The invoice is the most critical VAT document. In a blockchain-based regime, it is likely that for a VAT invoice to be valid, it will require a digital fingerprint, derived through the VAT blockchain consensus process.
The fingerprint would immediately confirm that the block under scrutiny is permanently linked to the previous and subsequent blocks. The entire history of the commercial chain (forward and backward from this transaction) could be followed and scrutinized by a tax official in an office, by a robot or by a customs officer at a border.
Anyone connected to an approved tax-auditing program could immediately pull up the entire commercial chain for an item from a valid invoice.
Customs declarations and export controls depend on detailed, accurate information to prove the origin and destination of goods, their end use, and their composition or classification, not only to ensure the correct payment of duties but also to satisfy regulations that forbid trade in illegal or dangerous substances.
The veracity and reliability of this information is vital, but certainty can be difficult to achieve as the necessary details are often provided by third parties, and they may be extracted from a range of systems within an organization. Errors can lead to penalties, lost opportunities and costly delays in transferring goods across borders.
Often it is difficult for traders and customs brokers to provide sufficient information or documentary proof to benefit from any potential reliefs or reductions (such as those available through a free trade agreement, for example). However, if the items were traded in a blockchain and the customs authorities had access to the chain, they could verify with complete accuracy the origin and nature of the goods at every stage of the chain.
This would not only apply to finished products but also to raw materials, components and semi-finished goods. Customs authorities could, for example, collect duties automatically as goods transit across borders, cutting out third-party declarations. And as this technology would allow them to verify every aspect of a shipment with certainty, they could maintain supply chain security with fewer officers who could target their inspections more accurately.
Supporting refunds, reliefs and rebates — and combatting fraud
The use of immediately verifiable information could allow taxpayers to support claims for VAT and GST deductions and customs rebates and reliefs.
Fraudulent and incorrect claims for input tax deductions pose a severe threat to many VAT and GST systems. Currently, a VAT payer who has a valid tax invoice or customs declaration (or what appears to be a valid document) is entitled to offset the VAT shown on the document as input tax against VAT charged on sales (output tax) or to claim a refund if there is no output tax to offset.
This applies even if the supplier has not paid the tax due. A valid VAT invoice serves like a check on the tax office, and the tax administration may permanently be out of pocket if the document used to claim the input tax is false or if the supplier who has issued it acts in bad faith and does not pay the output tax shown.
The most familiar scam in the European Union is the Missing Intra-Community Trader fraud, but that is just one manifestation of the danger that dishonest traders can pose to an entire system: VAT revenue lost through fraud in the EU is estimated at EUR 100 billion per year. Customs fraud also takes its toll as, for example, shippers mask the true origin of goods to qualify for preferential import duties or free trade agreements.
Tax and customs administrations combat fraud by demanding high levels of accuracy for accounting and reporting to support indirect tax filings and customs declarations. However, these demands can create significant compliance obligations for taxpayers and cross-border traders.
The speed, accuracy and transparency of blockchains could help to alleviate these burdens for taxpayers by decreasing the risk of fraud. Where blockchains can allow sensitive or valuable data to be passed with accuracy and trust, it is not surprising that they are becoming more commonly embedded in day-to-day business processes. Governments and regulators are already looking to them to solve some common issues created by poor recordkeeping or that require high levels of proof such as identifying land ownership rights.
We’ve seen how clever criminals can be, so we can’t assume blockchain will eliminate fraud, but using a blockchain to collect and offset tax could greatly reduce this risk. The output tax on a transaction could be taken by the tax administration when the transaction took place, and the right to offset input tax could be verified immediately but only once the tax was paid.
Using blockchain regimes, indirect tax administrations could carry out independent risk analysis facilitated by artificial intelligence. Because the indirect tax blockchain regime would probably be linked to other government sources, the auditors could have immediate access to large numbers of public and private databases and large amounts of taxpayer and comparative data.
Statistical anomalies could be identified in real time, and the relevant authorities (including those in other countries) could be alerted.