EU to Wield Blockchain to Combat VAT Fraud?

The European Union (EU) reports that it loses almost 150 billion euros a year to VAT fraud. As such, new options to reduce this loss are on the table.

In November, the EU’s TAX3 Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance published its first findings and recommendations (see this press release). True to the expansive title of the committee, the draft report covers a vast swath of territory, but an important focus is the VAT gap – the shortfall between expected VAT income and amounts actually realized. EU estimates put the VAT gap at around 147 billion euros for 2016.

Fraud accounts for a big chunk of that, and fraudulent cross-border VAT activity has been a particularly tough nut to crack. Noting that “one of the main issues allowing fraudulent behavior in relation to VAT to occur is the ‘cash profit’ that a fraudster can make,” the report calls on the European Commission to “analyze the proposal made by experts to place cross-border transactional data on a blockchain, and to use secured digital currencies that can only be used for VAT payments (single purpose) instead of using fiat currency.”

The experts cited in the report include Boston University’s Richard T. Ainsworth, who has argued that blockchain technology might solve VAT fraud. Ainsworth has also advocated for the use of VATCoin – potentially “the world’s first government-mandated cryptotaxcurrency” – in the Gulf Cooperation Council’s new VAT system.

Next step, according to the press release: “Work will be kicked off between the political groups to fine-tune the report with a vote to adopt it in committee expected in early 2019.” The vote is now on the committee’s calendar for February 27.

This is all just one more sign of the phenomenal rise of blockchain and distributed ledger technologies and their growing significance for corporate tax departments. Stay tuned to this blog; we’ll continue to keep you updated.