Decades ago, the phrase “permanent record” alarmed high school students who worried that their bad behavior might have undesirable consequences in the distant future. Today, the ubiquity of social media and mobile devices gives new meaning to the phrase. Today’s bad behaviors that are posted online are certain to become part of our highly public permanent records.
While this is bad news for some, the good news is that society and business need a permanent digital record of particular types of information – property titles, birthdates, social security numbers, credit scores, certain commercial and legal transactions, and the like – provided that it can be kept private and secure from tampering and fraud.
This type of permanent record already exists in the form of distributed ledger technology, which is more commonly referred to as blockchain – the technology behind the digital currency Bitcoin and other emerging crypto-currencies.
Blockchain is a decentralized, immutable public ledger of transactions that no single person or company owns or controls. Instead, every user can access the entire blockchain. Every transfer of title (whether that involves real property, tangible property, or digital property) from one account or individual to another is recorded in a secure and verifiable form within a closed network.
Blockchain transactions are direct; they do not require a financial institution, government, or any other third party for validation. This direct, private, and secure transaction is achieved via mathematical techniques (borrowed from cryptography) that secure the details of “smart contracts.” These details are opaque, so that only the parties directly involved in the transaction can see them. Each party may only see their half of the transaction; in many blockchain transactions, one party will not know the identity of their transaction partner.
With copies of the blockchain scattered all over the planet, it is considered to be effectively tamper-proof. If a single copy of a transaction changes in any way, the other copies expose the difference and reject the outlier copy.
Large technology vendors, financial institutions, and governments (for example, Britain) are actively investigating large-scale digital transformations that make use of blockchain technology. Application platforms are emerging, and major service firms are skilling up to provide distributed ledger technology expertise to companies. Core technology already is being developed via open-source approaches.
Blockchain technology raises interesting opportunities and issues for tax functions, as well as some big questions:
- How might blockchain technology transform corporate taxation?
- How might the audit process change if government revenue agencies received indisputable assurance of appropriate remissions upon receiving sufficient, blockchain-enabled transaction information (and nothing else)?
- What information currently shared with revenue agencies in audit responses might remain private in the future due to blockchain technologies?
- How might blockchain help to address VAT fraud and similar deceit?
- Could blockchain technology remove the seller from the transaction tax cycle (collection, remittance, compliance)?
- Could blockchain foster cooperative engagement between governments and industry?
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.