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?