What is Blockchain?
Blockchain technology is a revolutionary system leading the platform for digital assets. The ingenious invention is the root of the application named Bitcoin (Blockchain is often confused with Bitcoin), that allows for the transaction of ‘digital currency’ without intermediaries such as banks. Blockchain technology has an incredible scope for much more however, as it can be implemented to create payments, verify audit trails, and for the registration of digital assets. The author of ‘Blockchain Revolution 2016’, states that blockchain is a “digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” With its ability to automate calculations, increase the transparency and accuracy of transaction data, and its decentralized core, this technology can radically transform the economy in the near future.
Blockchain transactions and accounting
Blockchain will significantly affect transactions. First of all, the technology will provide long-term solutions reducing the administrative burden on tax systems. There are claims that Blockchain transactions can further be applied for verifying transfer pricing. In general, the technology also provides more transparency between clients and customers, and increased control and security as data online cannot be altered or tampered with. Detecting errors and fraud is suggested to become easier with Blockchain, as the system provides clear information, accessible to everyone within the decentralized network. Lastly, data is updated in real-time for everyone in the network simultaneously, reducing chances of miscommunication. Every time a Blockchain transaction takes place it is registered on both parties ledgers in real-time eg: Company A buys a PC from Company B, utilizing Blockchain it will register at the same time on both companies’ ledgers the asset that was purchased by A and sold by B and the agreed amount, leaving no space for differences between ledgers.
Blockchain and Tax
Blockchain can shape Tax Automation greatly, it has the ability to implement smart contracts which can automate the process of payments, transfer and the recording of assets. Automation of calculations for taxation can become more efficient and time-saving. Moreover, Blockchain can pave the way for more advanced levels of transparency, immediacy and security with reporting, as more countries make progress towards digital tax reporting.
Blockchain implications on VAT
Blockchain will have a huge implication on how VAT is recorded and will help to fight VAT fraud. Some of the possibilities for VAT reporting:
- Real-time registration of VAT on both parties – both buyer and seller have a copy of the VAT related data leaving no space for differences.
- No duplication of entries – Since the registration of a purchase of Item A for 10 Eur is processed in real-time for both buyer and seller, there is not any possibility for duplication of entries
- Single use – when the system records the purchase of one unit of Item A by 100 Eur and the company wants to sell it Blockchain ensures that the exact ownership of item A is transferred.
- Digital signature – All transactions have to be digitally signed meaning it is possible to prove that a product has been sold as someone from Company A has approved the transaction utilizing their credentials. Digital credentials are much safer than a paper signature of even email approvals.
- Real-time – Blockchain transactions can be confirmed in rea-time making the actual transaction much quicker in comparison with today’s processes concerning, stocks, property, assets, etc.
- Digital contracts – A transaction in Blockchain from Company A to Company B of item Z, registers both what’s item Z, the value of the transaction and its provenance, leaving no space for the wrong usage of VAT rate.
Still early stages
However, some of the negative implications associated with Blockchains also need to be considered. It is argued that the initial cost of implementation is high, many companies may be deterred as a result. Furthermore, other hurdles to overcome are the lack of privacy, lack of agreed standards, and limited scalability of blockchains for transactional purposes.