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Blockchain in public and tax administration

For several years Several blockchain applications were investigated and one of the main applications focused on the financial sector related to the issuance, insurance, negotiation and settlement of securities. also in logistics and also with intelligent contracts;; However, there are other areas such as the public sector where it has been shown that using blockchain can be useful for managing and managing public resources.

Before proposing blockchain as a solution, you must first identify the problem. With that in mind, we must first consider how broken the system is. With that in mind, we can find two important aspects: the gaps that exist in tax and tax issues.. In the first case, there are problems such as tax evasion or tax refund requests; In the second case, there are problems related to the differences between taxpayers’ tax amounts and the amounts actually recovered.

While many countries have made efforts to put in place tighter mechanisms for tax collection and evasion, we still do not have a global information management system that allows reliable verification of the economic activities from which certain countries originate. The fact that there are processes that are carried out manually creates several operational problems. For example, if the US buys raw materials from Mexico and the processed product is then sent to a European country, the origin of the activities must be present, which in practice is quite complex. In this sense, a proposal with great potential is the use of blockchain as a technological tool to automate these processes globally. In this context, The main countries that have used technology in their processes are:

  • United Kingdom. The UK Science Bureau indicated that the use of blockchain in the public sector has the potential to 1) improve the protection of infrastructure and critical data, 2) reduce operational costs, and 3) promote transparency and the traceability of transactions.
  • Estonia. In early March 2016, steps were taken to create a prototype capable of storing a million individual health records in a distributed ledger.
  • Honduras and Georgia. Blockchain has been used in both countries to improve public property records.
  • Denmark. Authorities have even considered introducing a blockchain-based equivalent of the local currency to save costs and enable small and microelectronic payments.

Blockchain as a proposed solution

Blockchain in public and tax administration
Blockchain in public and tax administration

In a pure form, blockchain represents a kind of database that allows the recording of transactions that are distributed among all participants on the network and keep a copy of the accounting book that is difficult to breach because they would have what attack each of the copies at the same time . The use of the blockchain consists not only of a database, but also allows a copy to be discussed in each of the nodes (devices) participating in the blockchain. This is possible because each block in the chain has a link to the previous block as well as the proof of work (proof of work) and a list of all transactions. Each of the previous blocks is encrypted using a hash function. This prevents illegitimate blocks from being added to the valid chain. The importance of the above lies in maintaining a chain of valid or legitimate blocks. One of the main features is traceability, a form of testing as there is a complete history of the instructions carried out, including the information. In terms of decentralization, blockchain makes a process more reliable because operations don’t depend on trusting third parties.

tax evasion

As mentioned earlier, one of the biggest problems governments face is tax collection. Many countries suffer from the difference between what should be collected and what is actually collected. Much of this problem is due to the lack of an effective mechanism for everyone to make their statements. Additionally, there is another important gap in relation to people’s income levels and what it would mean for them to say what they earn. For example, the UK reported in 2017 that approximately £ 34 billion was undeclared. Many countries consider one of the main reasons companies have the ability to manipulate their returns in order to obtain a tax advantage. In transnational corporations, for example, it is complex to test how profits can be made in a given country through the flow of foreign and domestic transactions and, additionally, through communication with the tax systems of the various states.

Some earlier aspects of using blockchain in relation to taxes included crypto assets to collect and refund cross-border VAT, the elimination of invoices through distributed ledgers or customs declarations presented directly by the container ships. An approved blockchain (the combination of a public and a private blockchain) controls access to the participants in certain processes. It is also possible to manage the identity, which can be managed using certificates. This type of blockchain could be the answer to the question of taxes. For example, the governing bodies would manage roles and permissions so that only those who are part of a transaction can view the private details. In general, blockchain for tax collection has the following advantages:

  • Eliminate a single point of failure for the entire system.
  • With the decentralization of power, there are fewer opportunities for a corrupt system.
  • Transactions cannot be reversed.
  • By using cryptography, you can avoid counterfeiting as it guarantees that transactions can only be carried out between the parties and are only validated by the participants.
  • Avoid replication errors and delays when working with a large number of parties worldwide.

Each region or country that was part of the blockchain would manage its own tax rules at the local level while being synchronized with tax information at the international level. Alternatively, this would solve most logistical problems such as: B. Contracts, administrative staff, time, etc. It would also be possible to achieve effective communication between the tax authorities of different countries, since the information is synchronized in real time. This type of blockchain is useful when different organizations are in the same industry as they can exchange information with other actors;; In addition to setting more flexible rules so that the information was only available to authorized persons, e.g. The visibility of the blockchain would be limited to certain validators who could change the rules through consensus to avoid discretion.

Various agencies have been investigating the implementation of blockchain to fight tax evasion through data tracking. In Denmark, for example, the maritime authorities have started a pilot project to register ships in blockchain to ensure tax payments.

Billing

One of the most important processes involved in making declarations is issuing invoices. For decades, countries have suffered from the problem of incorrect accounting. In Mexico, for example, tax fraud has reached significant levels in what is currently a serious crime that is classified as “organized crime”. Data reported by the Tax Administration Service showed a bypass of around $ 16 billion over the past five years in 2019, which is 1.4 percent of gross domestic product (GDP).

