Can blockchain technology replace auditors

How blockchain could transform indirect taxation

Tax bills

The most important instrument of sales tax is the invoice. In a blockchain-based regime, a valid sales tax invoice would likely require a digital fingerprint taken from the consensus process for the sales tax blockchain.

The fingerprint would immediately confirm that the block under consideration is permanently linked to the previous and the next block. The entire history of the commercial chain (forwards and backwards from the transaction in question) could be tracked and verified by a tax officer, robot or customs officer at the border.

Anyone who has access to a suitable tax auditing program could “pull” the entire retail chain for an item from a valid invoice.

Customs documents

Customs declarations and export controls depend on detailed, correct information to demonstrate the origin and destination of goods, their end use, and their composition or classification; not only to ensure the correct payment of duties and taxes, but also to comply with regulations that prohibit the trade in illegal or dangerous substances

The truthfulness and reliability of the information are crucial here, but complete security is difficult to guarantee, as the necessary information is often provided by third parties and can come from many different systems within a company. Mistakes can result in fines, missed opportunities, and costly delays in moving goods across borders.

It is often difficult for traders and customs brokers to obtain sufficient information or evidence to benefit from possible exemptions or benefits (such as under free trade agreements). If the articles were traded in a blockchain and the customs authorities had access to them, then they could determine the origin and type of the goods in every link of the chain with perfect precision.

This would be possible not only for finished products, but also for raw materials, components and semi-finished products. The customs authorities could automatically levy the duties on the goods when crossing the border, and customs declarations by third parties would no longer be necessary. Since blockchain technology reliably verifies every aspect of a shipment, it would be possible to ensure the security of the supply chain with fewer officers who could carry out their inspections with greater accuracy.

Blockchain supports refunds, exemptions and discounts - as well as the fight against fraud

With immediately verifiable information, taxpayers could prove their right to withholding VAT, refunds and exemption from customs duties.

The fraudulent and incorrect assertion of input tax deductions is a burden on sales tax systems. It is currently the case that a sales tax debtor who has a valid (or the appearance of being valid) tax invoice or customs declaration can deduct the sales tax shown on the document as input tax from the sales tax (output tax) added to his sales or apply for a refund, if no sales tax is to be charged.

This applies even if the supplier has not paid the tax due. A valid sales tax invoice is like a check from the tax office. It causes financial damage to the tax administration if the document authorizing input tax deduction is forged or the supplier who issued it acts fraudulently and the output tax shown is not paid.

“Intra-Community Carousel Fraud” (MTIC) occurs most frequently in the EU. However, this is only one manifestation of the danger that dishonest traders pose to the entire system. VAT revenue lost through fraud in the EU is estimated at 100 billion euros per year. Customs fraud also causes high damage, for example freight carriers hiding the true place of origin of goods in order to qualify for preferential import duties or free trade agreements.

The tax and customs authorities fight fraud through high requirements for bookkeeping and reporting, on which the assessment of indirect taxes and customs declarations are based. This can result in considerable compliance obligations for taxpayers and traders operating across borders.

The speed, accuracy and transparency of blockchain technology could partially remove this burden on taxpayers as the overall risk of fraud would be lower. If blockchain enables the error-free and trustworthy transfer of sensitive or valuable data, it will - and this is not surprising - be integrated more and more frequently into everyday business. Governments and regulators are already exploring how to use blockchain technology to solve some common problems caused by poor records or those that are challenging to prove, such as real estate identification.

It is well known how clever criminals can be, so of course it cannot be assumed that blockchain will create a world without fraud. Nevertheless, using them to collect and offset taxes could significantly reduce the risk of fraud. The output tax on a transaction could be levied by the tax administration when the transaction takes place and the right to deduct would be immediately verifiable, but the deduction would not be made until the tax has been paid.

Smart audits

By using blockchain regimes, the authorities responsible for indirect taxation could carry out independent risk analyzes using artificial intelligence. Because the blockchain indirect tax regime would likely be tied to other government sources, auditors would have instant access to a large number of public and private databases, as well as large amounts of taxpayer information and comparative data.

Statistical anomalies could be identified in real time and reported to the relevant authorities (also in other countries).