Blockchain. It's a buzz word that you haven't heard the last of, and that's scary to some people. It took years for most of us to begin to truly understand bitcoin. Now, try to process that bitcoin is simply the first large-scale application of the blockchain platform. Sounds pretty daunting, right?
But it's not quite as petrifying as it sounds. For the uninitiated, blockchain is essentially a digital transaction ledger that, theoretically, is impossible to manipulate. Think of it as one central repository (like a Slack channel) where every stage of a transaction is tracked, and the logging is beyond editing or reproach.
Thus far, it's been touted as a potential game changer for financial transactions and real estate deals. But when we think of it from a tax perspective, there is certainly a case to be made for blockchain as the ultimate digital disruptor in the global taxation landscape.
Corporate taxpayers, government tax administrations, and tax advisory organizations could all be swept up in the revolution. But at this current stage, what does it mean for American businesses? That's still up for debate.
In order to get some insight into how blockchain can truly transform the taxation process both at home and abroad, I spoke with two subject matter experts from EY: Michael Meisler, Partner & Global Blockchain Tax Leader, and Channing Flynn, International Tax Partner & Global Technology Tax Leader.
"I think the blockchain is about openness: an open ledger and advancing trust. So whatever the application, the end game is about efficiency," Flynn said. "Tax payers see positives in it, because they see less cost, less payroll, and more efficiency. Tax authorities see it as having to pay fewer auditors and gaining more liquidity, because they're getting money into the coffers faster so they can do the jobs they have to do. And providers like us see opportunities to serve and help and validate that blockchain is working like it should."
Sounds fairly straightforward. So what kind of applications does blockchain have for the United States, and how can it shift the way we collect taxes?
The two told me that EY's current focus on blockchain is global, and much of the use is in countries outside the U.S., where value-added taxes (VATs) are in play. As we've discussed in a previous column, value-added tax is a consumption-based tax that is applied at each point in the production and sale of goods whenever value is added. So if you were manufacturing a car, each step of the supply chain is taxed whenever value is added, such as when a steel company sells material for the frame, rubber is sold to produce tires, etc. Expenses at each leg of the chain are used to offset the tax.
That can be an arduous task, and it's why blockchain can be such a game changer for countries with a VAT because the technology would automate much of the manual processing associated with that process. Of course, the U.S. isn't one of those countries, but Meisler still thinks blockchain could have a tremendous impact here.
"In the U.S., we don't have the VAT system, but the same basic VAT application could eventually be applied to collection of payroll taxes, employment taxes, any transaction-based tax where, rather than a self-reporting system, we could have live access to transactions and get paid immediately," Meisler said.
That paints quite the picture of a digital world where the lion's share of the work would be automated, ensuring almost 100 percent compliance at every level of taxation. It also starts to open up the possibility that, while the bulk of mainstream attention on blockchain has been focused on its potential impacts to financial services sector thus far, its implications for taxation could be just as significant.
"What we're seeing from our clients is that there are a lot of discussions about the potential uses of blockchain, and although taxation is not always at the front end of those discussions, its potential is becoming clear," Meisler said. "Blockchain has the capability to create a fundamental change in how we tax, because it creates a world where every single leg of a transaction is tracked in an immutable record, which makes audit detection risk loom even larger."
This point has not been lost on government tax authorities, many of whom are actively experimenting with blockchain-based solutions for auditing and filing taxes. The country of Luxembourg has been one of the most progressive on this front, investing heavily in a technology company called LuxTrust, which has just created a blockchain identity platform that will be used throughout the country in everything from tax filing to regulatory enforcement. China is also reportedly planning to incorporate blockchain into its tax collection process within the next five years.
As more government agencies follow suit, anyone doing business in those regions will need to keep pace, ensuring they have both the technological capabilities and the practical experience necessary to support this type of reporting.
While there are certain to be barriers to adoption along the way - whether they come in the form of new privacy concerns or plain old resistance to change - the momentum that already exists behind blockchain applications for tax is becoming harder to ignore. For businesses at any level looking ahead to the future of tax compliance, it's a good idea to start cozying up to the idea of blockchain. It's here to stay.