Block leakages, streamline tax payable more efficiently and effortlessly, track paid taxes in real-time are what an ideal tax administration looks like in a 21st-century compliant economy. As actionable as these nuggets are countries and systems globally are still a mile away.

What would it mean for you if all government tax processes is transparent enough to be tracked? How thrilling will it be for you to have a seamless tax transaction? It will interest you to know that these can be the reality and not wishful thinking.

You have heard about cryptocurrency right? I bet what you don’t know is that the technology behind cryptocurrency; Blockchain can birth the ideal tax administration

It is on this note that we bring to the fore the potential of Blockchain Technology as a proven solution to these downsides experienced by the tax administration.

Just before we commence, with this article, you are expected to:

  • Understand the Blockchain Technology Ecosystem
  • What countries are doing with blockchain technology
  • How Blockchain can Improve tax administration

Let’s dive in,

UNDERSTANDING BLOCKCHAIN ECOSYSTEM 

The ability to exchange information directly in real-time between two or more participants in a pair-to-pair network represents the kernel of blockchain technology. It eradicates the involvement of a third party or intermediary. 

Technically speaking, a blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. It is made up of blocks where a block in the chain contains several transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. 

Blockchains are used across different sectors and come in three major types. These types are the Public Model which allows for open and anonymous participation, an example is Bitcoin; Private Model which is obtainable when a party defines the rule and supervises compliance; Closed Ecosystem where each participant is identified, allowing the creation of organizations or groups for a particular purpose.

WHAT COUNTRIES ARE DOING WITH BLOCKCHAIN TECHNOLOGY

Tax administrations globally continue to explore ways to shore up tax collection, hence the use of blockchain. Check out interesting highlights across countries below:

  • The Federal Tax Service of Brazil in October 2020 has implemented a blockchain network that connects customs in Brazil, Argentina, Paraguay, and Uruguay to ensure the authenticity and security of customs data shared between the Mercosur countries. This innovation will ensure real-time deduction in customs duty and adequate tracking of taxable goods. This also aims at reducing the VAT fraud prevalent in intra-community transactions.
  • China uses the technology to combat fake invoices, especially in Beijing with a goal according to the Chinese  Government to provide more transparency to taxpayers, reduce operating costs, save social resources, increase consumer convenience to save invoices, and create a healthy and fair tax environment.
  • The Tax Agency of Thailand is implementing blockchain in VAT refunds.

Other countries are also joining the fray.

  • In Finland, the Tax Administration works in close ties with banks on a blockchain system to track taxes on real estate transactions.
  • In Sweden, blockchain is being tested to digitize receipts, non-resident income tax, and customs duties.
  • Estonia has moved several government services to a blockchain system, including banking, health, and business records.
Electronic bill, online payment SMS notification, pay history, finance data protection, a smartphone with a credit card and shield isometric vector illustration on blue background. Photo Credit: Freepik.com

HOW BLOCKCHAIN CAN IMPROVE TAX ADMINISTRATION

  • Since blockchain can be used to capture information both locally and internationally in real-time, the tax administration in Nigeria can leverage this to capture potential taxpayers across sectors into the tax net.
  • Tax administrations with access to the blockchains of multinational companies could carry out real-time tax audits.
  • A key potential to be harnessed by the administration based on blockchain is in the area of transfer pricing. This potential can be realized due to the capacity of blockchain to systemize and automate, adding significant transparency into tax audits.
  • Another potential way to leverage the technology is hinging on pre-filled tax returns, where the tax administration could use a database with blockchain to supply them with taxpayer’s details, thus making the process more efficient.

Summarily, blockchain is capable of injecting transparency, efficiency, data integrity, and security into the tax administration.

The potential of blockchain technology is enormous, hence the tax administration has to:

  • Increase digital literacy amongst its officers not neglecting the end-users who represent the taxpayers.
  • The need to ensure a clear operational framework is also necessary as this will incorporate users, initialize processes, and integrate with existing systems.
  • The above is because, while blockchain can ensure that third-party information is accurately collected and disseminated, the technology, as conventionally described, cannot control input errors. This is also based on the garbage in; garbage out the principle of every created computer system.
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