Current reporting schemes for cross-border taxation are not completely fraud proof. Both the OECD’s Common Reporting Standards (CRS) and the US’s Foreign Account Tax Compliance Act (FATCA) allow tax evaders to hold assets abroad outright untaxed, or further allow for participation in schemes that can lead to tax manipulation, such as citizenship or residency by investment schemes (CBI/RBI). Besides closing these loopholes in the legislation, this paper proposes a blockchain solution. The proposed blockchain model will be derived from an existing blockchain solution to VAT fraud proposed by Ainsworth, Alwohaibi, and Cheetham. The blockchain specifically envisioned for tax reporting in this paper would be permissioned and controlled by a central authority, in order to regulate access. Zero knowledge proofs (ZKP) would be utilised to keep computational space and data private between jurisdictions participating on the shared distributed ledger. This blockchain solution could not only bring tax reporting into real time while increasing tax collection and transparency, but also automate a fairly complicated and bureaucratic process. However, implementation of such a process is costly and should be weighed against each jurisdiction’s national policy needs. Moreover, such a solution is not practical unless tax reporting is fully digitalised. A blockchain solution may have varied results on horizontal equity conditions within a nation, but it will not increase vertical equity. Finally, sovereignty is one major issue this paper is highly aware of when proposing a global solution to tax reporting. Because of ZKP and the fact that jurisdictions can opt-in, this paper does not foresee a diminishing of any jurisdiction’s national sovereignty.
Yent, Kellen and Yent, Kellen, Applying Blockchain Technology to Cross-Border Tax Reporting (May 20, 2020). University College London Centre for Blockchain Technologies, Discussion Papers, No 4. Q3 2020
Source: ssrn.com