If blockchain were used, these invoices would be registered and a digital fingerprint could be considered to ensure authentication (as banks already do to match a user with a bank account). This solution would also make it possible to check this bill in real time and simultaneously by the participants, for example those who are in the administrative offices, the user or someone who is in customs. Anyone connected to an approved tax auditing program can instantly remove the entire chain of an item from a valid invoice. An example of this is the UK, where one of the proposals was to create a unilateral system to follow up on all VAT transactions. One of the most important challenges in the implementation of the blockchain in the public sector is the political orientation and the involvement of the industry, i.e. all parties involved have the same level of development so that there is coherent coordination (Government Office for Science, 2016).

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Customs tax is largely based on reliable information that enables validation of the origin and destination of goods. It is important to know how these goods are classified, or how they will ultimately be used, as we can determine whether or not they comply with the regulations of the destination country. As a result, such information becomes essential to guarantee payment. The main problems in this process can be that the information provided by third parties has to be provided by other departments within the organization. The presence of errors in the information can lead to delays in the arrival of the goods or even to fines. Taxes on goods or services or VAT depend on the time and place the transfer was made. For example, how could we legally hand over the goods on container ships when they are in the arrival process?

Sometimes it happens that traders and customs brokers do not have the information or evidence required to obtain certain exemptions, such as those granted through free trade. In this sense, with blockchain, customs authorities could have access to records to reliably and accurately verify the origin of the finished products and processing in real time, and not only that, but information about raw materials would be possible. For example, customs could automatically collect customs duties when goods cross each border, eliminating the need for third party declarations. In addition, this would benefit the security of the supply chain as the immutability of the blockchain would offer a higher and less official level of inspection.

Tax conversion

The tax refund problem becomes complex as cross-border claims are not controlled as there is a risk of them being duplicated as in many cases the system does not provide evidence of the transactionality or the geographic region that is known to the applicant’s right. For example, in 2015 the Danish authorities reported a loss of around $ 1.8 billion in false tax refunds that were claimed (Skatteministeriet 2016).

In the financial markets, on the other hand, there are a number of growing investors, many of whom are making taxable profits. With that in mind, there are bilateral double taxation treaties that indicate that the country where they made a profit must have a source tax withheld (e.g. the organization paying the dividend) and the investor one Foreigners can apply for a tax credit (PwC, 2016). The problem in this area arises when companies are based in different countries at the same time and there is no adequate control over the compensation, as the residence documents may be forged. With this in mind, blockchain can improve the flow of information and avoid double spending, as it can create an immutable record of all historical transactions in the absence of an alternative system for tracking the flow of cross-border dividends.

Indirect tax

Within the financial sector we find the part of indirect taxes that takes into account consumption taxes, sales, value added tax, duties and tariffs, the environment and energy. Essentially, the tax is in any case derived from the manufacture, export, import, exchange of a good or the provision of a service. This transaction must be securely recorded for tax obligations. Tax registration must be reliable and accurate, otherwise negative effects could arise. With that in mind, blockchain could be included in different jurisdictions, for example those in charge of tax administration, thus enabling the exchange of tax information between taxpayers and tax administration offices.

Public spending and social support

One of the main public policy problems is the diversion of public funds to social support. In this sense, the cases of fraud and errors in the distribution of support show how the assignment of digital identities to citizens improves the exchange of information between public bodies in order to manage the eligibility. In addition, it would enable citizens to receive financial assistance directly from any device that has an electronic cryptoactive wallet. For example, an international agency could provide funding to people in need of assistance without the need for an administrative intermediary. The fact that blockchain allows a central bank or even a government to be bypassed (as part of international support from international non-profit organizations) would enable the reduction of transaction costs, as well as the restrictions that may come with a country’s currency, as well as providing evidence of the use of the Funds also available.

With regard to public spending, a government agency can automatically track purchases, transactions, payments and invoices so that accountants can review information in real time. The relevance of using blockchain in this space goes beyond ensuring that the funds are used solely for the purpose intended. With this technology, those contributing to taxes could have the capacity in which sector their funds would be destined. Contractors and auditors could also be involved in tendering procedures for work. For example, blockchain could be used to develop an application that could monitor the progress of any project through to completion, with the funds allocated being completely transparent. Registering all information would prevent the information from being tampered with, thereby providing greater security and transparency.

Reversibility and dispute resolution with smart contracts

Other situations can arise in international trade, such as: B. Transaction, Refunds, and Dispute Errors. This aspect is also complicated when there are different jurisdictions. With this in mind, blockchain can also support the implementation of a smart contract that supports:

  1. The information cannot be deleted.
  2. The data can only be saved in the smart contract and cannot be duplicated.
  3. Disputes can be resolved through a democratic process while preserving the anonymity of the parties.

Implementing Smart Contracts adds great value to this process as governments and companies can resolve disputes that are not necessarily judicial.

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