated ► C can “trust” B EUR100 EUR100 + 19% VAT MTIC fraud example Paid via “VATcoin” to German tax authorities
  13. 13. Page 12 EY Global Blockchain Summit Application to customs and global trade … ► Blockchain could be used to verify: ► Proof of origin and destination ► End use ► Classification ► Inward processing and processing under customs control ► Customs valuation ► Digital fingerprints could be used on customs documentation for: ► Import and export declarations ► Customs authorities could verify accuracy of origin and nature of goods throughout chain ► Collecting duties without third-party declarations ► Export controls ► Increased supply chain security with fewer customs officials provides: ► More targeted and accurate inspections ► Reduced customs duty fraud
  14. 14. Page 13 EY Global Blockchain Summit … and to corporate income taxes ► Blockchain could be used to validate, calculate and pay tax due. ► In real time, openly and transparently ► Smart contracts could remove the need for cash tax payments and reporting. ► Eliminate estimated tax payments (based on future liability) ► Decrease (eliminate?) tax evasion ► Every transaction could be recorded in real time. ► Governments already questioning alignment of profit and location of profit-making activities (base erosion and profit shifting) ► Allow governments to obtain real-time, intragroup transaction data ► Will there still be a need for tax due diligence? ► There are unpredictable implications in the era of government sharing of tax information. ► Calls for a new era of tax transparency
  15. 15. Page 14 EY Global Blockchain Summit Will governments drive the change? ► Blockchain technology could improve real-time transmission of tax data to and from tax authorities ► Smart audits provide: ► Improved tax authority visibility ► No way to hide transactions and not pay tax ► Identify statistical anomalies in real time ► Increased audit efficiency ► Facts already mutually agreed ► Speed up audits and assessments ► This provides independent, artificial intelligence-facilitated risk analysis ► Will tax authorities need blockchain experts rather than tax auditors? ► Will taxpayers face lower administrative costs, less controversy and more assurance?
  16. 16. Page 15 EY Global Blockchain Summit The digital tax revolution has already started. ► Digital tax administration is already here ► Current distributed ledgers are centralized, e.g., at tax authority level ► Only contain limited transactions ► No consensus or judgment about validity of transactions ► Opportunity for efficiency improvements for transaction taxes ► Governments already exploring possibilities of blockchain ► Netherlands: MTIC fraud solutions ► Australia: proof-of-concept solutions ► How quick will the uptake be?
  17. 17. Page 16 EY Global Blockchain Summit Early examples ► Anticipated early adopters ► EU: MTIC fraud (EUR50b–60b revenue losses per annum) ► Gulf Cooperation Council: no existing VAT system to replace ► Africa: No centralized tax ledgers to disrupt and decentralize ► Industries: pharmaceuticals and mining ► Revenue Quebec ► Mandatory use of sales recording modules in restaurants ► Records sales in secure memory ► Transmits sales information in bar code with digital signature on receipt ► Summary transmitted to Revenue Quebec monthly ► Data stored in central database ► Artificial intelligence detects fraud ► Taxpayers and Revenue Quebec have access
  18. 18. Page 17 EY Global Blockchain Summit Where do tax professionals fit in? ► Blockchain could be innovative for the industry and will transform the finance function. ► Will change be driven or even mandated by governments? ► How quickly will businesses adopt? ► How will tax professionals fit in? ► Future roles may require financial, tax and technical experience. ► It is vital to understand how governments are using blockchain to collect tax due. ► Mistakes and fraud could be reduced greatly. ► Could the tax function be replaced by blockchain’s secure, certain and real-time ledger? ► Tax professionals and tax compliance administrators may need to become blockchain technologists. ► Tax knowledge still will be required to build, install and maintain systems.
  19. 19. Page 18 EY Global Blockchain Summit What should you be doing now? ► Keep closely involved in the blockchain strategy development. ► Engage with policymakers. ► Consider how real-time tax collection will impact business opportunities. ► What are the tax implications of the resulting investment and operational decisions? ► How will you develop a tax-efficient strategy when tax is paid in real time and with total transaction transparency? ► When will you think about reporting taxable events via blockchain? ► A word of caution: blockchain can help make great strides in understanding the properties of the assets people own. ► Blockchain specifically is useful for recording transactional information and understanding the components of a workflow. ► It still will require compliance and risk management (at least in the short term).
  20. 20. Page 19 EY Global Blockchain Summit EY Digital Tax
  21. 21. Page 20 EY Global Blockchain Summit Liz Day Senior Manager, US VAT Practice Ernst & Young LLP San Francisco +1 415 894 8247 Key contacts Michael Meisler EY Global Blockchain Tax Leader New York +1 212 773 3579
  22. 22. EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit © 2017 EYGM Limited. All Rights Reserved. EYG no. 04033-173GBL 1705-2288253 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.