Blockchain boasts an incredible potential to disrupt and revolutionize many an industry, including Finance and Accounting. One area, specifically, that has room for a technological shake-up is Value-Added Tax. Along with Artificial Intelligence and automations, blockchain can contribute to making the collection, tracking, reporting, and recovery of VAT practically seamless.
What is blockchain and how is it relevant to VAT?
Blockchain began life as an accounting method for Bitcoin, a decentralized digital currency, which you may have heard referred to as a cryptocurrency. Blockchain has since blossomed into a technological innovation with an ever-growing variety of applications. Using distributed ledger technology (DLT) where transactions are processed and stored across a network of distributed devices called nodes, the blockchain can be used to verify transactions, store information, provide a digital “paper trail,” and ensure real-time updates. The transactions can represent almost anything. They can be instructions to buy/sell stock, an actual exchange of money, and exchanges of other assets– from stock certificates to property deeds.
When it comes to VAT technology solutions, blockchain can be instrumental as a companion to intelligent, deep learning automation solutions, such as VATBox. There are many potential benefits to using blockchain’s distributed ledger technology even if your business does not process any cryptocurrency transactions and does not plan to accept or use alternative currencies any time soon. Blockchain technology can be used as a ledger for information of any kind, with or without cryptocurrency involvement.
If you’re having a hard time conceptualizing the blockchain, think of it as being similar to a database or spreadsheet. The difference is, identical copies are stored on every node, so there is no central copy that can be hacked or compromised. With this fancy database, no transaction is too small or insignificant, information cannot be corrupted because it is verified by a decentralized consensus, and the likelihood of errors is minuscule. This is essential for VAT recovery as VAT compliance requires careful and accurate collection, tracking, and reporting of transactions involving Value-Added Tax.
It is clear that tax rules and solutions must adapt to the many fast-paced changes in technology. Not only are the relationships between taxpayers and tax authorities changing as the digital landscape changes, but the nature of storing and submitting tax-related information is changing. Tax authorities are optimistic about the potential for greater efficiency and compliance with the implementation of new digital technologies, and taxpayers are equally optimistic about the potential for an easier, less time-consuming filing process. Blockchain is one of the most promising opportunities for advancing the VAT technology landscape because of its many attractive features.
Features of blockchain that make it attractive for VAT
Blockchain technology has several useful characteristics which minimize errors, increase efficiency, track the smallest of micro transactions, and maintain a tamper-free record with real-time updates. With these characteristics, blockchain has the potential to increase a business’s VAT recovery rate and compliance.
In fact, for tax advisors, the potential of blockchain brings to mind applications for tracking indirect taxes such as VAT, GST, and sales taxes. These taxes often follow chains of transactions and their tax liabilities. For instance with VAT, where tax is assessed at each point where value is added for a service or product, tracking the entire chain of transactions would make it much easier to ensure accuracy and compliance. Tax obligations are often triggered by key events that need to be documented and recorded securely, such as delivery of goods, the conclusion of a contract, and the export and import of goods and services. Blockchain maintains a complete, tamper-free chain of transaction information, which makes it particularly appealing for tracking tax data.
Taxes can be complex. Determining the how, where, when, and what type of tax applies in any given situation depends on complex knowledge that must be applied correctly for every transaction. Collecting the correct amount of tax depends on accurate, “real time” information and decisions. Tax errors, lack of data, and fraudulent activity can all have a significant impact on compliance and recovery. Blockchain provides a way for all applicable parties to have access to up-to-date, real-time information by ensuring all nodes have the same information at all times.
Real-time tax data is increasingly important as tax administrators around the world are demanding real-time information from businesses in order to assess and support their VAT and GST liabilities and deductions. From a tax administrator’s perspective, blockchain can greatly increase the speed, accuracy, and ease of collecting relevant tax data, thereby improving the quality of VAT and GST compliance while reducing the cost of enforcement. From the business’s perspective, blockchain can ensure higher rates of VAT recovery with less burden.
As blockchain becomes more and more prevalent and is applied in various arenas, it is important to consider how blockchain might impact VAT, specifically, including impacts to documentation. When it comes to VAT, the invoice is the most critical VAT document. A possible consequence of moving to blockchain is that a VAT invoice may require a digital fingerprint to be considered valid. Derived through the VAT blockchain consensus process, the fingerprint would immediately confirm the block under scrutiny is permanently linked to the previous and subsequent blocks in the chain. The entire history of the commercial chain could be followed and verified by anyone connected to an approved tax-auditing program.
Combating tax fraud and errors with blockchain
Because blockchains allow sensitive and valuable data to be transferred accurately and securely, it is not surprising blockchain is becoming more commonly embedded in day-to-day business processes and being considered for tax applications across the world.
Tax and customs administrators combat fraud by demanding high levels of accuracy for accounting and reporting to support indirect tax filing and customs declarations. These demands can create significant compliance burdens for taxpayers and cross-border traders. The speed, accuracy, security, and transparency of blockchains could help to alleviate these burdens for taxpayers while decreasing the risk of fraud.
For example, blockchain provides transparency and traceability of all transactions by storing every detail of transaction history in blocks, making it easier to ensure all VAT data is accounted for, no matter how small the transaction might be. Data is validated by a consensus of trusted nodes, which means errors are likely to be detected and eradicated before they become a problem, and devices introducing errors lose their status as a trusted node. Records cannot be tampered with or erased because they become part of the chain itself, which makes blockchain an ideal method for preventing tax fraud.
Blockchain has other useful features as well. Communication can happen across multiple ledgers, helping to integrate all your data. Blockchain offers user controls, which means only identified users with appropriate user permissions have access to information, and this information is updated in real-time such that everyone with access has up-to-date information. As for efficiency and speed, when blockchain is set up with appropriately planned incentives for nodes, transaction speeds can be lightning fast because the fastest devices on the network are rewarded for responding quickly.
New possibilities for blockchain technology are being developed every day. There are countless iterations and variants in development with the potential for revolutionizing how businesses process, store, and track information. With so much blockchain potential out there, applying distributed ledger technology as a part of a business’s VAT technology seems a likely near-future reality. It is only a matter of time before blockchain-based applications are coupled with artificial intelligence, robotic process automation, machine learning, and the Internet of Things.
In the long run, blockchain can be a driving factor in implementing real-time, automated tax processes that ensure compliance, maintain security and transparency, and ease the burden of tracking and reporting taxes.
To learn more about how VAT automation can help your business, contact VATBox. VATBox has successfully streamlined the VAT recovery process, providing businesses and financial institutions with unrivaled visibility, compliance and data integrity. Leveraging the cloud and utilizing full automation, VATBox exhibits complete control of a company’s VAT spend, while making the recovery process more productive and yielding higher returns. To learn more about how VATBox’s AI-driven solution can help your company thrive in today’s complex financial times, request a free demo.