Blockchain is a nothing more than a decentralized distributed ledger, a registration system, a database. The question is: why is this database so special?
Here’s the answer: Imagine a database issued by the government of one of the most corrupt countries in the world, would you trust? Now, imagine the same database produced by a regulated stock exchange company. Would you trust?
Although I already know the answer, in both cases, those databases are created by a human being and can also be modified by a human being. This, because in both cases those databases are centralized (controlled by a central authority, in one case government and in the other, a public company).
As we said, the blockchain is also a database, but unlike the previous ones, the records of transactions are validated by thousands of individuals or companies around the world. Imagine 10,000 validators stating the same transaction and one of them lying. There are, indeed, no incentives for lying, and on the contrary, a real punishment could occur in such case. The interesting thing is that these validators are distributed around the world, literally, and when they validate something in consensus, information is encrypted in blocks that are closed every certain period of time, for example, in Bitcoin every 10 minute and, so far, nothing and no one has the incentives or the technology to decrypt this.
So, if a government or some company disagrees with what was recorded in that database, too bad.
There are thousands of uses that can be given to this technology: in land owner registration issues, in probate issues, identity data of people, banking issues, paperless voting issues and without the possibility of fraud.
From a tributary perspective, here are some examples of real cases where blockchain has contributed to reach better results for governments:
– In Finland, the tax administration already uses blockchain for the control of real estate properties, so frauds could be prevented and efficiency could be reached.
– In Estonia, there is already a kind of key with which you can do paperwork and pay taxes and integrate many aspects of your economic life under the blockchain.
– In Brazil, there is already a Blockchain-based database with information on taxpayers at all 3 levels of government, i.e. federal, state and municipal, and they plan to issue tokens for value added tax and importation taxes.
– Likewise, at Mercosur level, Brazil, Argentina and Paraguay, blockchain-based information is already being used to combat smuggling and tax fraud.
But just to make this a little bit more interesting, I will address a use that could turn into a horror story for many people or companies.
Since year 2011, Mexico has been the leading country in the use of technology to control taxpayer’s information. Mexico was a forerunner of the digital invoice and of the obligation of filing a monthly accounting before the Mexican tax authorities. As of today, if you are Mexican tax resident and want to file an annual tax return, everything, literally, everything, is uploaded in a digital file that you can only sign and send, without hiring a public accountant or professional to register ever and each transaction.
That is control. But, is that information duly exploited?
As of the date, Mexico does not use the blockchain technology to manage all data (only in some international trade transactions); and maybe if such country do so, it will have moderate improvements in taxation field.
What could be a real horror story for many taxpayers, could be a blockchain that is shared by tax administrations from OCDE’s countries and that could improve the automatic exchange of information or international audit processes that are managed through the so-called Mutual Agreement Procedures or MAPs, and that could take years to successfully work.
I do not want to be like the guy who asks the teacher if there is no homework on Friday right before the bell rings, but I believe this is going to happen with or without this article, so be prepared for an era, in which, through the use of blockchain technology, national or international audits would be express and you might have a tax credit in seconds.