If you are an Indirect Tax executive, chances are you have heard about blockchains (also known as distributed ledgers). But you may not yet have been involved in detailed discussions about their impact in your business — or about the implications for value-added taxes (VAT) and customs duties or other indirect taxes. If that’s the case, now may be the time to get involved.
More and more companies are considering how blockchains and smart contracts could disrupt their industries.
“Blockchain technology could fundamentally transform how businesses and indirect tax administrations operate and interact.“
At EY, we are also engaging with our clients in exploring how blockchain applications could solve a wide range of issues across their enterprises.
Some companies are now beginning to explore these possibilities in earnest. Currently, most projects are at the pilot stage; but at least some of them look set to become realities soon.
When they do, adding indirect taxes into the mix could significantly boost the business benefits that these applications aim to deliver, while reducing the risk that new ways of doing business could result in unintended indirect tax consequences.
Examples of some blockchain applications and their possible indirect tax implications
- Cryptocurrencies — virtual currencies used to pay for goods and services (such as bitcoin). A number of countries have taken a position on the VAT treatment of cryptocurrencies and related transactions. Indirect tax administrations could also adopt these currencies to receive payment for indirect taxes and duties (e.g., VAT coin).
- Procurement — by providing accurate and immutable information, blockchains can enforce compliance with procurement and settlement terms for materials used in product manufacturing. The application can increase supply chain security, ensuring that only approved products, suppliers and purchase orders are used and that variable pricing and volume discounts are applied correctly. This application could reduce the administrative time and manpower costs needed to calculate and agree payments. It also could have a wide range of implications for indirect tax reporting.
- Blockchains for food and drink manufacture (from field to fork) — consumers can verify the origin, quality, authenticity and sustainability of every delicatessen or bottle using its label. This application could allow verification of the safety and authenticity of ingredients used in the manufacture of food and drink. It could also be used to track raw materials, semi-finished goods and finished products of all types throughout the supply chain, including across borders. This could reduce fraud and illegal traffic in goods, as well as favor automatic offset of input VAT and output VAT.
- Consignment stock — confirmation of amounts supplied to a pharmaceutical company for raw materials stored onsite at its premises, allowing automatic invoicing and settlement with the supplier as product is used. This application could also be “indirect tax sensitized” to incorporate indirect tax reporting obligations, including dealing with the EU consignment stocks VAT simplification and self-billing for VAT.
- Marine insurance — automatic settlement of an insurance contract for an insured cargo on its arrival at an agreed port (verified by GPS trackers in the cargo). This application could also be used to automatically complete the payment and reporting for a range of indirect tax and trade obligations, such as settle fees, indirect taxes and duties related to the cargo, and support entitlement to benefits under trade agreements.
What is blockchain?
A blockchain may be defined as a distributed ledger of transactions. Like a traditional ledger, individual transactions (unique blocks) are added to the ledger (the chain) and never removed.
If you have access to the latest block, it is possible to access all previous blocks linked together in the chain. A blockchain database retains the complete history of all assets and instructions executed since the very first one — making its data verifiable and independently auditable.
Trust in the ledger comes from the process itself rather than from the status of any one participant. In this secure, shared database, participants have their own copies of the stored data.
Strong cryptography provides that transactions can be initiated only by certiﬁed parties, that changes are validated by participants collectively, and that the outputs of the system are immediate, accurate and irrevocable. Distributed ledgers are inherently harder to attack, as a cyber attack would have to attack all the copies simultaneously to be successful.
Therefore, a complete audit trail is maintained throughout the chain by the distributed nature of the information. Anyone with the appropriate encryption rights can access a copy of that ledger and verify past transactions without having to trust the participants in the original transaction.
What does blockchain mean for indirect tax?
You do not need to understand how blockchains work to think about the indirect tax consequences, or to get involved in discussions about their impact in your business. Rather, focus on the benefits of blockchain and the business issues that this technology could address.
For example, if the blockchain would allow your company to trust unrelated suppliers’ transaction data because they could not be altered, could that benefit also be used to improve the accuracy of your VAT reporting or your defense position during a VAT audit?
Some issues to consider
- Could you add value to any planned blockchain projects your business is considering, for example by adding indirect tax reporting capabilities, efficiencies or savings or by eliminating indirect tax risks?
- Could blockchains revolutionize reporting for VAT and customs duties?
- What could be the indirect tax risks of blockchain applications?
- Are there any indirect tax opportunities?
- What could be the implications for your indirect tax strategy or indirect tax risk profile of changing business models, adopting a decentralized structure, or if value is created in new ways?
- What would be the impact of having improved data quality and immediate real-time information, or of changing invoicing, settlement or reporting?
Asking these types of questions can help you identify where indirect tax may play a part in your company’s blockchain plans.
Examples of the indirect tax implications of using blockchain
- VAT — eliminating or reducing fraud by having full audit trails, automatic settlements and identity management
- VAT, customs or excise duties — reducing fraud and improving indirect tax collection by using cryptocurrencies (e.g., VAT coin)
- Global trade — reducing the time taken to move goods cross-border by using blockchains to authenticate traders and goods for customs purposes (e.g., for granting authorized economic operator status and using green lanes). Reducing transport time supports the efficiency of cross-border supply chains (e.g., for perishable goods) and just in time manufacturing.
- Excise taxes — using blockchains created for excisable products (mineral oil, tobacco products, wine and beer) to calculate duties more accurately, reduce smuggling and counterfeiting and track cross-border movements
- e-invoicing — providing automatic settlement and payment and fully authenticated matching documents between suppliers and purchasers (e.g., allowing automatic matching of input and output indirect tax and avoiding the need for self-billing for consignment stocks)
- Customs duty — allowing increased used of customs regimes and free trade agreement duty reductions by allowing traders to prove the origin and provenance of goods (e.g., imported goods used in manufacturing prior to export)
Start the conversation
Blockchain technology could fundamentally transform how businesses and indirect tax administrations operate and interact. If your colleagues are talking about using blockchains, you need to be part of the conversation!