By Vincenzo Villamena, CPA
Blockchain was originally designed to facilitate transactions of the cryptocurrency Bitcoin. But Bitcoin was only the first large-scale application of the Blockchain platform. Blockchain technology has immense potential beyond just cryptocurrency transactions. It could completely change financial and business transactions, real estate deals, and more.
From a tax perspective, Blockchain has the ability to disrupt global taxation.
What is Blockchain?
Blockchain is essentially a decentralized transaction ledger, in which digital information can be distributed and viewed but not copied or altered. As a distributed database, it lives across a network of computers, which makes it exceptionally secure.
Blockchain stores transaction records in groups called blocks. Each block is time-stamped and added to a chain, linked to the previous block. It is completely transparent and cannot be changed, eliminating the need for a third party audit.
A transaction can involve money, contracts, records and other information. Therefore Blockchain is not limited to financial transactions but can be used for anything of value.
Potential impact of Blockchain on businesses
Since Blockchain technology fundamentally changes how transactions are made and recorded, the accounting industry will likely see the biggest impact.
But the disruption will not stop there. Other industry examples include:
- Real estate transactions could be greatly simplified using Blockchain technology instead of manual paperwork.
- Distributed ledgers provide an easy way to trace the origins of goods, for example for fair trade products, thus simplifying supply chain audits.
- In the sharing economy, Blockchain could enable true peer-to-peer transactions, thus eliminating the intermediary, like an Uber or Airbnb.
- Blockchain technology could take crowdfunding to the next level, potentially creating crowd-sourced venture capital funds.
- Using smart contracts, creators can protect intellectual property and sell creative work directly to their audiences online.
- Client verification, often a cumbersome manual process, could be simplified through cross-institution verification based on Blockchain. This could also have applications in anti-money laundering efforts.
- In politics and governance a distributed database could make results fully transparent and publicly accessible.
How Blockchain could transform taxation
Blockchain’s core characteristics give it significant potential for use in taxation.
Transparent real-time information
Businesses could see less cost and more efficiency, as Blockchain technology could automate the manual processing of payroll tax, employment tax and any transaction-based taxes. Instead of self-reporting, every single transaction is recorded and paid immediately, ensuring almost 100% compliance.
Blockchain could also help with verifying transfer pricing. This technology would make it easier to value the “fair market price” between a willing buyer and willing seller to ensure all related party transactions are valued appropriately. It would help make valuations more of a science than an art, and keep these valuations supportable and up to date.
Increased security and fraud protection
With Blockchain incorporated into the tax collection process, audit detection occurs automatically and instantaneously. The digital ledger cannot be tempered with once the data is entered. Any changes are fully transparent to all identified network users, thus limiting the potential for errors and fraud.
Tax authorities would also benefit from that. The transparency inherent to Blockchain would change how tax audits are performed. Some governments, such as Luxembourg, have already started to experiment with Blockchain-based solutions for tax filings and audits.
As a technology-oriented company focused on providing the best tax services to our global client base, Online Taxman is on top of the latest developments in this field. We will continue to write about the impact of Blockchain on businesses and taxation to keep our clients informed of how this may affect them.
Photo by JJ Ying