4 minute read 7 Jun 2019
cryptocurrency mining rig from computer

How blockchain can support ‘smart’ contracts

By EY Global

Multidisciplinary professional services organization

4 minute read 7 Jun 2019

Automating the processes of applying, documenting and defending transfer prices is clearly attractive, but is it feasible? The short answer is yes.

Tax professionals should be aware that blockchain technology has the potential to revolutionize the taxation of transactions as well as their record keeping, but we believe the technology even has the potential to automate many processes within the transfer pricing world. But first, a few blockchain basics.

The signal achievement of blockchain technology is enabling the secure transfer of digital assets without a central authority, bank or any other mediator between the two parties to a transaction. A peer-to-peer network of computers equipped with cryptographic algorithms examines each new transaction, comes to a “consensus” about its validity and either validates or rejects it. A nearly real-time record of transactions occuring through the network is visible to all participants, achieving unprecedented transparency.

Three types of blockchains

  • Public blockchains, such as the ones that host cryptocurrencies require tremendous processing power.
  • Companies wanting a smaller network create private blockchains, granting permissions to participants: read only, limited transactions, etc., as in a traditional corporate database. Notice that the company must reintroduce the central authority itself, but still benefits from blockchain’s unique accuracy and transparency, potentially also permitting real-time auditing by regulators.
  • Finally, there is the consortium blockchain, common in banking, which may grant reading rights to many people or even everyone, but which limits the consensus mechanism to a few trusted parties, achieving faster processing.

All three blockchain types support “smart contracts,” computer programs that self-execute the terms of an agreement when predefined conditions are met by transacting parties, greatly reducing or eliminating the costs of coordination, monitoring and enforcement. This is one of the features that differentiates a blockchain from a traditional database or an enterprise resource planning (ERP) system.

A multitude of blockchain applications is springing up (see table below), and governments are thinking that blockchains can help address some of the challenges of taxing the digital economy. Estonia, Luxembourg, Singapore and India are among the first movers, and developing countries hope blockchain technology can help them leapfrog more-developed economies.

Industrial applications of blockchain technology

Automotive Platform for autonomous vehicle fleet management
Banking Optimization of global internal treasury operations
Finance Settlement of securities transactions
Food and beverages Tracking of ingredients of groceries; authentication system for wines
Health care Digital record keeping
Insurance Acceleration and simplification of captive insurance transactions
Life sciences Product life cycle management
Music Digital rights management
Real estate Decentralized global home rental platform
Various industries Supply chain management

In other words, if you have not seen it yet, you are likely to see blockchain soon on a cloud near you.

Potential applications for transfer pricing

Given the characteristics of blockchain, it’s not surprising that tax professionals are intuitively accepting the idea that value-added taxes (VATs) and other transaction taxes are candidates for management on a blockchain. How about transfer pricing?

Considering the complexity of intercompany transactions and governments’ demand for transparency, automating the processes of applying, documenting and defending transfer prices is clearly attractive, but is it feasible?

The short answer is yes. There is no reason a multinational enterprise (MNE) could not reliably use blockchain to track its intercompany transactions and to make payments according to pre-established, arm’s-length conditions via smart contracts, when the necessary conditions are met. Intangible assets could be tokenized, with a token representing the entire intangible asset or a defined fraction of it.

This could prove especially valuable for transactions involving shared asset ownership, cost contribution arrangements and the application of profit split methods. Companies could also use blockchain technology to optimize intra-group treasury transactions, including intra-group current accounts, cash pooling, other types of lending transactions and guarantees, among others.

If a company’s vendors and customers are also invited to join a private blockchain, it can track and display an entire supply chain, complete with documentation and real-time visibility of all its transactions. It’s even possible that with blockchain’s increasing adoption, new sources of bigger and better data will enable a more frequent application of the comparable uncontrolled price method for establishing arm’s-length prices between MNEs and their subsidiaries and related groups.

Tax needs to jump in

While blockchain enthusiasm is still mostly in technology and cryptocurrency circles, the tax function needs to be an early participant to resolve questions such as:

  • How can companies’ ERP data be made fit for blockchain?
  • How will tax compliance change with blockchain?
  • How will the scope of work with accountants and auditors change?
  • Will blockchain solutions, potentially also cloud-based, be compatible with the bookkeeping requirements and regulations in each jurisdiction?

While the technology is deemed to be secure, or at least more secure than others, questions around the correctness of the content remain. Governments may be eager to embrace greater transparency and the potential to perform real-time tax audits. But they may also be wary about the potential downsides, wondering if the use of private or consortium blockchains will indeed provide appropriate information and how harmful leaks of stored information may be prevented to comply with traditional secrecy for tax matters.

So far, blockchain technology has received sensible praise and skepticism. We are thrilled by the challenge of understanding its promising implications for the tax world, and we urge our colleagues in the tax function to join in shaping this exciting future.

Reproduced with permission from Tax Management Transfer Pricing Report, 27 Transfer Pricing Report, 7/12/18. Copyright [1] 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com .


Blockchain can enable a nearly real-time record of transactions throughout a network that’s visible to all participants, achieving unprecedented transparency.

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By EY Global

Multidisciplinary professional services organization