Goodbye, annual tax returns… Hello, blockchain

in Tax, 23.01.2017

In Charles Dickens’s David Copperfield (1850), an adolescent David works long hours to learn shorthand, a type of abbreviated language composed of symbols. The skill gives him a fighting chance for a job as a court reporter, a sound career since records of what was said in court needed to be kept, and writing shorthand was the only way.

In 2017 this profession is pitifully archaic. My question is… will the concept of annual tax returns be relegated to the realms of fiction and history in the same way? Blockchain technology suggests yes, and we can already see the framework being set down here and now.

Spoiler alert

A blockchain (also called distributed ledger technology or DLT) is essentially a permanent and immutable record of transactions – in real time – within a network. At the root of the blockchain are “digital ledgers” that are distributed amongst all network participants to serve as a common source of truth. Since the system relies on references to other blocks that are cryptographically secure within the digital ledger, it is almost impossible to falsify. It also feeds the public demand for transparency, as the ledger is public and searchable.

Blockchain technology was sung about very loudly and in a variety of melodies in 2016. While it can be applied within virtually any industry, financial services organisations have been the most active in this field as it has been able to help the industry drive its wider transformation agenda. Following this trend, KPMG Luxembourg launched a new blockchain-based digital fund distribution platform for asset managers last year called FundsDLT. The platform allows asset managers to sell funds directly to the investor and will dramatically reduce the cost of administration and the time taken to process transactions.

Other blockchains began cropping up in healthcare and other industries. But when it comes to applying blockchain technology to taxation, the first legitimate question that pops up is: what does it concretely mean for taxpayers and tax authorities?

The tax world of tomorrow

A full-blown revolution to taxpaying is not going to happen in 2017, but we can nevertheless outline a vision of the future: in essence, it looks like paying tax is going to become something that happens on the go, and in completely automated fashion. At least, that’s what will become possible. Once corporations have blockchains in place recording every transaction on their books, tax authorities will be able to track this data and extract the necessary information instantly. This is why I foresee any stories about taxpayers rushing to meet annual filing deadlines going the way of David Copperfield and his shorthand struggles.

Most countries have already started the journey of tax digitalisation (without yet necessarily using blockchain technology) and already require taxpayers to submit their tax returns online through an e-filing system. This is, however, only the first step towards a more comprehensive digital tax system that promises to be more effective and simpler for both taxpayers and tax authorities.

Anticipating this trend, HMRC (the UK tax authorities) has expressed the (maybe too optimistic) ambition of “making tax digital” for 2020, meaning that businesses and individual taxpayers would be able to register, file, pay, and update their information at any time of the day or night, and at any point in the year, that suits them. This may well mean the end of the need to fill in an annual tax return. But it should also go beyond this as bringing the tax system into the digital age is not only about simplifying compliance processes but also about completely transforming the way tax authorities access data and manage the assessment and collection of taxes. For example, HMRC is willing to implement digital tax accounts where taxpayers will see the information that HMRC already holds (for instance, from employers, banks, building societies, and other government departments) – together with their complete financial picture with all liabilities and entitlements, for all types of taxes – recorded in one place.

The tax system of the future will thus operate much more closely to a “dynamic” system where taxpayers will be able to see a real-time view of their tax affairs and pay taxes closer to the point when profits arise.

On top of that, digitalisation, especially with blockchain, will also play a role when it comes to fighting against tax fraud. Every day, tax transparency is looking like less of a momentary obsession and more of a millennial-generation zeitgeist. If and when blockchains become the norm for corporations, tax information will be readily available and thus hard to hide, fake, or dodge. In particular, the fraud-fraught area of VAT might be one with interesting developments.

The blockchain reaction

So, for taxpayers, what would feature in a tax world where blockchain is the norm?

Naturally, mastering tax automation would necessitate new types of skills. The key skills in tax compliance teams would ultimately shift towards programming and maintaining distributed ledger systems. It will also require taxpayers to adapt to this digital revolution not only by using the right software and apps, but also by managing their tax data in a world where tax transparency is the new normal.

This doesn’t mean that tax knowledge won’t be necessary—questions about tax law, tax strategies, and a watchful eye on new legislation will all remain important aspects of the job. However, as with most if not every field worldwide, a technological element will become the executing factor.

Building blocks, building blockchains

This is, of course, one depiction of the future in a digital world. But when it comes to blockchain and tax digitalisation, tax is not quite as advanced as other areas. Thus, 2020 won’t be the year by which annual tax returns have become obsolete. However, there are a number of things to keep your eye on: how do local tax authorities plan to implement a digital tax strategy? Does your company have the required capabilities to adapt to a more digital tax environment? Have you taken into account the possible impact of tax digitalisation in the tax strategy of your company? The sooner you undergo this abstract exercise the faster you can start planning concretely for potential issues and ensuring your competitive advantage in the future.

For more information about blockchain and tax feel free to contact me or visit our webpage.

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1 Comment

  1. Steav Smith

    Nice and informative article. Thanks for sharing the information with us. It was worth reading

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